UMass graduate student Thomas Herndon rocks economics world with class project on debt, growth

Last modified: Sunday, May 26, 2013

AMHERST — Last fall, Thomas Herndon and economics classmates at the University of Massachusetts Amherst had to show statistical savvy by testing the findings of a published study.

The 28-year-old from Austin, Texas, chose a work by two Harvard University professors on what seems a dry subject: the effect high levels of government debt has on economic growth.

Dry, but timely: As governments in Europe and the United States struggled through recession, the conclusions reached by Carmen M. Reinhart and Kenneth Rogoff of Harvard backed up calls for public sector austerity.

But Herndon, working with two UMass economists, found miscalculations that undermine fundamental conclusions by Reinhart and Rogoff in a study that appeared in 2010 in the American Economic Review.

The work the Ph.D. student recently published as a working paper had been downloaded 28,000 times by Thursday from the website of the university’s Political Economy Research Institute — and is rattling the economics world.

“I heard some reports that I even crashed the PERI server,” Herndon said Thursday. “I’m really glad that it’s been able to reach an audience.”

Since The New York Times reported on the findings Wednesday, Herndon and his collaborators — Michael Ash and Robert Pollin — have been fielding a flood of media requests. Herndon spoke with CNN and Pollin, one of Herndon’s mentors in the economics department, was to appear Thursday on FOX News. Ash and Pollin explained the work further in a column this week in the influential Financial Times newspaper.

Last fall, it was Pollin who assigned Herndon and other students in his applied econometrics class to replicate someone else’s research findings. He encouraged Herndon to take on the Reinhart-Rogoff study in part because the work is so influential. In addition to the study Herndon, Ash and Pollin examined, the Harvard economists are the authors of a best-seller, “This Time is Different: Eight Centuries of Financial Folly.”

William M. Vannah of Amherst, who is working with the Massachusetts Institute of Technology on a project to improve artificial legs, called the Reinhart-Rogoff study “central” to how people view debt and public policy.

“To find out its central conclusion was flawed is a big contribution,” he said in an email message. “Congratulations to the UMass econ department folks who did the detailed work to figure this out. If we want to move beyond the economic equivalent of bleeding patients to make them well, we have to understand from a factual basis how these systems work.”

Debt and growth

In a nutshell, the Reinhart-Rogoff study found that governments that take on debt-to-gross-domestic-product ratios of 90 percent or more saw their average economic growth rates go into negative territory — from the 3 percent growth rate experienced by countries with debt ratios under 90 percent to -.01 percent. The study is based on data from 20 countries in the years since World War II.

The PERI working paper found instead that countries with debt-to-G.D.P. ratios over 90 percent saw growth rates of 2.2 percent.

“It’s a decline, but it’s much more modest,” said Pollin. “We just said this stuff is wrong — and they acknowledged it.”

Pollin said he tells his graduate students that if they choose a timely topic, they may be able to publish their findings. “When you do something that’s clear and has important policy implications, that’s when you start to get people interested.

“I tell my students, if you are willing to work hard, you can be at the research frontier. ... I rest my case,” he said.

Demand for the UMass study is understandably high, given that the national debate over the consequences of public debt dominated public policy discussions through the recession. The Times story noted that “prominent politicians” — including Olli Rehn of the European Commission and U.S. Rep. Paul Ryan, chairman of the House Budget Committee — have cited the work of Reinhart-Rogoff as proof of the need to cut government spending.

While the PERI report does not settle that debate, it appears likely to influence it, Times reporter Annie Lowry noted, in part because the spring meeting of the World Bank and International Monetary Fund was about to begin.

At that session, Lowry wrote Tuesday, economists with those organizations were expected to call upon governments in Europe to “ease up on (their) commitment to austerity in the face of rising unemployment and new economic contractions.”

Getting the data

As the semester wrapped up last fall, Herndon said, he felt his study needed to be fortified. In recreating the Reinhart-Rogoff work, he had to go in search of data. He said he contacted the authors and after several attempts received an email from Reinhart that said she did not have the time to respond to his questions.

But then she went further — providing a spreadsheet with data used for the 2010 study and saying Herndon should feel free to publish whatever findings resulted.

Having the Harvard data enabled Herndon and his collaborators to guarantee an apples-to-apples examination.

“I was really trying to reconstruct their data from public sources. That was the big puzzle,” Herndon said. “She was really kind to offer it.”

Herndon said he hopes the paper spurs a rethinking of received wisdom about the consequences of public debt — particularly the belief that public spending is the wrong resort. He believes, instead, that government spending is essential in helping get people back to work. “The cries of alarmism (over public debt) are very over-reaching,” Herndon said.

His decision to study economics at UMass was in part guided by the department’s progressive reputation. “I’ve respected their work for a long time, especially the social justice implications.”

Pollin, the economics professor, acknowledged that some may question the PERI paper’s findings because of that reputation. “I’ve seen all kinds of statements,” he said. “The research is the research. The numbers tell the story.”

Pollin said the attention the paper is getting is good for his department. “The signal that it sends out to the world is that we do serious, solid work, including by our students.”


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