39 thoughts on “Reinhart and Rogoff: Letter to Paul Krugman”

  1. Something amiss with the following????
    “It is worth noting that in the past, polemicists have often pinned the austerity charge on the International Monetary Fund for its work with countries having temporary or permanent debt sustainability issues.  Since its origins after World War II, IMF programs have almost always involved some combination of austerity, debt restructurings, and structural reform.  When a country that has been running large deficits is suddenly no longer able to borrow new funds, some measure of adjustment is invariably required, and one of the IMF’s usual roles has been to serve as a lightning rod.   Even before the IMF existed, long periods of autarky and hardship accompanied debt crises. “

  2. And I’m not sure about…
    “Policy response to debt with drama.  On the policy response to this sad state of affairs, we stress that restoring the credit channel is essential for sustained growth, and this is why there is a need to write off senior bank debt in many countries. Furthermore, there is no reason why the ECB should buy only sovereign debt-purchases of senior bank debt along the lines of the US Federal Reserve’s purchases of mortgage-backed securities would be instrumental in rekindling credit and working capital for firms.  We don’t see your attraction to fiscal largesse as a substitute. Periphery Europe cannot afford it and for Germany, which can afford it, fiscal expansion would be procyclical.  Any overheating in Germany would exert pressure on the ECB to maintain a tighter monetary policy, backtracking some of the progress made by Mario Draghi. A better use of Germany’s balance sheet strength would be to agree on faster and bigger haircuts for the periphery, and to support significantly more expansionary monetary policy by the ECB.”

    If there is a need for senior bank debt write offs, why would the ECB get involved in buying same?

  3. It appears that Paul Krugman has other things to do – such as writing yet more polemical blogs – than seriously addressing the research evidence that Reinhardt and Rogoff bring to bear on the burning macroeconomic issue of our time.

  4. R&R provided a flawed study that was used to push policies which were expressly ideological rather than based on sound economics.

    You cant be feted by people in power who don’t care if your study is flawed or not simply because it ties in with opinions they formed years earlier and then claim to simply be academically neutral when the egg is all over you face.

    Having their cake and eating it too is not useful when there is huge unemployment. You cant help shape a policy course which is ideologically driven and then hold your hands up and say nothing to do with me gov. You have power and wield it then you live with the consequences

  5. This sentence has real relevance for Ireland:

    “Specifically, our 2009 book (released before our growth and debt work) showed that recoveries from deep systemic financial crises are long, slow and painful. ”

    This definitely will be true for Ireland — measured in decades.

  6. Why should Krugman or anyone else seriously be required to take these two jokers at face value?

    They’ve been shown up as either grossly incompetent or so ideologically-driven that they will shamelessly present wrong data and concusions; and allow the perpetual inclinations of right-wing elites the world over to use their work as a figleaf for intentional years of misery for populations.

  7. Ouch!

    @Gregory Connor

    Not necessarily! One simply needs to find a way to ‘dump’ the unconscionable private debt dumped on the state/citizenry.

    To quote Carmen Reinhardt:

    “First, the advanced economies now have levels of debt that surpass most if not all historic episodes. It is public debt and private debt (which often becomes public as a crisis unfolds). ”

    Why oh why should “private” debt [financial system debt] become “public”?

  8. “There is, however, an enormous difference between the statement “countries with debt over 90 percent of GDP tend to have slower growth than countries with debt below 90 percent of GDP” and the statement “growth drops off sharply when debt exceeds 90 percent of GDP”. The former statement is true; the latter isn’t. Yet R&R have repeatedly blurred that distinction, and have continued to do so in recent writings.” (P. Krugman)

    OK. So let’s say FoolsLand takes on private financial system debt of 50% GNP and another 25% of GNP thourgh creative accounting leading to a debt/GNP of 160% …. well … let’s just say that there must be a hellava lot of fools in FoolsLand.

  9. @ Gregory Connor

    “This definitely will be true for Ireland — measured in decades.”

    Maybe this explains why some people may be enticed to try for a “strategic default” on their mortgage, a subject that you were widely quoted on unfortunately without any substantive analysis. Interested to know if subsequently, you have managed to dig out any real figures other than guess work based on what happened in the US because the US as you know has the complete opposite approach to insolvency that Ireland. In the US they do not believe in what might be referred to as the punishment model of insolvency.

