First, University of Massachusetts-Amherst grad student Thomas Herndon shot holes in their influential research paper, "Growth In A Time Of Debt," by pointing out several mistakes and omissions the Harvard economists had made. Now, two PhD students at the University of Missouri-Kansas City have a new paper that they say finds another flaw in that same research.
The students argue that Reinhart and Rogoff's paper leaned too heavily on data from one country, Japan, leading to all sorts of bad conclusions about the relationship between government debt and economic growth.
"The argument that high ratios of government debt-to-GDP cause low growth remains plagued by misconceptions, at least for nations which issue their own currency," wrote the UMKC students, Matthew Berg and Brian Hartley. They used the same data that Herndon used, correcting for Reinhart and Rogoff's earlier errors and omissions.
Berg and Hartley argued that, once you adjust for the outsize influence of Japan on the data, there is no evidence that high debt causes slow growth, as Reinhart and Rogoff strongly suggested in their original paper and in subsequent influential op-ed pieces. In fact, there is some evidence that the chain of events may work in the other direction, with slow growth leading to higher debt, Berg and Hartley wrote.
Reinhart and Rogoff discussed Japan briefly in a recent response to critics published in The New York Times. They, too, labeled Japan an outlier, but stood by their overall research. And they conceded that a lot more investigation needs to be done into the question of whether high debt causes slow growth or the other way around.
Every new blow to Reinhart and Rogoff's research is another nail in the coffin of the case for austerity -- or should be, at least. Reinhart and Rogoff's original claim, that countries with debt of more than 90 percent of gross domestic product suffered from dramatically slower economic growth, has been repeatedly used as a baton to beat austerity opponents into submission. It was used to justify devastating belt-tightening measures in Europe and the U.K. and contributed to a deficit obsession in the U.S. that has helped keep growth slow and unemployment high.
Despite the errors in their research, Reinhart and Rogoff claim their main point -- that too much debt is bad -- still stands, and other austerity fans still agree with them.
They just don't really have the numbers to back them up any more, thanks to Herndon, who says he finds Reinhart and Rogoff's rebuttals unconvincing. And his paper has apparently inspired an army of economists, and grad students, to pile into the Mystery Machine and look for other flaws.