Cambridge, Massachusetts, May 25 2013
Dear Paul:
Back in the late
1980s, you helped shape the concept of an emerging market debt overhang. The financial crisis has laid bare the fact that
the dividing line between emerging markets and advanced countries is not as
crisp as once thought. Indeed, this is a recurring theme of our 2009
book, This Time is Different: Eight
Centuries of Financial Folly.
Today, the growth bind of advanced countries in the periphery of the eurozone
has a great deal in common with that of emerging market economies of the 1980s.
Yes
their debts are not denominated in a currency of their own. The pattern is clear – borrowing in Euros is
risky as is borrowing in dollars for countries other than the USA. Following DeGrauwe (and I’m sure countless others) Krugman has
repeatedly stressed the difference between debts in a currency the debtor can
print at will and debts in other currencies.
Let’s see if R&R ever mention the fact that debts in the eurozone
are denominated in Euros.
We admire your past
scholarly work, which influences us to this day. So it has been with deep
disappointment that we have experienced your spectacularly uncivil behavior the
past few weeks. You have attacked us in very personal terms, virtually
non-stop, in your New York Times column and blog posts. Now you have doubled down
in the New York Review of Books, adding the accusation we didn't share our
data. Your characterization of our work and of our policy impact is
selective and shallow. It is deeply misleading about where we stand on
the issues.
The
two sentences discuss fundamentally different issues. The policy impact is not the same as their
stand on policy. This should be obvious
to everyone who reads newspapers.
And we would
respectfully submit, your logic and evidence on the policy substance is not
nearly as compelling as you imply.
You particularly
take aim at our 2010 paper on the long-term secular association between high
debt and slow growth. That you disagree with our interpretation of the results
is your prerogative. Your thoroughly ignoring the subsequent literature,
however, including the International Monetary Fund's work as well as our own
deeper and more complete 2012 paper with Vincent Reinhart, is troubling.
The
idea that post WWII OECD experience is what is relevant to post WWII OECD
policymakers is not eccentric at all.
More data does not mean more data which are relevant. Krugman has explained why he considers data
from countries which borrow in foreign currencies or which are on the gold
standard to be irrelevant. He has
explained why he focuses on the data he uses.
The claim that a paper which ignores these issues is “deeper and more
complete” than a paper where they are not relevant is unsupported by logic or
argument.
Perhaps, acknowledging the updated
literature-not to mention decades of theoretical, empirical, and historical
contributions on drawbacks to high debt-would inconveniently undermine your
attempt to make us a scapegoat for austerity. You write "Indeed, Reinhart-Rogoff may have had more
immediate influence on public debate than any previous paper in the history of
economics."
Setting aside this
wild hyperbole,
If
this is hyperbole, it should be possible to come up with an example of a paper
which has had more immediate influence on public debate. R&R don’t, because they can’t. In any
case, the assertion that a claim is “wild hyperbole” should be based on
something not nothing. The claim is very
likely true. Strong claims are not necessarily hyperbole.
you never seem to
mention our other line of work that has surely been far more influential when
it comes to responding to the financial crisis.
The
claim “surely been more influential” is completely unsupported by any
evidence. Note that R&R seem to ignore
the phrase “public debate.” Krugman was not discussing influence on academic
economists. Do R&R claim that the
paper was quoted more often in newspapers in congressional and parliamentary
debates, in speeches by policy makers ?
In the context of a discussion of “public
debate” the claim is plainly obviously false and R&R must know it.
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 was
not the common wisdom at all before us, as you yourself have acknowledged on more than one occasion.
Krugman
also repeatedly noted that recoveries from deep systemic financial crises are
long slow and painful before the book was published. The books is a work of economic history which
adds a lot. But R&R should have
noted that Krugman had critiqued the alleged common wisdom before their book
was published.
Over the course of
the crisis, and certainly by 2010, policymakers around the world were using our
research, alongside their assessments, to help justify sustained macroeconomic
easing of both monetary and fiscal policy fronts.
This claim is obviously false. It asserts that “by 2010, policymakers around the world … justify sustained macroeconomic easing of …
fiscal policy. “ Which policy makers ? What easing of fiscal policy ? The claim is
absurd on its face. There was not fiscal
policy easing in much of the world in 2010.
R&R seem to be totally out of contact with planet earth. Now it may be that policy makers were using
their research to advocate fiscal policy easing. I’d be interested in names, dates and
citations, since I know of no such policy makers. But the claim that there was fiscal policy
easing to justify is totally nuts. Also
Krugman made a relative claim. Influential does not mean more influential than
the R&R 2010 AEA presentation.
