Home > Uncategorized > Another note on Reinhart and Rogoff (and Reinhart): Great Stagnations do exist. Like great expansions.

Another note on Reinhart and Rogoff (and Reinhart): Great Stagnations do exist. Like great expansions.

The discussion about the Reinhart (and Reinhart) and Rogoff (RRR) articles is flaring up again: they have finally written a coherent, systematic defence. Look here. It is important to discuss this because of the importance of their main finding:

monetary economies have been inherently unstable during (at least) the last 200 years, because of endogenous forces related to, among other things, money and debt.

This clearly shows that the ‘General Equilibrium’ characteristics of modern economies, assumed by main stream economists and a cornerstone of the main economic models, are not general at all. Debts and credit are totally endogenous to our economies and they are dangerous – surely when the main creditors and money creators, the banks, are unbridled. Alas, the whole discussion does not focus on such emergent properties of monetary economies but on the relation between growth and (public) debt. And RRR do not do a good job when it comes to this relation.

We do know that growth rates differ between periods, because of changes in the pace of technological development, population growth dynamics and a whole bunch of other variables, mentioned in for instance ‘The ‘Great Stagnation’  of Tyler Cowen. For one thing steamships and railroads in combination with the exploitation of ‘virgin’ land enabled a large increase of net grain imports in Europe in the nineteenth century, once the Crimean War and the USA Civil War had ended (see the graph, source and details here), enabling quite a bit of ‘economic growth’. You just can’t compare the growth experience of countries during the first part of the nineteenth century (until about 1865) with the growth experience of other countries during the second part of the nineteenth century (after 1865), or during the twentieth century. But that’s exactly what RRR do.


Table 1 (!) in their 2012 article, which according to them is much better than their much maligned 2010 paper, does not take account of differences between economic epochs – it’s a prime example of the naive a-historical character of main stream economics. They mix up countries for which data are available only for the 1924-2011 period, like Ireland, with countries for which data are available for the 1816-2011 period like the Netherlands. Below is the list of countries in their table 1, which is very explicit in the use of the famous but arbitrary 90% government debt to GDP 90% threshold:

United States  1791–2011
Netherlands 1816–2011
United Kingdom 1830–2011
Belgium 1836–2011
Greece 1848–2011
Spain 1850–2011
Australia 1852–2011
Italy 1861–2011
New Zealand 1861–2011
Canada 1871–2011
Japan 1872–2011
France 1880–2011
Ireland 1924–2011

The table also includes 9 other countries which never crossed the 90% threshold, or which did not cross it long enough and which are not included in the debt/growth analysis. I suggest to take 1865 (1867?), 1921 and 1948 as dividing lines and to do a new analysis, using all the countries and all the debt levels – and focusing on stability and instability. If I remember well the authors discovered that there is no example of an ’emerging economy’ which did not default at least once. Now that’s a ‘stylized fact’ which does make a difference, unlike the arbitrary 90% threshold.

  1. paul davidson
    May 27, 2013 at 7:56 pm

    Irma Adelman in a research paper has shown that real growth per capita in both OECD countries and less developed countries in the period from 1947 to 1973 was higher than any time in economic history — including the Industrial Revolution

    • Mike Meeropol
      May 27, 2013 at 8:19 pm

      Could there be anything to the idea that the capitalist world had to “compete” with the Soviet bloc and their “model” of economic development? The European and American versions of Social Democracy seemed to work very well at least up till the early 1970s — By the late 1970s, the Soviet version of economic development had become mired in stagnation and the Chinese had repudiated Maoism for a newly totalitarian version of capitalism — not like Mussolini but not like Japan either …

  2. paul davidson
    May 27, 2013 at 8:22 pm

    Regarding the Adelman research paper here is direct quote from my 2007 book JOHN MAYNARD KEYNES (part of Macmillan’s “Great Thinkers in Economics” series :

    “Keynes (1936a, p. 159) noted, “It is enterprise which builds and improves the world’s possessions…. Speculators may do no harm as bubbles on the steady stream of enterprise. But the position is serious when enterprise becomes the bubbles on a whirlpool of speculation”. Comparing the pre-1973 and post-1973 U.S. record indicates that, since 1973, enterprise had slowly become enmeshed in an ever-increasing whirlpool of speculation.

    For almost a quarter of a century after the Great Depression and World War II, governments actively pursued the types of economic policies that established regulations for domestic financial markets. In 1944, at Bretton Woods, nations agreed to create an institution, the International Monetary Fund, whose function it would be to maintain stability in international exchange rate markets. Moreover, when it was deemed necessary, most nations instituted international capital controls to limit the flow of funds between nations.

