The past is never dead. It’s not even past.

Rajan Calls Krugman "Paranoid" for Criticizing Reinhart and Rogoff’s Research

By William K. Black, New Economic Perspectives

Posted on August 13, 2013

The original feud was most famously between Stiglitz and Rogoff.  Stiglitz, who led the movement at the World Bank to throw off its support for austerity, memorably claimed that IMF was staffed with “third rate” economists.  Rogoff famously blasted Stiglitz in a July 2, 2002, “open letter” (only months after Stiglitz was made a Laureate) that, inter alia, referred to him as a “loose cannon” who had “slandered” the IMF staff, slammed him for refusing to “admit to having been even slightly wrong about a major real world problem,” suggested he was so arrogant that he doubted that Paul Volcker was “really smart,” admitted that Stiglitz had a few ideas with which the IMF would “generally agree” because most of them were “old hat,” described Stiglitz’s most recent book as “long on innuendo and short on footnotes,” derided him as pretending to see himself “as a heroic whistleblower” when he was actually peddling “snake oil,” described Stiglitz views as being most analogous to Arthur Laffer’s “voodoo economics” (cleverly and deeply insulting on multiple levels), accused Stiglitz of lacking faith in markets and having faith in increasingly democratic governments (“you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better”), and ended with a wonderfully nasty “compliment” that compared Stiglitz to a famous scholar who suffers from often disabling mental illness (“Like your fellow Nobel Prize winner, John Nash, you have a ‘beautiful mind.’ As a policymaker, however, you were just a bit less impressive.”)  To top off this list, Rogoff told Stiglitz that he should pull his book from publication because it “slandered” a senior IMF official.

But those are only the gratuitous insults that Rogoff launched at Stiglitz.  His real attack was that Stiglitz had done incalculable damage to the developing world by criticizing the IMF and by opposing austerity as “battlefield medicine” for nations thrown into severe recessions.

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Rogoff’s claim is that the “impulsive” Stiglitz’s criticism of the IMF during the Asian crisis endangered the economic recovery essential to “indigent people in Asia” because it could have reduced “confidence” in the IMF’s policy of imposing austerity as “battlefield medicine” for Nations that were in sharp recessions.

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Having analogized Stiglitz to a murderous war criminal, Rogoff returns to his subthemes that Stiglitz is arrogant, a terrible economist, and personally responsible for the IMF’s failed austerity programs because Stiglitz “ignominiously sabotaged” those programs by criticizing them.  Rogoff asserts that the key to economic recovery from a recession is the appearance of what many economists now refer to as the “confidence fairy” and that austerity is the sole elixir that can summon the confidence fairy.  The confidence fairy only appears if one believes, really believes, in fairies so Stiglitz’s criticism of austerity was an act of sabotage that prevented the IMF from summoning the fairy.

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Rogoff’s criticisms of Stiglitz and his (and the IMF’s) embrace of Greenspan, Rubin, and Summers’ assaults on financial regulation produced the criminogenic environments that led to the epidemics of control fraud that drove the global financial crisis and the Great Recession.  Reinhart and Rogoff (R&R) published a book claiming that government stimulus programs were counterproductive and that austerity should be the response.  They asserted in policy recommendations that there was a cliff when a nation’s debt reached 90% of its GDP that led to untenable interest expense burdens that served as a long-term brake on economic growth.  Their book was widely and favorably cited by proponents of austerity.  The proponents were able to restrict the size of the U.S. stimulus program, remove its vital “revenue sharing” component that could have prevented so much harm to states and communities and speeded the recovery, and force much of the stimulus to be in the form of relatively ineffective tax cuts for the wealthy.  The impact of R&R in the Eurozone was far worse.  It led to austerity programs that forced the Eurozone into a gratuitous recession and much of the periphery into a second Great Depression that continues.

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There were strong, immediate criticisms of R&R’s claims about austerity and the asserted debt cliff, including those of my colleague Randy Wray that proved correct.  R&R failed to distinguish between nations with fully sovereign currencies and other nations and engaged in selective data that excluded nations and years that ran counter to their claimed findings.  Graduate students from two of the Nation’s few remaining heterodox economics departments (University of Massachusetts, Amherst and the University of Missouri-Kansas City) devastated the R&R book by examining its data – and the data R&R excluded.  The U. Mass graduate student won deserved fame for finding that R&R had made serious data entry errors that when corrected revealed that the purported 90% cliff was fictional and greatly reduced the relationship that R&R reported between increased debt and reduced growth.  Our graduate students demonstrated that if one were to infer causality from the data the direction of causality ran the opposite of what R&R claimed in their policy arguments.  Recessions led to high levels of debt, not the other way around.