I google reinhard rogoff ninety danger Circa 585.000 risultati (0,33 secondi)
I google reinhard rogoff this time is different Circa 400.000 risultati (0,17 secondi)
Not so surely.
Your desire to blame our later 2010 paper for the
stances of some politicians fails to recognize a basic reality: We were
out there endorsing very different policies.
This is
a plainly false assertion on a simple matter of fact Krugman has repeatedly noted that basic reality
http://krugman.blogs.nytimes.com/2013/04/26/grasping-at-straw-men/ “they deny having been strong austerity advocates”
R&R’s
claim of fact is false. They are
literate and claim to have read Krugmans critiques of them. .I found the proof of the falsehood of their
claim that Krugman failed to recognize a basic reality in a few minutes by
googling krugman reinhart rogoff..
Anyone with experience in these matters knows that
politicians may float a citation to an academic paper if it suits their
purposes. But there are limits to how much policy traction they can get
with this device when the paper's authors are out offering very different
policy conclusions.
This is
a claim about history which is plainly false.
Arrow is a social democrat but his work has been used very successfully
to argue that markets work an elections don’t.
Phillips was horrified by the use made of his scatter plot (read Zombie
Economics). Uh Godwin’s law violation
warning. Darwin did not advocate
genocide but that did not put limits on Hitler.
Rousseau said that France was not capable of Democracy and any effort to
establish it in France would fail, but that didn’t limit Robespierre. The claim is obviously false. The episode of
R&R’s AEA presentation is proof enough to anyone who reads the papers, but
human history is full of proof that the claim is plainly nonsense. No sensible person could possibly believe
such a thing. I am sure that R&R
don’t except when it is convenient to them.
You can refer to the appendix to this letter for our
views on policy through the financial crisis as they were stated publicly in
real time. We were not silent.
Very senior former policy makers, observing the
attacks of the past few weeks, have forcefully explained that real-time
policies are very seldom driven to any significant extent by a single academic
paper or result.
Very
seldom does not mean never. Note that no
current policy makers deny that their AEA presentation drove policy debates to
a significant extent. I know of no one who has made that claim about that
particular paper, because it is false. R&R discuss the general pattern and
assert that if something is “very rare” it couldn’t have happened recently Such plainly invalid arguments made by such smart
people are “very seldom”.
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.
It is
also worth noting that this has nothing to do with the debate between Krugman
and R&R. They are attempting to tar
him with guilt by association with IMF bashers.
Now let us turn to the substance. The events of the
past few weeks do not change basic facts and fundamentals.
Some Fundamentals on Debt
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). Significant shares of these debts are held by
foreigners in most cases, with the notable exception of Japan. In Europe,
where the (public and private) external debt exposures loom largest, financial
de-globalization is well underway. Debt financing has become an
increasingly domestic business and a difficult one when the pool of domestic
saving is limited.
Note no mention of the Euro. Does the claim apply to European countries
outside of the Eurozone ? R&R
completely ignore the issue of domestic denominated vs foreign denominated
debt. They must know it makes a critical
difference.
As for the United States: our only short-lived
high-debt episode involved WWII debts, which were held by domestic residents,
not fickle international investors or central banks in China and elsewhere around
the globe. This observation is not meant to suggest "a scare"
in the offing, with bond vigilantes driving a concerted sell-off of Treasuries
by the rest of the world and a dramatic spike US in interest rates.
Even
when denying that they are suggesting a scare they neglect to mention that the
result of the bond vigilantes could be depreciation of the dollar and increased
demand for US made products. The balance
depends on FOMC policy (including future expected FOMC policy). Rogoff is, to put it very mildly, very
familiar with the concept of an exchange rate and the importance of exchange
rate regimes (I agree with Krugman that he is the world’s number 1 or so
international macroeconomist). A
discussion of a sell-off of Treasuries with no mention of exchange rates is an attempt
to hide the reason that their work is not relevant to the US policy debate.
Carmen's work
on financial repression suggests a different scenario. But many emerging
markets have stepped into bubble-like territory and we have seen this movie
before. We should not take for granted their prosperity that makes
possible their continuing large-scale purchases of US debt. Reversals are
possible. Sensible risk management means planning for these and other
contingencies that might disturb today's low global interest rate environment.
The US
Treasury also sells long term debt instruments.