    The result of deliberate government activities, especially in international financial markets was to encourage per capita economic growth in the capitalist nations to proceed at a rate that has never been reached in the past nor rarely matched since (see Table 7.1). Adelman (1991) has characterized this postwar “Keynesian” era of unsurpassed economic global prosperity performance as a “Golden Age of Economic Development . . . an era of unprecedented sustained economic growth in both developed and developing countries.” The average annual per capita economic growth rate of OECD nations from 1950 till 1973 was “almost precisely double the

    1700-1820 na 0.2% na
    1820-1913 na 1.2% na
    1919-1940 na 1.9% na
    1950-1973 na 4.9% 3.3%
    1973-1981 na 1.3% na
    1981-1990 1.2% 2.2% 1.2%
    1991-1993 -0.4% 0;.6% 2.6%
    1993-2002 2.7% 2.0% 3.0%
    1998-2005 2.8% 1.9% 4.2%

    1950-1973 na 5.9% 5.5%
    1966-1973 5.1% 4.8% 6.9%
    1974-1980 3.4% 2.9% 5.0%
    1981-1990 2.8% 2.9% 2.4%
    1991-1997 2.2% 1.9% 5.0%
    1998-2005 3.9% 2.5 % 5.0%

    na= not available

    Sources: Adelman (1991), IMF, World Economic Outlook (1999, 2002, 2006)

    previous peak growth rate of the industrial revolution period. Productivity growth in OECD countries was more than triple (3.75 times) that of the industrial revolution era.” (Adelman, 1991, p. 15).
    The resulting prosperity of the industrialized world was transmitted to the less developed nations through world trade, aid, and direct foreign investment. As Table 7.1. indicates, from 1950-73, average per capita economic growth for all less developed countries (LDCs) was 3.3 per cent, almost triple the average growth rate experienced by the industrializing nations during the industrial revolution. Aggregate economic growth of the LDCs increased at almost the same rate as that of the developed nations, 5.5 per cent and 5.9 per cent respectively. The higher population growth of the LDCs caused the lower per capita income growth.

    By 1973, however, Keynes’s analytical vision of how to improve the operation of a market-oriented, entrpreneurial system had been lost by politicians, their economic advisers and most academic economists. As a result, Keynes’s policy prescriptions fell from grace. As Table 7.1 demonstrates, since 1973, the economic performance of capitalist economies is much more dismal than it was during the quarter century following World War II. The annual growth rate in investment in plant and equipment in OECD nations fell from 6% (before 1973) to less than 3% (since 1973). Less investment growth means a slower economic growth rate in OECD nations (from 5.9% to 2.5%) while labor productivity growth declined even more dramatically (from 4.6% to 1.6%)

  3. Bruce E. Woych
    May 28, 2013 at 2:31 am

    Derivatives and fiat monetarism is a bubble that doesn’t have an exact relationship to past histories at the same rates and proportions. Reinhart and Rogoff are more interested in their academic egos and reputation than the state of the political economy that entails a good deal more than a National Debt relationship to entire populations when the actual wealth distribution and expansion is the true correlate to that debt…. if they were intellectually honest they would be distinguishing war and economic class structures that are pushing personal elite wealth growth over national economic health and stability. If they were intellectually honest they would stop homogenizing debt as if it were universal and not specifically related to bubbles and specific growth factors that are simply not sustainable.
    It is a difficult thing for the establishment to critique itself, and Reinhart and Rogoff are not taking the difficult road that would bite the hand that feeds them.

    • Bruce E. Woych
      May 28, 2013 at 2:58 am

      I guess you can say this is a double case of path dependency gone wild.

  4. Bruce E. Woych
    May 28, 2013 at 2:37 am

    Are Reinhart and Rogoff Right Anyway?
    Posted on April 18, 2013 by James Kwak | 17 Comments
    By James Kwak
    Fatal Sensitivity
    Posted on April 19, 2013 by James Kwak | 76 Comments
    By James Kwak

  5. Bruce E. Woych
    May 28, 2013 at 2:52 am

    “The Massachusetts economists who led the attack on the 2010 paper questioned why their Harvard rivals used a generic Excel spreadsheet to carry out ground-breaking research. According to the European Spreadsheet Risk Group, spreadsheets were behind the collapse of the Jamaican banking system in the late 1990s, and their use was key in the development of collateralised debt obligations – the financial instruments that promised sub-prime mortgages could somehow become AAA-rated investments.”

    But perhaps too little too late, Rogoff appears to state that he was never for austerity as a primary policy, but for a complete “restructuring” a ” major restructuring as a centrepiece of the solution for eurozone periphery public debt and senior bank debt.”