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For reasons that pass all understanding, Reinhart and Rogoff decided to claim that the U. Mass study had confirmed the R&R study that higher debt was associated with lower growth and to claim that they had never argued that there was a cliff or that high debt led to lower growth.  This was a strategy that had to fail in the modern era, which retained records of their statements and statements of policy makers about the cliff and about their claim that high debt led to low growth.  (Note that Rogoff’s 2002 letter lambasting Stiglitz made that same claim.)

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Reinhart and Rogoff’s disingenuous response to the revelation of their many errors prompted Krugman to call them out on their claims.  Note that Reinhart and Rogoff’s response (immediately above) did not complain of Krugman’s (quite mild) comments one week before they wrote their April 26, 2013 response.

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Reinhart and Rogoff reprised some of the tactics of Rogoff’s 2002 open letter attacking Stiglitz with an open letter (May 25, 2013) attacking Krugman for criticizing R&R.  The famous line in this iteration was: “it has been with deep disappointment that we have experienced your spectacularly uncivil behavior the past few weeks. You have attacked us in very personal terms, virtually non-stop….”

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Just when one might have hoped that R&R’s flawed study, their disastrous support for austerity, and the feud would become a bit of arcane economic history, Rajan, on the way to India to lead its central bank, decided to rally around his IMF colleagues and to (by innuendo) accuse Krugman of being “paranoid.”

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There are three obvious things to say in response to Rajan’s title and claim.  First, having read Rogoff’s open letter to Stiglitz, if Rajan wants to criticize a “paranoid,” “spectacularly uncivil” style of discourse containing myriad ad hominem attacks he has aimed his pen at the wrong economist.

Second, Krugman did not make ad hominem attacks on Rajan’s IMF colleagues.  Krugman made substantive criticisms of Reinhart and Rogoff’s arguments and practices.  One can debate the accuracy of his criticisms, but they were addressed to the merits of their research.

Third, Rajan makes an ad hominem attack on Krugman in this article.  Worse, he does it by innuendo, implying that Krugman is “paranoid.”  Rajan and Rogoff have reason to be personally upset with Krugman.  Krugman wrote a June 9, 2011 (2010) column that explained that Rajan and Rogoff gave spectacularly bad advice not only in favor of fiscal austerity, but raising interest rates, at a time when doing so would have been disastrous and was unsupported by any economic model.  Krugman quoted Keynes’ famous passage in which he noted that many economists viewed the willingness to inflict misery on others as the hallmark of a real economist.

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Readers will likely ignore Rajan’s column because they will consider his attack on Krugman as an understandable, but disingenuous, payback for Krugman criticisms of the three former IMF economists.  That would be a shame, for Rajan’s article contains two enormously important admissions that my colleagues who specialize in macroeconomics have long emphasized.

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Theoclassical economists did not simply assume away finance and money.  By assuming finance and money away they implicitly assumed away fraud and the essential regulatory cops on the beat.  Theoclassical economists pushed to eviscerate the institutional protections such as effective financial regulation and regulators that had helped ensure “that the financial plumbing worked in the background” and created the criminogenic environments that led to the epidemics of control fraud that drive our recurrent, intensifying crises.  Economists ignored the warnings and the policies recommended by another Laureate, George Akerlof.  Akerlof and Paul Romer wrote a classic article in 1993 entitled “Looting: The Economic Underworld of Bankruptcy for Profit.”

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Neoclassical economists overwhelmingly continue to ignore Akerlof, Romer, and their former colleague Jim Pierce’s findings about control fraud and the findings of criminologists.  Rajan’s book about the crisis, for example, asserts that fraud played no material role in the crisis and describes a hypothetical scam that he says illustrates the (lawful) causes of the crisis.  The scam, however, requires two felonies and would fail as a scam.  Rajan does not understand the law or fraud.  The accounting control fraud “recipe,” by contrast, works and has great explanatory power.