That is a way to plan for those contingencies. There is no reason it has
to rely on future decisions by investors.
It can lock in low interest rates now.
Surely R&R know about Treasury bonds.
Second, on
debt and growth. The Herndon, Ash and Pollin paper, using a different
methodology, reinforces our core result that high levels of debt are associated
with lower growth. This fact has been hidden in the tabloid media and
blogosphere discourse, but this point is made plain by even a cursory look at
the full set of results reported in the very paper they critique.
Still at U Mass Amherst Dube shows that the timing is
low growth then a high debt to GDP ratio except for extremely high growth at
extremely low ratios (basically Axis countries whose debt was forgiven growing
quickly soon after WWII as noted by Krugman).
I have noted that for the post wwII OECD dataset there is no evidence at
all that high debt to GDP granger causes low growth. Herndon, Ash and Pollin (2013) is an
important paper, but it was not the last contribution to the literature.
More importantly,
the result was prominently featured in our 2012 Journal of Economic Perspectives paper with Vincent Reinhart on Debt Overhangs, which
they do not cite. The main point of our 2012 paper is that while the difference
in annual GDP growth between high and lower debt cases is about one percent a
year, debt overhang episodes last on average 23 years. Thus, the cumulative
effect on income levels over time is significant.
Notice how the data are divided into categories “high
and lower debt” this creates a step by assumption. This is the key point of
debate with Krugman (see his reply) http://krugman.blogs.nytimes.com/2013/05/26/reinhart-and-rogoff-are-not-happy/ . The
calculation is not useful to policy makers. Also growth is not just brief recessions
and the effect of debt (note a literature too huge to cite) so this does not address
the issue of causation (as frequently suggested by CR&R and I think VR and
no I won’t find the link)).
Third,
the debate of the last few weeks does not change the fact that debt levels
above 90% (even if one entirely rejects this marker for gross central
government debt as a common cross-country "threshold") are very rare
altogether and even rarer in peacetime. From 1955 until right before the
recent crisis, advanced economies spent less than 10% of those years at a
debt/GDP ratio of higher than 90%; only about two percent of the years are
above 120% debt/GDP. If governments thought high debt was a riskless
proposition, why did they avoid it so consistently?
This is policy analysis made under the assumption that
policy makers know what they are doing. If one is willing to make that
assumption, there is no reason to bother with economic research.
Debt and Growth Causality
Your recent April
29, 2013 NY Times blog The Italian Miracle is meant to highlight how in high-debt Italy, interest
rates have come down since the European Central Bank's well-placed efforts to
act more as a lender of last resort to periphery countries. No
disagreement there. However, this positive development is meant to re-enforce
your strongly held view that high debt is not a problem (even for Italy) and
that causality runs exclusively from slow growth to debt. You do not
mention that in this miracle economy, GDP fell by more than 2 percent in 2012
and is expected to fall by a similar amount this year. Elsewhere you have
stated that you are sure that Italy's long-term secular growth/debt problems,
which date back to the 1990s, are purely a case of slow growth causing high
debt. This claim is highly debatable.
Indeed, your
repeatedly-expressed view that slow growth causes high debt but not visa-versa,
is hardly supported by the recent literature on the subject.
The
sentence immediately above is totally false.
R&R either know it is false or have neglected to read anything
Krugman wrote on the question. For
example he wrote
“I’m
also puzzled by the way R-R deal with the reverse causation argument: they
admit it can happen, but argue that causation doesn’t always run from growth to
debt, but can run the other way. Isn’t that attacking a straw man?”
The
claim that the assertion which they definitely claim he made is a “straw man”
is the strongest possible proof that their claim is false.
Of course, as we
have already noted, this work has been singularly ignored in the public
discourse of the past few weeks. The best and worst that can be said is
that the results are mixed. A number of studies looking at more
comprehensive growth models have found significant effects of debt on growth.
We made this point in the appendix to our New York Times piece. Of course, it is well known that the
economic cycle impacts government finances and therefore debt (causation from
growth to debt). Cyclically adjusted budgets have been around for
decades, your shallow characterization of the growth-debt connection.
This
is not a complete sentence, but the argument is that difference in growth are
nothing but the effects of debt plus brief recessions. This is nonsense. I am beginning to think
that maybe R&R really don’t understand this issue. It’s as if they have overlooked the entire
much too large growth regression literature.
