Foreign Policy Blogs

Doubts about Data (and Debt)

 

global-debt

In a 2010 study, Carmen Reinhart and Kenneth Rogoff identified a 90 percent debt/GDP threshold as a “red line” national economies crossed only at the cost of impeding their growth. That study garnered a great deal of attention among debt hawks. More has been written about the impact of recent academic work discrediting Reinhart/Rogoff’s core conclusion (John Cassidy in The New Yorker, former Treasury Secretary Lawrence Summers in The Washington Post, and Paul Krugman in The New York Review of Books have all produced analyses of the episode in recent weeks.) Methodological concerns with the Reinhart/Rogoff work were voiced when it was initially published. The principal kerfuffle over the 90 percent threshold thesis is that it armed austerity warriors whose policies have prolonged the “Great Recession” instead of ending it. But blaming the spread of austerity politics on this one source overestimates how much “arming” austerity warriors really needed. More importantly, the analysis of the Reinhart/Rogoff work is making some timely points on the role that data analysis plays in policy making.

Both sides of the political aisle have engaged the current downturn, not wanting “to let a good crisis go to waste.” It is unclear whether conservatives, looking to shrink government under any circumstances, needed much ammunition for an austerity agenda. A budget surplus of 1.3% of GDP in 2001 and a robust economy spurred the Bush tax cuts. Although additional defense spending and the ever-present growth of health care spending quickly brought deficits back for the long term, surpluses presented as strong an opportunity as deficits for those looking to shrink government.

The questions stemming from the controversy over how data is used in policymaking are more compelling. Among economists, data is king. “In God we trust; all others bring data” is a common mantra. It’s worth noting, then, when the role of statistical analysis in policymaking comes in for any substantive criticism among economists. Summers offers the sobering observation that coding errors of the type found in Reinhart/Rogoff are “distressingly common.” Therefore, one statistical result alone should never drive decision-making, he argues. More importantly, however, he concludes that “there should be a reluctance to accept conclusions from ‘models’ without an intuitive understanding of what drives them.” Economists, as quantitative analysts, usually give any kind of qualitative assessment short shrift – if any shrift at all. So Summers’ suggestion of greater skepticism of ‘models’ and support for the necessarily qualitative efforts to arrive at an “intuitive understanding” of them sounds mildly revolutionary. Summers does not denigrate data, or even demote its importance. What he really does is argue for creating space alongside it to allow for qualitative assessments and clearer context in policymaking. It is a needed recalibration.

The Reinhart/Rogoff argument for the 90 percent “red line” debt threshold was challenged before the latest round of criticisms. Krugman is among the most consistent critics of allowing long-term debt concerns to prevent short-term fiscal stimulus as unemployment persists in the U.S. and elsewhere. Debt levels are not stopping other countries from turning to spending to boost their recovery. The May 18 issue of The Economist features a cover story on Japanese Prime Minister Shinzo Abe’s plan to sustain his country’s recovery. “Abenomics” incorporates increased public spending in a country whose gross debt stands at 240% of GDP (roughly three times that of the U.S.) Krugman’s anti-austerity push may be struggling to get traction in the U.S. But it’s gaining ground abroad.

 

Author

Michael Crowley

Mike Crowley received his MA with distinction from The Johns Hopkins University School of Advanced International Studies (SAIS) in American Foreign Policy and European Studies in 2003 and his MFA in Classical Acting from The Shakespeare Theatre Company/George Washington University in 2016. He has worked at the Center for Strategic International Studies, Akin Gump, and The Pew Charitable Trusts. He's an actor working in Washington, DC and a volunteer at the National Gallery of Art, and he looks for ways to work both into his blog occasionally.