    I might also suggest a paper; “Looting: The Economic World of Bankruptcy for Profit”

    George A. Akerlof and Paul M. Romer both University of California, Berkley.

  10. Yeah… if these were posts on an internet forum, the parties involved would be banned for conducting a transparently obvious flame war.

    Why should any of these people be allowed anywhere near a Government building for the rest of their lives?

  11. The saying that academic politics are so vicious because the stakes are so low, is often attributed to Henry Kissinger, former Harvard professor and secretary of state.

    In this case the dispute is really a storm in a teacup in terms of the stakes as the 90% threshold would have been used by politicians even if R&R were more nuanced in their use of it.

    There were significant examples where growth didn’t sharply fall at the threshold.

    However, Krugman is correct (although he could have left out ‘enormous’) when he says there is “an enormous difference between the statement ‘countries with debt over 90% of GDP tend to have slower growth than countries with debt below 90% of GDP’ and the statement ‘growth drops off sharply when debt exceeds 90% of GDP’. The former statement is true; the latter isn’t. Yet R&R have repeatedly blurred that distinction,” he wrote.

  12. Krugman has been a bit shrill of late regarding R&R and the R&R book “This Time Is Different” is a major contribution — very useful empirical research, with new data that was difficult to generate. Rogoff is correct that Krugman has been a bit unfair to him, but these are the big boys and it is right and fair that they slug it out — there are big stakes at play.

    As for the strategic arrears estimates, only the central bank has access to the confidential panel data to nail down a more precise estimate. My own impression from discussions is that most thoughtful, open-minded analysts think my conjecture is about right, given the limits on data for the Irish case. Listening to Patrick Honohan at the Bank Resolution Conference last week, it sounded to me like he took the 35% as about right (he did not say that explicitly, but also did not quibble with it). There is not much interest in pursuing it since my estimate looks like it was roughly on-target given the limits on data. The panel data is very dynamic and changing rapidly – not sure if it is getting better or worse now.

    A wildly inaccurate estimate (if taken literally) comes from Lorcan O’Connor, the new head of the Personal Insolvency Service, who puts the percentage of strategic cases at 1%. I quote:

    “it’s incumbent on the service to ensure we are strict and protect the integrity of the 99pc of cases that are genuine”.

    This is ridiculously low (100% – 99% = 1%) and virtually anyone with a bit of sense knows that. There is certainly no evidence-based analysis at all at all behind that number. I think it is meant perhaps as a metaphor? Fair play to the Irish Independent for calling him to task on it today.

    http://www.independent.ie/business/irish/insolvency-quango-backsliding-already-29270924.html

  13. “Krugman has been a bit shrill of late regarding R&R and the R&R book “This Time Is Different” is a major contribution….”

    Krugman has praised This Time Is Different quite lavishly. His gripe concerns various later R & R pronouncements, in particular the stress they place on the (now discredited) 90% debt/GDP tipping-point.

    For economists to be a bit hard on one another is nothing new. Keynes wasn’t nice to Pigou. Stiglitz gave Stanley Fischer a pasting in Globalization and its Discontents and drew a very snarky response from Rogoff. As Krugman says, in his latest blog-post on the subject, there’s too much at stake to be bothering about economists’ feelings.

  14. @Kevin Donoghue — I basically agree with you — there are big issues at stake and these are major players so they need to be ready to take some abuse — and fling it at others if called for! But I do not think that Krugman’s shrill commentary is justified in terms of Rogoff’s actual views and statements which seem reasonable in most cases. I have not followed Reinhart’s as closely so cannot comment reliably. So Krugman has been a bit unfair to Rogoff, but I agree that Rogoff is a major figure and should expect some rough treatment.

  15. @ Gregory Connor
    Of course it’s going to take a long time but policy choices made will determine whether it’s 10 or 30 years
    2 good Martin Wolf links from 2010 and 2011

    http://cachef.ft.com/cms/s/0/7f55fe18-6a8c-11df-b282-00144feab49a.html

    http://www.ft.com/cms/s/0/28e2d3e2-a1b5-11e0-b9f9-00144feabdc0.html

    “The BIS is right: normalisation of monetary and fiscal policy is needed. But it is impossible to eliminate structural fiscal deficits until either the private sector structural adjustment is complete or we see big shifts in the external balances. It is impossible, finally, for this external adjustment to occur without big changes in the surplus economies.”