Also it is easy to test if the lower growth due to debt/GDP over 90%
(compared to =90%) is due to short term correlation between the previous year’s
growth and this yea’ss ratio. For the post WWII OECD sample it is. This is one
simple regression. R&R have no
excuse for letting me be the first to report it.
As for ways debt might affect growth, there is debt
with drama and debt without drama.
Debt with drama. Do you really think that a country that is
suddenly unable to borrow from international capital markets because its public
and/or private debts that are a contingent public liability are deemed
unsustainable will not suffer lower growth and higher unemployment as a
consequence?
If the
result is a sharp depreciation of the currency sure. Rogoff is pretending he
doesn’t know what exchange rates are. I was in Italy when there was a sudden
collapse of faith in Lira denominated Italian debt (1992). It was the best thing that happened to the
Italian economy in decades.
With governments
and banks shut out from international capital markets, credit to firms and
households in periphery Europe remains paralyzed. This credit crunch has a
crippling effect on growth and employment with or without austerity.
Fiscal austerity reinforces the procyclicality of the external and
domestic credit crunch. This pattern is not unique to this episode.
It is
only found when countries borrow in currencies which they can’t print at will
and countries which are determined to stay on the gold standard. R&R pretend that Eurozone problems have
nothing to do with the Euro.
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.
Here
the concern is that Draghi et al will be more austere than Merkel et al. It is an absurd preoccupation. German y overheating means inflation in
Germany. Europe needs inflation in the
core or deflation in the periphery. IIRC
deflation is always associated with severe recession whether or not there is a
debt problem.
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.
This
might or might not be better, but it is much less fun for Germans. It obviously won’t happen (nor will German
fiscal stimulus). It is a fantasy magic pony plan. To be interested in whether debt forgiveness
would be better than tax cuts one has to ignore political realities
entirely. In any case, there is no
reason with Krugman Reinhart and Rogoff can’t argue for both debt forgiveness
and German tax cuts. It isn’t as if
Germany’s balance sheet strength will be exhausted if they advocate a lot of
both. Also my pet obsession. The ECB is now close to the ZLB. I think it is clear that there isn’t much
more they can do (the US experience shows how totally ineffective nonstandard
monetary policy is in the absence of support from the fiscal authority).
Debt without drama. There are other cases, like the US today or Japan
since the mid-1990s, where there is debt without drama. The plain fact
that we know less about these episodes is a point we already made in our New York Times piece. We pointedly do not include the historical
episodes of 19th century
UK and Netherlands among these puzzling cases. Those imperial debts were
importantly financed by massive resource transfers from the colonies. They had
"good" high-debt centuries because their colonies did not. We
offer a number of ideas in our 2012 paper for why debt overhang might matter
even when there is no imminent collapse of borrowing capacity.
Bad shocks do happen. What is the foundation for your
certainty that as peacetime debt hits new records in coming years, the United
States will be able to engage in forceful countercyclical fiscal policy
if hit by a large unexpected shock? Furthermore, do you really want to
find out the answer to that question the hard way?
The US Federal Government has an
unlimited supply of dollars. The idea
that it might run out of dollars is obvious nonsense. It is like worrying about
a hot air shortage in the US Senate.
This is plainly obvious. There is
no way that R&R can fail to understand that the risk is of a future policy
error (resulting in a severe recession or high inflation) not of a binding
limit to the US Federal Government’s access to dollars. Also it takes a lack of
imagination or empathy to worry more about a possible future problem with the
unemployment rate is 7.5% the deep poverty rate is at record levels (party
because records don’t go back very far) and long term unemployment is far above
the previous post WWII high. I stress that think that in normal times the US
Federal Government should run a surplus, and indeed build a sovereign wealth
fund. But I believe this because I believe that people aren’t Ricardian so debt
creates the illusion of wealth and sub optimal capital accumulation and not
because I think the USA might run out of dollars.
The United Kingdom, which does not issue a reserve
currency, is more dependent on its financial sector and suffered a bigger
banking bust, has not had the same shale gas revolution, and is more vulnerable
to Europe, is clearly more exposed to the drama scenario than the US. And
yet you regularly assert that the situations in the US and UK are the same and
that both countries have the costless option of engaging in an open-ended
fiscal expansion. Of course, this does not preclude high-return
infrastructure investments, making use of the public balance sheet directly or
indirectly through public-private partnerships.
