Yeah, it's bullshit, though. They found a tiny math error amongst a giant sea of agreement and the blogs are all freaking out. EDIT You know, having watched this out of the corner of my eye all day, I'm less and less wont to defend R&R. All economists are liars but when you have to tweedle the data in such a way that other economists can't even see the way you've tweedled it you're a douche. I retract my statement.
Is it? Dropping 5 countries from the average is a human error, but this: Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that the U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight. In case that didn't make sense, let's look at an example. The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K. It's hard to see how that doesn't make their findings nonsensical. Maybe it's because I am in research, but in science, it's not enough to fall in 'near agreement' with previous literature (and even here, the notion of 'agreement' is debatable) even if your methodology is bunk. Presenting a false analysis as a factual one makes it more difficult to make informed decisions, or to overturn previous interpretations in light of new or better evidence. Basically, if you are not going to do it right, don't do it at all. Otherwise, you screw everything up for everyone that is trying to understand how the world works. These two presented cherry-picked and massaged the data that fit a narrative. It doesn't matter to which degree the narrative is true or not.Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.
It doesn't make their findings nonsensical because it isn't a condemnation of the paper's gestalt. I've got This Time It's Different on my bookshelf. I haven't cracked it open yet. Mauldin leans on it heavily, and he's been pretty accurate so far. My bias comes from the number of sources that lean on R&R and the fact that the new paper's findings were presented as an ambush. That said, this looks like much ado about nothing to me, probably because of my current reading.
While the actual data might suggest that the paper's 'gestalt' isn't wrong (and the difference between negative growth or 2.2%, regardless of the trend, is a big deal for policy decisions made by a country with 90% of GDP in debt), it does reveal that what they presented weren't actually findings; and that's no small issue. Also their response is terrible. Not only do they not mention leaving countries out of the average, they say It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small but don't address treating one isolated year of -7.9% as equally large. Finally, they try to get away with saying both It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign. and By the way, we are very careful in all our papers to speak of “association” and not “causality” since of course our 2009 book THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises. It's a dishonest and jumbled response to a dishonest presentation of data. Maybe all economics is like this. I personally doubt it. But if it is, then FTS, it's useless.It doesn't make their findings nonsensical because it isn't a condemnation of the paper's gestalt.