In which Paul Krugman gets cutesy with causality

ICYMI, this week serious questions were raised about a controversial and influential paper by Harvard economists Carmen Reinhart and Kenneth Rogoff that purported to show -- or at least has been taken to show -- that when a country's national debt reaches about 90% of GDP, that debt acts as a significant drag on growth.  On April 15, Thomas Herndon, Michael Ash and Robert Polin published a paper alleging that Reinhart and Rogoff's paper contained, along with various methodological errors, a coding error in an Excel spread sheet. In response,  Reinhart and Rogoff acknowledge the error, but defend their methodology and  maintain that the error does not materially affect their conclusions. They also claim that they never stated categorically that higher debt caused lower growth. It's that question of how a politically freighted point is communicated and received that interests me here.

On his blog, Paul Krugman cried "casuistry" on that last point:

And the everyone hyping Reinhart-Rogoff very much included Reinhart and Rogoff themselves. Matt O’Brien has the goods. It’s true that their papers never said outright that the relationship was causal, but they weren’t anywhere near that scrupulous in op-eds and other media presentations. And the truth is that the papers may not have stated causation flatly, but it was clearly insinuated. By trying to claim now that they never meant to imply such a thing, R-R are falling down seriously in the menschhood test.

Today, Krugman, austerity's most stalwart enemy, devoted a whole column to the kerfuffle. And while I'm happy to see him hammer away at the foundations of the case for austerity, I must say that he replicates the alleged rhetorical error. That is, he gets cutesy with causality. The whole essay is set up to convey a conclusion that he somewhat airily dismisses in the final sentence.

The opening paragraph poses a pretty grandiose premise: 

Autocracy, inflation, revolt, crackdown

A few weeks ago, social scientists Michael J. Lamia and James Raymond Vreeland published the results of an exhaustive statistical study of the factors that lead countries to transition to democracy. One ostensibly surprising conclusion was that rapid GDP growth does not correlate with such transitions:

Regarding transitions to democracy, we find that economic growth has a robust negative effect. This finding, standing in stark contrast to modernization theory, suggests that autocracies with strong economic performance are unlikely to see democracy emerge. Instead, economic contraction causes dictatorships to break down. Also in contrast to modernization theory...the level of GDP per capita does not have a robust relationship with the emergence of democracy (p.2).

We have an interesting finding for economic growth: it makes dictatorships more likely to survive and lowers the chances for democracy to emerge (p. 27).

Is this really so surprising? No one wants to change a winning game. As long as an autocracy delivers the goods, people are likely to tolerate it. However, these researchers also found that

autocracies with strong economic performance are unlikely to see democracy emerge. Instead, economic contraction causes dictatorships to break down.

What happens when rapid economic progress gives way to economic stress? Perhaps that is the danger point for many autocracies.

Such was the case in the runup to the Tiananmen Square crackdown in China in 1989. From 1984-1988, China's average yearly growth rate (not compounded) was 12.1%, according to Chinability. In 1989, growth slowed to 4.1%, shrinking to 3.8% the next year before soaring again to 9.2% in 1991 and never dipping below 7% thereafter. The major economic stress point in the months prior to the student protests, however, was runaway inflation, which led to widespread calls for increased centralized control of the economy after a period of liberalization.

The Chinese people ultimately accepted continued authoritarianism after the Tiananmen crackdown. Prior to the 1989 dip, they had experienced a dozen years of extraordinary growth, and after a two-year slowdown in 1989-90 the country resumed its torrid wealth creation. Some may lament the wealth-freedom tradeoff. But the government has credibility to the extent that it's fostered the commonwealth for a generation.

Iran's current crisis is also occurring at a moment of economic pressure following a period of growth. Since 2000, according to the Congressional Research Service, GDP growth has averaged about 6.4% per year; this year, in the midst of the world financial crisis, it's projected at 3.5%. But again, the chief stressor is inflation: the official CPI was 17.1% in 2007 and 28.0 in '08, the real rate is higher, and the costs runups hit people where they live, in housing and food prices. Unemployment is also high - 12.1% in 2007 -- and Iran suffers the world's biggest brain drain, according to the IMF, as its young population goes abroad in search of opportunity.

Unlike the Chinese in 1989, Iranians today widely consider their country to be mismanaged economically. Ahmadinejad has held interests rates artificially low, fueling inflation. The international sanctions bite, and foreign investment is low.

A Tiananmen-style crackdown could happen at any time in Iran. But the Iranians have less cause to accept their government's heavy hand than the Chinese did. There is no upside to acquiescence -- no promise of prudent economic stewardship, or of stability and increasing foreign engagment.