Lawrence Summers, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010.
The economics commentariat and no small part of the political debate have been consumed recently with the controversy surrounding the work of my Harvard colleagues (and friends) Carmen Reinhart and Ken Rogoff. 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 Reinhart and Rogoff have acknowledged, that they made a coding error that resulted in their omitting some relevant data in forming their results and that using updated data for several countries reduces substantially the strength of some of the statistical patterns Reinhart and Rogoff had asserted. Issues have also arisen regarding how they weighted observations in forming the averages on which they base their conclusions.
Many have asserted that these questions undermine the claims of austerity advocates around the world that deficits should be quickly reduced. Some have gone so far as to blame Reinhart and Rogoff for the unemployment of millions, asserting that they were crucial intellectual ammunition for austerity policies. Others believe that even after reanalysis, the data support the view that deficit and debt-burden reduction is important in most of the industrialized world. Still others think the controversy calls into question the usefulness of statistical research on economic policy.
Where should these debates settle? As 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, these would be my takeaways:
First, this experience should accelerate the evolution of mores with respect to economic research. Rogoff and Reinhart are rightly 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 appear to have had errors similar to those made by Reinhart and Rogoff. Going forward, authors, 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 on a single statistical result. Policy judgments should be based on evidence accumulated from multiple studies done with differing methodological approaches. Even then, there should be a reluctance to accept conclusions from “models” without an intuitive understanding of what drives them. It is understandable that scholars want their findings to inform policy debates. 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 of people have become 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 different currencies, financial systems, cultures, degrees of openness and growth experiences? And there is the chestnut that correlation does not establish causation and so any tendency for high debt and low growth to go together might well reflect the debt accumulation that follows from slow growth.
Third, while Reinhart and Rogoff’s work was shown not to support the claims made by prominent right-leaning U.S. and British figures 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 then cast about for intellectual ballast. While there may be no threshold beyond which debt becomes catastrophic, and while the British and American experiences both suggest 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 debt can or should be accumulated with abandon. On all but the most optimistic forecasts, further action will be necessary almost everywhere in the industrial world to ensure that debt levels are sustainable after economies recover.
Now is not the time for austerity. Yet 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 those painful acts.