Saturday, April 20, 2013

Dean Baker: How Much Unemployment Did Reinhart and Rogoff's Arithmetic Mistake Cause?

That's the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

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