There have been an extraordinary number of reactions to the paper we wrote with Thomas Herndon that critiqued the highly influential 2010 Reinhart and Rogoff paper “Growth in a Time of Debt.” Not surprisingly, these reactions have run the gamut. It is obviously impossible for us to respond to all the points raised. One of the most thoughtful critical responses was from Prof. James Hamilton of UC San Diego. Prof. Hamilton is an eminent econometrician. He posted his critique on his own blog site Econbrowser here. We are reposting here his critique of our work along with our response, below. Prof. Hamilton was kind enough to post our response on his site as well.
In 2010, two Harvard economists published an academic paper that spoke to the world’s biggest policy question: should we cut public spending to control the deficit or use the state to rekindle economic growth? Growth in a Time of Debt by Carmen Reinhart and Kenneth Rogoff has served as an important intellectual bulwark in support of austerity policies in the US and Europe. It has been cited by politicians ranging from Paul Ryan, the US congressman, to George Osborne, the UK chancellor. But we have shown that several critical findings advanced in this paper are wrong. So do we need to rethink austerity economics more broadly?
Updated May 9
In this new paper, Thomas Herndon, Michael Ash and Robert Pollin look carefully at the analysis underlying a cornerstone of government austerity plans: studies by Carmen Reinhart and Kenneth Rogoff which correlate national debt-to-GDP ratios over 90% with sharp declines in growth. Their critique has struck a live wire in the media. Some interesting highlights are:
Paul Krugman’s blog in The New York Times
Mike Konczal on RortyBomb
Moneybox blog on Slate
Wonkblog in the Wall Street Journal
FTAlphaville blog in the Financial Times
Dean Baker in The Guardian
Josh Bivens on the EPI blog
Jared Bernstein’s blog
Arin Dube on RortyBomb
Mary Bottari on PRWatch
and a sampling of the rest…
Are you concerned with unemployment and the effects of austerity on the very slow recovery? The Congressional Budget Office (CBO), with the help of mainstream theory, has a solution. Just hike the natural rate of unemployment. Now there are less people involuntarily unemployed, and we are only about 2.2% above ‘full employment.’ If they hike it a bit more we are done, and John Taylor and Martin Feldstein will be correct in pressing the Fed to hike the rate of interest.
The U.S. Department of Labor today reported that the official unemployment rate had nudged down from 7.7 percent in February to 7.6 percent in March. But this slight improvement in the unemployment rate was due entirely to the fact that nearly 500,000 people dropped out of the labor force in March. Think of a mid-sized city like Indianapolis. Now image if all of the people in the labor force in Indianapolis in February dropped out in March. That’s effectively what happened last month to bring down the official unemployment rate to 7.6 percent. If those nearly 500,000 people (from Indianapolis and everywhere else) had been included among the unemployed, the official rate today would instead be 7.9 percent. On top of this, if we also take into account people who wanted full-time work but had to accept a part-time job, plus people who didn’t look for work this month but haven’t fully stopped looking, the unemployment rate rises to 13.8 percent, or 21.3 million people.