This week’s #TCFBest featured another great run-down of policy work, but the stand-out was Arindrajit Dube’s guest post on the Next New Deal blog. In Reinhart/Rogoff and Growth in a Time Before Debt, Dube, an econmentrician at University of Massachusetts, Amherst re-analyzes the Reinhart/Rogoff statistical work on debt:GDP ratios and growth. Reinhart/Rogoff’s influential 2010 paper Growth in Time came under scrutiny when it was discovered that an Excel error existed. Reinhart/Rogoff defended the mistake and said the findings do not “affect in any significant way the central message of the paper or that in our subsequent work.” Mike Konczal (@rortybomb), who runs Roosevelt Institute’s Next New Deal blog, had also explored the Reinhart/Rogoff paper and was concerned about Reinhart/Rogoff’s defense. He asks, “What is that message? That higher debt is associated with lower growth?” He asked Dube to crunch the numbers. As expected many economists were discussing the findings last week. Slate’s Matthew Yglesias writes:
[Dube] confirms what seems to be the common ground of everyone in this debate, namely that there’s a statistical correlation between high debt:GDP ratios and slow GDP growth. But is that because a high ratio causes a low denominator, or because a low denominator causes a high ratio? The theoretical argument for the latter is strong whereas the former causal interpretation relied on some kind of unknown dark matter.
In the post, Dube says:
While it is difficult to ascertain causality from plots like this, we can leverage the time pattern of changes to gain some insight. Here is a simple question: does a high debt-to-GDP ratio better predict future growth rates, or past ones? If the former is true, it would be consistent with the argument that higher debt levels cause growth to fall. On the other hand, if higher debt “predicts” past growth, that is a signature of reverse causality.
We encourage you to read the rest of the post here and see the related graphs. Thank you to Labor Economist Mark Price (@price_laborecon) for the nomination.
TCF is now taking nominations for next week’s #TCFBest. As always, you can submit your nominations in the comments below, via the Twitter hashtag #TCFBest, on our Facebook page, or by email to email@example.com.