YouTube video

Bob Pollin (Co-Author of Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff): Deficit Hawks still defend conclusions of a study that contained spreadsheet errors and weighted selected countries in an inappropriate way; led to incorrect theory about public debt and growth

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

As we reported on The Real News last week, a new study from the PERI institute written by Michael Ash, Bob Pollin, and Thomas Herndon refuted, some people say, something that had been described as one of the intellectual touchstones of the move towards government austerity efforts. That’s a study by Carmen Reinhart and Kenneth Rogoff, two eminent Harvard economists, which essentially presented the argument that if debt-to-GDP ratio reaches 90 percent, there will be no growth in the economy. Well, the report from the PERI institute—and if you haven’t watched it yet, you should—more or less takes that argument apart.

Now joining us is one of the authors of that report is Bob Pollin. Bob’s the founder and codirector of the PERI institute in Amherst, Massachusetts. His latest book is Back to Full Employment.

Thanks for joining us again, Bob.


JAY: So, first of all, before we get into some of the reaction to the report, just go back over the basic argument about the conclusions your team reached.

POLLIN: Reinhart and Rogoff’s very influential, widely cited paper of 2010 found that when public debt—it’s not all debt, it’s the government’s debt—when public debt gets to equal 90 percent of an economy’s GDP, then you basically have this very dramatic falloff in economic growth. This is for all kinds of countries in different circumstances.

The specific data set that we looked at that they work through is for the entire post World War II period, 20 advanced economies. So starting in roughly 1946, all the way to 2009, they found that when the debt, public debt to GDP ratio exceeds 90 percent, the average economic growth of those 20 countries falls from around 3 percent per year to –0.1, so a very precipitous falloff.

Now, in our study we found major errors. We found that they made some actual Excel coding errors. We found that some of the countries that were in their dataset, some of the years were dropped. One country, Belgium, was dropped altogether in their calculations.

And then the third thing wrong with it was the way they averaged out the performances of the different countries. So, for example, Great Britain was in this high public debt ratio for 19 years, and the economy grew at an average rate of 2.4 percent. Okay? Now, New Zealand had, according to their calculations—wrong calculations, it turns out, but anyway, according to their calculations, New Zealand had one year, 1951, in which they were at the high public debt ratio, and their economy collapsed to –7.6 percent. The way they averaged the Great Britain 19 years experience and the New Zealand ’51 one-year experience was they were equally weighted. One year in New Zealand, 19 years in Great Britain, equally weighted. So that wasn’t a mistake. That was their deliberate methodology. The result is it hugely overstated the impact of this one year, 1951, in New Zealand.

Now, when you make corrections for their miscalculations—and, I would say, inappropriate methodology—instead of this average being when you get to the high public debt ratio, growth collapses to –0.1, we found that the average is at 2.2 percent. So it’s somewhat less than 3 percent on average, but it is very mild rate of reduction in growth.

And more importantly, what we also found was that there was a lot of dispersion, a lot of different experiences. It wasn’t that this 2.2 percent average represented all years for all countries. Most importantly what we found was that over the years 2000 to 2009, obviously the most relevant experiences for understanding our world today and what to do about our crisis today, over those years, 2000 to 2009, countries that were in the highest public debt ratio actually grew either at a rate comparable to or faster than the countries that were below this 90 percent public debt to GDP threshold.

JAY: So the conclusion you reached, that then at the very least this 90 percent threshold either isn’t a decisive factor one way or the other on growth, that it depends on circumstances—and they don’t seem to allow for that, and you actually have some evidence that you could even draw a different conclusion, that the higher debt ratio actually might lead to a little more growth in times of recession.

POLLIN: Well, yeah. I mean, that certainly is the implication. I mean, if we look at the most recent decade, you could say, oh, but that’s—we had the financial crisis and we had the Great Recession, so this decade is different. Well, that’s exactly the point. This decade is different. We’ve had the most severe recession since the 1930s, and it was exactly in 2008 and onward that we needed government spending to expand to prevent a total all-out 1930s collapse. So it’s not surprising that we observe that over the past decade—. And, by the way, their numbers stop in 2009, so they’re not even including 2010, ’11, and ’12. It’s not surprising that we see that the growth experience for countries with high public debt is at least as good, if not better, than countries with low public debt. That’s from Reinhart and Rogoff’s own data. This is not from data that I constructed. This is data that we just cleaned up from their own data set.

JAY: Now, have they responded any further to all of this? I mean, this has gone very widely and all over mainstream media. A lot of the economic blogs have been talking about the results of your PERI study. Have Reinhart and Rogoff done any more than their original statement, which I think was just that they stick with the way they weighted this? They still defend that. I didn’t see any detail of their defense.