  16. @ Fiatlux
    “Even before the IMF existed, long periods of autarky and hardship accompanied debt crises. ”

    Yes, thankfully this collapse didn’t lead to a world war, as the last 2 did.
    But macroeconomics was supposed to smooth all of this out, was it not?

  17. @Seafoid
    Yes. I suppose you could say that we got austerity and hardship instead of self sufficiency even though we are “neutral”.

  18. @seafoid

    Not sure that its worth engaging the right in a debate about an economic recovery since their concern is more about replacing social democracy in Europe with a “market state” than improving economic output or the common good.

    Looking back over the years since the global financial crisis the arguments for austerity have gone through a depressing but predictable evolution.

    (1) Austerity will promote economic growth in the short term (Alesina et al.)

    (2) Austerity may not produce economic growth in the short term but is politically necessary and will provide sound foundations for a recovery in the medium term. (the European Commission position).

    (3) Though austerity may not provide growth in the medium term not implementing austerity now has long term risks (John McHale).

    (4) Because there will be no economic growth in the long term austerity is necessary (Michael Hennigan).

    Whatever your question is the answer is a smaller state.

  19. It’s always possible of course that both sets of illustrious economists are dead wrong. Consider:
    Krugman argues that fiscal stimulus will allow the economy to grow its way out of debt (and adds in the small print that it should be helped along by a little more inflation – 4%).
    R+R argue that won’t work because no economy has ever grown its way out of this much debt in real terms. Debt-restructuring is the right way go, they say (and add in the small print that it should be helped along by “mild” inflation).
    But the world’s financial system is too fragile to handle debt-restructuring at the level required. That was proved by Lehman bros in the US, and by the reaction to the Deauville announcement in Europe. There is a good reason why policy-maker don’t choose this path – they already tried it and it created total panic.

    The common ground is that inflation is needed, but all of these economists are still pretending it will just be a little bit. Here’s a suggestion: forget stimulus and forget re-structuring, turn the inflation dial up from “mild” to “simmering” – and add a substantial dose of financial repression to keep governments safely financed.

  20. Does anyone still believe or even peddle the 90% threshold? No

    Did R&R push this threshold? Yes

    Was it picked up by the powers to be as representing significant support for their policies? Yes

    Have R&R come out clearly stating that the result was wrong wrong wrong? No

    Does that failure have at least some impact on policy? yes

    Is shrillness or harshness justified in the result? for sure

  21. @John Gallagher

    That Michael Heller piece is barking, barking, mad, particularly in the part where he asserts that Krugman is “climbing down” when he offers Rheinhart and Rogoff a ladder to free themselves from the debt level of doom gibbet. I know the paper has caused terrible shame and embasssment to R&R but it has done much worse damage to Europe and I think Krugman’s display of magnanimity is far too early. Let them choke a little more.

    Anyone who reads Heller’s article can again see how helpful it is to always read “common sense” as “a reactionary position I am unwilling to expand on”.

  22. @shay this really kicked off in New York review of books,link embedded in article at top.
    A little impolite perhaps….
    “The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place. Right from the beginning, critics raised strong concerns about the paper’s methodology and conclusions, concerns that should have been enough to give everyone pause”
    http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/

  23. @ skeptic01: ” … and add a substantial dose of financial repression to keep governments safely financed.”

    Yep. And to hell with the consequences of future debts.

    In the name of God. Just forget about R,R and K and that 90%. Just do your own arithmetic. Believe yourself, not the academics.

    If consumption accounts for 50% of aggregate economic activity, and it decreases by 10%, then please explain how the other variables (government transfers, investment and exports) will pick up the slack. Yeah, I thought so!

    Austerity (aka: consolidation) is a total economic crock. But what is the alternative? In a pre-1970 production/consumption economy a fiscal stimulus might have worked. But no commonly understood economic response will work with a global, financialized economy which has deliberately amassed an unpayable debt overhead. Someone, somewhere, somehow, is going to have to accept significant debt writeoffs. If this should occur it is likely to regress western developed economies two decades. The exemplar (Japan) is in plain sight. So who will you believe? The pumpers or your own eyes?

    If its left to our politicians to solve, then they are more than capable of pulling the roof down first. And they are trying might hard to achieve that.

  24. @ John Gallagher:

    The Blyth book is excellent. Easy to read and informative.

    Its no mystery why some folk get ‘canonized’ – they work very hard to make it so. And once a seductive political idea (austerity => growth) is released, it takes on a mind of its own. And heaven help those who attempt to trash it!

