I Fisk Reinhart and Rogoffs Open Letter to Paul Krugman

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,

http://qz.com/75117/how-influential-was-the-study-warning-high-debt-kills-growth/

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”

http://krugman.blogs.nytimes.com/2010/08/18/reinhart-and-rogoff-walk-in-the-light/

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

http://krugman.blogs.nytimes.com/2010/08/11/reinhart-and-rogoff-are-confusing-me/

“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.

http://angrybearblog.com/2013/04/a-bit-more-on-debt-and-growth.html

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 19^th 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.

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,