POLLIN: Now, they—yeah, they made two statements, one, like, within two or three hours of our paper coming out, because, yeah, it just exploded. Who would have thought? I mean, it was just a week ago today that we posted this paper. They responded within a few hours. Then they responded overnight on Tuesday morning last week, in which they said, yes, of course we feel terrible, we made some stupid mistakes, but we defend our methodology, and we also—the basic conclusions, they’re saying, still hold, because you do find, even with our corrected data, that over the full period, all our full post World War II period, growth does go down to 2.2 percent relative to about 3 percent. So they’re saying, well, the basic result still holds.

That’s why just now I just said you have to look at circumstances. I mean, do we really care about what happened in New Zealand in 1951 as being informative for what’s going on in the U.S. and Europe today? I don’t. I think that this story over the last decade, in which we see growth somewhat higher for countries with a higher public debt ratio, that’s much more relevant for me than what happened in New Zealand in 1951.

JAY: What reaction have we seen from policymakers here? I mean, one of their main theoretical pillars has been knocked out from the whole austerity argument. Do you see any sense of any game change there?

POLLIN: Yeah, I mean, it’s not like policymakers are calling me up and saying, I’ve changed my position. So I’m just following it in the press like anybody can.

There’s been some interesting stories. One is Erskine Bowles, who was the cochair of the deficit reduction commission appointed by President Obama, who was reported in the press as saying, yes, he heard about our study, he knows the results, he understands that this pillar of his approach with Reinhart and Rogoff has been refuted. But he still—that doesn’t change his thinking at all, because he knows intuitively that when you have a lot of debt, it’s bad. So that was his reaction.

One of the amusing ones was a report in a British paper that said the British chancellor, George Osborne, who is the architect of austerity policies in Great Britain, was seen crying at Margaret Thatcher’s funeral. But the article said, well, we know the real reason why George Osborne is crying: because his sainted Reinhart and Rogoff paper has now been refuted, and so the main pillar of his austerity policies has now melted away.

And then the third example, in a blog that was written over the weekend by Professor John Taylor of Stanford, who is a leading austerity hawk, I would say equal to Reinhart and Rogoff—and we’ve talked about John Taylor before in our discussions. And he said in this thing he wrote over the weekend that our results have already led to changes in policy at the IMF–World Bank meetings last week and at the G20 meetings and in the U.S. that the case for austerity is now getting attacked and is weaker. So that’s from three pretty reliable sources.

JAY: And Taylor was saying this with some regret, I guess, ’cause—.

POLLIN: Well, of course. John Taylor, as we’ve talked about, has been a very strong deficit hawk for years. We’ve talked about his work. He himself says in his book First Principles, you know, that the United States is on the road to ruin as a country and he fears for his children and his grandchildren. And so, I mean, he obviously thinks that the overriding question in the U.S. and elsewhere is high public debt, we’re on the road to ruin. The arguments that they’ve been making since 2009, that interest rates are going to skyrocket, that inflation was going to skyrocket, that we couldn’t cover our interest payments, all have been demonstrated to be false, as we have discussed before, Paul. Nevertheless, they keep hammering on these points.

JAY: And we’ve discussed why, but [incompr.] one more go at it. I mean, given the factual evidence—you know, we’re not seeing inflation and high interest rates, in spite of the size of the public debt—the mechanism for this 90 percent threshold to kick in, the mechanism doesn’t seem to be doing anything. And one can see the terrible effects of the recession. I guess one more time, you know, why do they keep at it?

POLLIN: Well, you’re going to have to ask them. You’re going to have to bring them on the show and ask them. I think—I don’t know John Taylor personally. I think he truly believes what he thinks, that the worst thing that can happen in a country is for the public debt to get out of hand. And he thinks it’s out of hand.

By the way, in principle I don’t disagree with the idea that it would be a bad thing for public debt to, quote, get out of hand. But we’re not anywhere close to that point. As we’ve talked about, the interest payments that the U.S. is making now on our debt is actually at a historic low, not an historic high. It’s half of what it—less than half of what it was under Ronald Reagan. The amount the government has to put aside and pay off our creditors every month as a share of total government spending is less than half of what it was under Ronald Reagan. And the reason is obvious: because the interest rate on U.S. Treasuries is at a historic low. You can borrow—the U.S. government can borrow at less than 1 percent. And we are. So we have a lot of room to pursue a fiscal stimulus that would create jobs, help move us out of the recession, help build infrastructure, help build a green economy.

JAY: Okay. Well, once again, we have contacted the communications people that represent Reinhart and Rogoff, we’ve asked them to come on and debate Bob, and we are awaiting an answer. We hope—if they’re watching this, we hope you do come and join us.

And we thank you, Bob, and thank our viewers for joining us on The Real News Network.

POLLIN: Thank you very much, Paul, for having me.

JAY: And don’t forget we’re in our spring fundraising campaign. We’re in the last days of it. We have—by May 2 we have to reach our matching grant. We have a $50,000 matching grant. Every dollar you donate gets matched with another dollar. And if you’d like to see more of this kind of economic reporting from The Real News Network, we need your help.

Thanks for joining us on The Real News.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.