    I’m a sort of a fan of Krugman – “He’s good, but not great”, as the man said: William Greider is far superior. But this might be appropriate:-

    “Never underestimate the destructive power of bad ideas” [NTY 10-10-’09]

    I do not have access to the NYT archive to check the context.

  25. @Brian Woods Snr here is that piece.
    http://economistsview.typepad.com/economistsview/2009/10/paul-krugman-misguided-monetary-mentalities.html
    Regarding the spread of ideas this is worth a ….h/t zero hedge.
    “The realization that the world is often quite different from what is presented in our leading newspapers and magazines is not an easy conclusion for most educated Americans to accept, or at least that was true in my own case. For decades, I have closely read the New York Times, the Wall Street Journal, and one or two other major newspapers every morning, supplemented by a wide variety of weekly or monthly opinion magazines. Their biases in certain areas had always been apparent to me. But I felt confident that by comparing and contrasting the claims of these different publications and applying some common sense, I could obtain a reasonably accurate version of reality. I was mistaken.”
    http://www.theamericanconservative.com/articles/our-american-pravda/

  26. @Gregory Connor, Lorcan O’Connor

    “As for the strategic arrears estimates, only the central bank has access to the confidential panel data to nail down a more precise estimate. My own impression from discussions is that most thoughtful, open-minded analysts think my conjecture is about right, given the limits on data for the Irish case. ”

    Estimates? Impressions? Opinions?

    “A wildly inaccurate estimate (if taken literally) comes from Lorcan O’Connor, the new head of the Personal Insolvency Service, who puts the percentage of strategic cases at 1%. I quote:

    “it’s incumbent on the service to ensure we are strict and protect the integrity of the 99pc of cases that are genuine”.

    Methinks, MeEstimates, Meopinions that both of you may be “wildly inaccurate” …. and that this supposition will prove to be supported by ‘real data’ if and when it becomes available!

  27. @ John G: Much obliged for that. Thanks. Bad ideas are like Monsanto-engineered Roundup-resistant weeds. The blighters just keep sprouting.

  28. @ JG

    “The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place.”

    I don’t think so. The plutocrats backing Romney last November knew what they wanted. Can anyone in Ireland stand up to Nedis O Brien, for example ? Of course not.

  29. @BW snr anytime,the most infamous PK prediction regards his views back in the day on the Internet.
    If memory serves he stated that it would have as much impact as the fax machine,it frequently gets dragged out off his closet over here!
    @Seafoid there is a certain level of professional courtesy which some think PK crossed…you can’t blame RR for people hitching a wagon to their research.
    Regarding,Romney they ran ads showing what Bain Capital “did” in restructuring companies.
    Kinda like fired 200 or 2,000 workers restructured the enterprise and sold it for vast profits stuff,lots people were going yeah!!!
    Lets have a successful businessman running things for a change,rather than a career politician…..be no harm in Ireland either.Those school teachers and 70 year olds are beyond their shelf life,why is Noonan stil at it?

  30. @ John G: ” …why is Noonan still at it?”

    Nowt else to do might be the unkind answer. But more likely its power and the trappings of office. Very (like very, very) addictive.they are. Hey, there’s a good idea. Let’s have a ‘war’ on the Trappings of Office. Its a war that will never be won or lost. Will just endure! Like … … ?

    I wonder why I bother! Yes, quite so.

  31. @Brian Woods Snr,a bit slow with the response hols over here.
    I do wonder myself why at 70 he thinks he still has game,most companies of equilivant size have a mandatory retirement age…perhaps politicians at say 70 should consider if finance is a bit of a complex brief to wing….old dogs new…and all that!
    Anyway this came out today,not too technical…debt is just debt,age is just age:)
    “But even if debt is used in ways that do require higher taxes or lower spending in the future, it may sometimes be worth it. If a country has its own currency, and borrows using appropriate long-term debt (so it only has to refinance a small fraction of the debt each year) the danger from bond market vigilantes can be kept to a minimum. And other than the danger from bond market vigilantes, we find no persuasive evidence from Reinhart and Rogoff’s data set to worry about anything but the higher future taxes or lower future spending needed to pay for that long-term debt. We look forward to further evidence and further thinking on the effects of debt. But our bottom line from this analysis, and the thinking we have been able to articulate above, is this: Done carefully, debt is not damning. Debt is just debt.”
    http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/

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