By Lawrence Summers
May 5 The economics commentariat and no small
part of the political debate in recent weeks has been consumed
with the controversy surrounding the work of my Harvard
colleagues (and friends) Carmen Reinhart and Ken Rogoff (RR).
Their work had been widely interpreted as establishing that
economic growth was likely to stagnate in a country once its
government debt-to-GDP ratio exceeded 90 percent.
Scholars at the University of Massachusetts have
demonstrated and RR have acknowledged that they made a coding
error that resulted in their omitting some relevant data in
forming their results and also have noted that using updated
data for several countries reduces substantially the strength of
some of the statistical patterns they asserted. Issues have also
arisen with respect to how RR weighted observations in forming
the averages on which they base their conclusions.
Many have said that the questions raised undermine the
claims of austerity advocates around the world that deficits
should be quickly reduced. Some have gone so far as to blame RR
for the unemployment of millions, asserting that they provided
crucial intellectual ammunition for austerity policies.
Others believe that even after re-analysis the data support
the view that deficit and debt burden reduction is important in
most of the industrialized world. Still others regard the
controversy as calling into question the usefulness of
statistical research on economic policy questions.
Where should these debates settle? From the perspective of
someone who has done a fair amount of econometric research,
consumed such research as a policymaker and participated as an
advocate in debates about fiscal stimulus and austerity, here
would be my takeaways.
First, the RR experience should accelerate the evolution of
mores with respect to economic research. Rogoff and Reinhart are
rightfully regarded as careful, honest scholars. Anyone close to
the process of economic research will recognize that data errors
like the ones they made are distressingly common. Indeed the JP
Morgan risk models in use when the "London Whale" trade was
placed had errors not unlike those made by RR.
In the future, authors and journals and commentators need to
devote more effort to replicating significant results before
broadcasting them widely. More generally, no important policy
conclusion should ever be based solely on a single statistical
result. Policy judgments should be based on the accumulation of
evidence from multiple studies done with differing
Even then, there should be a reluctance to accept
conclusions from "models" without an intuitive understanding of
what is driving them. It is right and understandable that
scholars want their findings to inform the policy debate. But
they have an obligation to discourage and on occasion contradict
those who would oversimplify and exaggerate their conclusions.
Second, all participants in policy debates should retain a
healthy skepticism about retrospective statistical analysis.
Trillions of dollars have been lost and millions have been
unemployed because the lesson learned from 60 years of
experience between 1945 and 2005 was that "American house prices
in aggregate always go up." This was no data problem or
misanalysis. It was a data regularity until it wasn't.
The extrapolation from past experience to future outlook is
always deeply problematic and needs to be done with great care.
In retrospect, it was folly to believe that with data on about
30 countries it was possible to estimate a threshold beyond
which debt became dangerous. Even if such a threshold existed,
why should it be the same in countries with and without their
own currency, with very different financial systems, cultures,
degrees of openness and growth experiences? And there is the
chestnut that correlation does not establish causation and any
tendency for high debt and low growth to go together reflects
the debt accumulation that follows from slow growth.
Third, while RR's work, even unqualified by the recent
replication efforts, did not support the claims made by the
prominent figures on the right in the U.S. and UK regarding the
urgency of deficit reduction efforts, much of the joy taken on
the left in their embarrassment is inappropriate.
It is absurd to blame them for austerity policies. The
authors of those policies chose the policies first and only then
cast about for intellectual ballast.
While there may be no threshold beyond which debt
automatically becomes catastrophic, and while the British and
American experiences are both suggesting that fiscal contraction
in a slack economy where interest rates are near zero is
inimical to growth, it is a grave mistake to suppose that the
debt can or should be accumulated with abandon.
On all but the most optimistic forecasts, further actions
will be necessary almost everywhere in the industrial world to
assure that debt levels are sustainable after economies recover.
Now is not the time for austerity, but we forget at our
peril that debt-financed spending is not an alternative to
cutting other spending or raising taxes but only a way of
deferring these painful acts.