You may have seen the new skirmishes this weekend in the very public debate about Carmen Reinhart's and Kenneth Rogoff's government debt research. Reinhart and Rogoff (I'll call them RR) posted a letter to Paul Krugman on Reinhart's website, in response to a piece that Krugman wrote for The New York Review of Books.
Krugman, of course, is one of the pundits who last month published "incomplete, exaggerated, erroneous and misleading" reports about RR's research, as I explained at the time. Unlike some of the others involved, he kept the smear campaign alive and all but guaranteed RR's latest response. I'll recap the weekend's exchange in a moment, but not before offering my take on Krugman's MO.
Observations on Krugman's Campaign for More Deficit Spending
I'll start with this excerpt from my April 27 article, "More Reasons to Call Off the Reinhart-Rogoff Witch Hunt":
[The] question of how much debt is too much is an extremely important question. And RR's many critics make no attempt whatsoever to answer it (if I'm wrong about this, please send me the research), even as they bash two researchers who've been leading the way to possible answers since well before their 2010 paper.
It seems to me that you can say two things about the many pundits on this issue:
- Commentators in the U.S. who've both looked under the surface of our fiscal challenges (see the problems with official numbers in articles such as this and this) and seriously considered the question "How much is too much?" have come away alarmed.
- Of the commentators on the other side - those now crowing over the misinformation that's spread all the way from Rortybomb to the Colbert Report - I don't know of any who've attempted to do the same due diligence and answer the all-important question.
Well, I still haven't found an RR critic who's made a genuine effort to estimate how much debt is too much. But I did force myself to search a little further, and my search coincidentally focused on Krugman. I read End This Depression Now, his 2012 book, from cover to cover.
This wasn't my idea of a good read, but I try to make my reading list as balanced as I can stand. In this case, I was looking for counter-evidence to my assertions above. I wanted to see if there was anything more to Krugman's positions than über-Keynesianism and boasts that his adversaries were proven wrong. He writes incessantly about inaccurate inflation and interest rate forecasts made by so-called "austerians" -- those who've dared to express concerns about America's soaring government debt -- while arguing that these erroneous forecasts somehow prove his policy advice to be correct.
But his logic is full of holes. Near-term inflation and interest rate predictions have little to do with one's beliefs about the mostly long-term risks of excessive debt. I don't doubt that some forecasters have made faulty predictions. I know for a fact, though, that there are many who've opposed Krugman's deficit spending recommendations while at the same time either accurately forecasting inflation and interest rates or not making any predictions at all. By my estimates, the second group is large and the first not so much.
How Reinhart and Rogoff Spoiled My Holiday
So, what does all of this have to do with RR's letter to Krugman?
Well, just when I'd gotten through End This Depression Now and thought I could go back to reading stuff that makes sense to me, I learned of the RR post and felt compelled to read through Krugman's latest attacks. And then I felt compelled to write -- not just to offer my two cents on this weekend's scuffle, but also to draw some parallels between the current debate and Krugman's book. So much for my planned holiday reading of either The Bankers' New Clothes or more of The Great Deformation. (I know, I'll get over it.)
In any case, here's my list of takeaways from RR vs. PK, Memorial Day weekend edition:
- Using Internet archives (the "WayBackMachine"), RR demonstrated that their data was publicly available as far back as 2010, contrary to PK's accusations that this data was withheld. (As I said in earlier posts, I've downloaded their spreadsheets in the past and knew they were available.)
- RR showed that they've recommended policies intended to reduce austerity, contrary to their portrayal by PK as tireless austerity advocates.
- RR counter-punched on the question of debt-to-growth causality. (And yes, everyone recognizes this isn't determined wholly by correlation.) They responded to the accusation that they put too much weight on the causal effects of high debt on growth with an argument that PK puts too much weight on the causal effects of low growth on debt.
- Krugman eventually retreated to a core position that RR should have prevented impressionable policymakers from over-interpreting their 90% debt-to-GDP threshold. (I offered my opinion on these accusations here.)