Policy response to debt without drama. Let us be clear, we have addressed the role of
somewhat higher inflation and financial repression in debt reduction in our
research and in numerous pieces of commentary. As our appendix shows, we
did not advocate austerity in the immediate wake of the crisis when recovery
was frail. But the subprime crisis began in the summer of 2007, now six
years ago. Waiting 10 to 15 more years to deal with a festering problem is an invitation for
decay, if not necessarily an outright debt crisis. The end may not come
with a bang but with a whimper.
It
may. Also R&R may write an open
letter tomorrow saying Krugman was right about everything and apologizing for
this letter. But it’s not the way to
bet. An argument that a policy proposal
may cause problems without any evidence that it would or any explanation of how
it could is not worthy of Reinhart and Rogoff. They are appealing to prejudice,
because they have no evidence or argument.
Scholarship: Stick to the facts
The accusation in
the New York Review of Books is a sloppy neglect on your part to check the facts
before charging us with a serious academic ethical infraction. You had
already implicitly endorsed this from your perch at the New York Times by posting a link to a program that treated the misstatement as fact.
Fortunately, the
"Wayback Machine" crawls the Internet and periodically makes
wholesale copies of web pages. The debt/GDP database was first archived in October 2010 from Carmen's University of Maryland webpage.
The data migrated to ReinhartandRogoff.com in March 2011. There it sits with our other
data, on inflation, crises dates, and exchange rates. These data are
regularly sought and found for those doing research who care to look. The
greater disclosure of debt data from official institutions is testament to
this. The IMF began to construct historical public debt data only after
we had provided a roadmap in the list of our detailed references in a 2009 book
(and before that in a 2008 working paper) that explained how we had unearthed the data.
Our interaction with scholars and practitioners working
on real world questions in our field is ongoing, and our doors remain open. So
to accuse us of not sharing our data is an unfounded attack on our academic and
personal integrity.
OK this is an important issue. Do R&R use sitemeter ?
Update -- R&R did *not* make their data set available. Some of their data (debt/gdp) is publicly available. The data on real GDP growth are not (except via Herndon and even then there are multiple real GDP time series and I don't know which they used).
see Herndon on the question.
http://www.businessinsider.com/thomas-herndon-on-reinhart-and-rogoffs-data-availability-2013-5
He is very polite, but notes that they did not make their spreadsheet available. I'm pretty sure that it is the only way to find out that they weighted by debt episode and not by country-year. I am pretty sure that it was impossible to reproduce their 2010 AEA presentation results using publicly available data. I call this one too for Krugman, but it sure isn't as clear as the other issues.
Update -- R&R did *not* make their data set available. Some of their data (debt/gdp) is publicly available. The data on real GDP growth are not (except via Herndon and even then there are multiple real GDP time series and I don't know which they used).
see Herndon on the question.
http://www.businessinsider.com/thomas-herndon-on-reinhart-and-rogoffs-data-availability-2013-5
He is very polite, but notes that they did not make their spreadsheet available. I'm pretty sure that it is the only way to find out that they weighted by debt episode and not by country-year. I am pretty sure that it was impossible to reproduce their 2010 AEA presentation results using publicly available data. I call this one too for Krugman, but it sure isn't as clear as the other issues.
Recap
Finally, we attach, as do many other mainstream
economists, a somewhat higher weight on risks than you do, as debts of all
measure -- including old age liabilities, public debt, private debt and
external debt -- ascend into record territory. This is not a
conclusion based on one or two papers as you sometimes seem to imply, but
rather on a long-standing body of economic research and extensive historical
experience about the risks of record high debt levels.
You often cite John
Maynard Keynes. We read Keynes, all the way through. He wrote How to Pay for the War in 1940 precisely because he was not blasé about large
deficits - even in support of a cause as noble as a war of survival. Debt is a
slow-moving variable that cannot - and in general should not - be brought down
too quickly. But interest rates can change much more quickly than fiscal
policy and debt.
The
interest yield of a 30 year bond as traded on the secondary market is not a
problem for the Treasury. Concerns about
future interest rates can be addressed by issuing long term debt. Are Reinhart and Rogoff familiar with the
meaning of the phrase “Treasury Bond” ? They are pretending that they have no
idea what it means.
You might be right, and this time might be, after all,
different. If so, we will admit that we were wrong. Whatever the
outcome, we intend to be there to put the results in proper context for the
community of scholars, policymakers, and civil society.
Respectfully yours,
1 comment:
Of possible interest, if dishonestly cherry-picked quotes by an idiot interest you:
http://www.economicprincipals.com/issues/2013.05.26/1507.html
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