    So let heads fall where they may, but it also appears they are being made something of a scapegoat for policies that are politically desirable and the reputation fiasco is just what happens when you start believing that you are an institutional mouthpiece.
    In fact, isn’t “austerity” just a vulgar propaganda term for the effects of calculated contraction on a segment / strata selectively imposed on a demographic segment of a domestic economy? If so, the book sites “contraction” as a major portion of default and failure. No where does the book (unless i am mistaken) push for austerity…but it does suggest sound judgement in being frugal in the first place. What about this:

    Re: Reinhart and Rogoff “This Time Is Different” Slamfest
    [Their book was published in September, 2009, criticisms arrive in 2013 based upon a 2010 paper]:
    I am not certain that this book is open to the same precise scrutiny as the 2010 paper they published subsequently.
    Frankly, I own this book and it is a pretty good book overall, and I can not find any critical fault with its general contentions. I may not be sophisticated enough to pick up the subtle statistical inferences on the whole of economic theory, but the work essentially demonstrates that excessive debt recurs in bubbles of euphoria amidst (among other things) self deluding denial, greed, and finally corruption that over-stresses the extreme boundaries of the system. The major contention is that this occurs time and time again.
    I understand the distinctions made concerning the correlations and disproportionate “bundling” that is utilized in the 2010 paper; but I am very interested in a clarification concerning how that paper’s methodology negates the major work they produced in THIS TIME ITS DIFFERENT…which covers (subtitled) Eight Centuries of Financial Folly.
    Any help from the mainstream on this distinction?

    [selected excerpts]
    “Austerity programs consist of a set of policies established by governments experiencing financial debt problems within their operational budgets and choose to embark on a commitment to reduce spending for public goods and services. Austerity programs can be highly controversial and disruptive to an orderly society if the populace mobilizes against the government for taking such action after unreasonable spending sprees based on whatever logic the government may stipulate.”
    “The process can be political suicide for representatives in certain areas. The measures typically demand reduction in services to the lower socioeconomic level of society, often in response to previous over-spending that has amounted to transfer of public funds into the hands of individuals who need no handout.
    But in actuality, government is made up of people. And these people have usually been prevailed upon by money power – Western power elites – to borrow more money than the country’s citizens can easily repay. When the business cycle turns sour, as it inevitably does, the debts taken on by the country prove unpayable. By this time, the person(s) who have obliged the debts have left power and perhaps even left the country while those remaining now bear the responsibility.”
    Robert Johnson: I think the, call it the oligarchy now is audacious. They don’t really care if they’re legitimate. There was a time – you know, I always hear Jurgen Habermas was paraphrased by saying, “Legitimate if you can, coerce if you have to, and accommodate if you must.” And I think we’ve gone past –…”

    “…But there is a sort of, “Okay guys, you’re mad, how are you going to stop me?” mentality at the top.”


  6. May 28, 2013 at 5:05 am

    “monetary economies have been inherently unstable during (at least) the last 200 years..” Revelation of the century!!!

    Walter Bagehot pointed that out 150 years ago. And they had a credit crunch in Ancient Rome. Tell me something new.

  7. Jan Milch
    May 31, 2013 at 4:31 pm

    “The debunking of Carmen Reinhart and Kenneth Rogoff continues.
    by Mark Gongloff

    The Harvard economists have argued that mistakes and omissions in their influential research on debt and economic growth don’t change their ultimate austerity-justifying conclusion: That too much debt hurts growth.

    But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.

    In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff’s data and found “not even a shred of evidence” that high debt levels lead to slower economic growth.

    And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.

    Click to access Dube_Growth_Debt_Causation.pdf

    As you can see from the chart from Dube’s paper below, growth tends to be slower in the five years before countries have high debt levels. In the five years after they have high debt levels, there is no noticeable difference in growth at all, certainly not at the 90 percent debt-to-GDP level that Reinhart and Rogoff’s 2010 paper made infamous. Kimball and Wang present similar findings in their Quartz piece. (Story continues below chart.)

    This contradicts the conclusion of Reinhart and Rogoff’s 2010 paper, “Growth in a Time of Debt,” which has been used to justify austerity programs around the world. In that paper, and in many other papers, op-ed pieces and congressional testimony over the years, Reinhart And Rogoff have warned that high debt slows down growth, making it a huge problem to be dealt with immediately. The human costs of this error have been enormous.

    Even after University of Massachusetts graduate student Thomas Herndon found Reinhart and Rogoff’s work included errors and that their 2010 paper was missing important data, the researchers stood by their ultimate conclusion: that growth dropped off significantly after debt hit 90 percent of GDP. They claimed that austerity opponents like Paul Krugman have been so so rude to them for no good reason.

    At the same time, they have tried to distance themselves a bit from the chicken-and-egg problem of whether debt causes slow growth, or vice-versa. “The frontier question for research is the issue of causality,” they said in their lengthy New York Times piece responding to Herndon.

    It looks like they should have thought a little harder about that frontier question three years ago.”

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