Here's the Discussion We Should Be Having
Now I'll jump from RR vs. PK to F.F. Wiley vs. PK. (And no, I don't expect a response, but I'll say my piece anyway.) Not surprisingly, End This Depression Now reads like a longer version of Krugman's blog. If you're one of his followers, you'll be even more convinced that poor inflation and interest rate forecasts by the "austerian" crowd provide the evidence needed to justify massive deficit spending. Never mind those of us who've forecast inflation and interest rates correctly, or not at all, and yet still believe his fiscal policy views are too extreme.
As I said above, I couldn't find a genuine effort to estimate how much debt is too much. But Krugman's book does include a section titled "What About The Burden Of Debt?" This is two pages long, running from the top of page 141 to the top of page 143. Here's an excerpt:
The key thing to bear in mind is that the $5 trillion or so in debt America has run up since the crisis began, and the trillions more we'll surely run up before this economic siege is over, won't have to be paid off quickly, or indeed at all. In fact, it won't be a tragedy if the debt actually continues to grow, as long as it grows more slowly than the sum of inflation and economic growth.
To illustrate this point, consider what happened to the $241 billion in debt the U.S. government owed at the end of World War II ... this amounted to about 120 percent of GDP (compared with a combined federal, state, and local debt of 93.5 percent of GDP at the end of 2010). How was that debt paid off? The answer is that it wasn't.
Krugman goes on to discuss post-World War II debt developments, while providing some incredibly misleading debt service calculations, but I'll leave those for another day. I've shared the excerpt because it seems to tie into the RR debate. Consider the following:
- By using the post-World War II experience to dismiss our current debt problems, Krugman essentially suggests a debt threshold of 120% of GDP. He says nothing about debt above 120%, but he's suggesting that we shouldn't worry as long as we're below 120%. It's a threshold, all the same.
- For all the bellyaching about RR's data choices, they've built the world's most extensive government debt database (to my knowledge). Their most recent paper on debt and growth, published in 2012 and largely ignored by their critics, examined 26 high debt episodes in 22 countries. Krugman's threshold, on the other hand, is based on one high debt episode in one country.
- There are many reasons to believe that our World War II debt was far less troubling than today's challenges. One of these is that we were running gigantic non-defense budget surpluses, which meant that we balanced the budget after the war by merely bringing our soldiers home and returning factories to civilian use. As I discussed here and here, balanced budgets and financial repression were the critical ingredients in our success at whittling away war debt, and were more important than the "mild inflation and substantial economic growth" cited by Krugman.
- Outside of the natural slippage that occurs in recessions, our post-war leaders truly detested budget deficits. Presidents Harry Truman and Dwight Eisenhower restored surpluses within two years of every 1940s and 1950s recession, while mostly dismissing Keynesian theories that were being shaped in academia at that time. Truman even raised taxes to help pay for the Korean War (what a novel idea!), while Eisenhower went so far as to claim that "continued deficit spending is immoral."
In other words, there are several layers of contradictions in Krugman's reliance on the post-World War II period to support calls for more stimulus. Perhaps most glaringly, the reduction to a 60% debt-to-GDP ratio by 1957 (about half of the 1946 figure) was achieved partly by avoiding the types of Keynesian stimulus measures that have since helped push debt back above 100% of GDP. If Krugman's ideas about deficits existed at all in the 1950s, they certainly had no influence in policy-making circles, where old-fashioned principles of fiscal discipline still held sway. And without Truman's and Eisenhower's un-Krugman-like beliefs, the success story that he cites as a reason to be unconcerned wouldn't have unfolded the way that it did.
Krugman's use of this decidedly non-Keynesian episode of debt reduction to justify his Keynesian beliefs reminds me of the many times (too many) that I've encountered "circular reference" errors in Excel. His logic is no less flawed or "circular." But since there's no spreadsheet involved, I'll call it an error of induction.
Getting back to RR vs. PK, Krugman refuses to walk away from a smear campaign that's based on overblown accusations of questionable thresholds, selective data use and a spreadsheet error. I think it's time to change focus and consider the questionable thresholds, selective data use and induction error in Krugman's work.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.