Reinhart-Rogoff forgot economics is a case-by-case science

Reinhart Rogoff

Adam Posen, who is an economist and was member of the British Monetary Policy Committee, has made a call for serenity over Reinhart-Rogoff‘s gaffe and their prediction that a country’s economy’s growth halts when reaching a higher than 90 percent debt per GDP.

Firstly, we’d need to know the many minor correlations involved in such outcome: was there an increase of main interest rates?, or a Ricardian effect about future tax expectations? Otherwise, the value of their conclusions is limited, as they finally have been found to be. Moreover, there are well-studied cases when the opposite was true, as in the US during the post-war period, when public debt surpassed the 100 percent ratio. Also, consider Japan, Italy and Belgium, in more recent times.

Then, there is the strong suspicion that the relation goes the other way around, that is, the debt per GDP ratio spikes because GDP remains flat or drops. In the eurozone, this is hardly arguable, if only because fiscal and monetary austerity policies are proving once and again to be nefarious.

Another problem the Reinhart-Rogoff’s paper had was its sheer simplicity. The simpler, the better for politicians whose aim isn’t exactly understanding the challenge and applying a rational solution but to sell mere propaganda to their voters. In this sense, Wolfgang Munchau a few days ago mentioned European Commissioner for Economic and Monetary Affairs Olli Rehn and his clamorous support to Reinhart-Rogoff’s paper back in 2011: “To see their enormous influence on the European debate, it is worth quoting an extract from a speech by Olli Rehn, the European Commission’s economic chief, to the Council on Foreign Relations in June 2011. ‘Carmen Reinhart and Kenneth Rogoff have coined the 90 per cent rule,’ he said. ‘That is, countries with public debt exceeding 90 per cent of annual economic output grow more slowly. High debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90 per cent threshold, which the US has already passed.'”

To be sure, economics is a slippery science. The economics of facts is an interrupted stream of data in which past and future complex forecasts make an impact and don’t behave according to a single model. There’s no universal model for economics, every economic cycle is unique in a certain way. Still, we must avoid mistakes from the past. It may sound discouraging for those seeking facile assurances but exercises like Reinhart-Rogoff’s are destined to become fruitless and of the interest of the specialists only.

Economic growth is compatible with high debt, particularly when your central bank can make fears of default vanish and interest rates can be contained. It depends on how much inflation will be necessary to accelerate the reductions of the debt per GDP ratio, too. But there is no absolute truths.

Commissioner Olli Rehn and most of the EU bureaucracy, meanwhile, insanely repeat to us: “austerity is the only way, the only way, the only way…”

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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