Solving History’s Puzzles

• Author: James L. Rowe Jr.
• Position: a Senior Editor of Finance & Development.

People in Economics

Had Miami Dade College offered a concentration in fashion design, Carmen Reinhart might never have become an economist.

Reinhart—the world’s most-cited female economist and coauthor of one of the most important economic books of the past decade—studied fashion merchandising instead.Â

“I like art a great deal, and I like drawing. And I thought that, well, I really didn’t go to the right school to become a fashion designer. So, let me see whether I like fashion merchandising.”

She didn’t.Â

“Fashion merchandising is how to become a buyer. It has really little to do with any kind of design . . . the artistic part of it.” She was convinced she’d made a poor choice.Â

But the merchandising curriculum required her to take a course on the principles of economics. Her instructor, “a crazy old Marxist,” paired a standard textbook with Douglas F. Dowd’s critique of U.S. capitalism, The Twisted Dream. “And I found it fascinating . . . . I didn’t make a decision, ‘Oh, I’m going to become an economist.’ No, I made the decision that I was going to take more economics courses and see how I liked them. And I did.”

That started Reinhart on a rise through the economics profession that included stints on Wall Street, the International Monetary Fund, and academia—including the University of Maryland and her current home, the Kennedy School at Harvard University, where she is Minos A. Zombanakis Professor of the International Financial System.Â

It was during her four years at the now-defunct investment bank Bear Stearns that she developed an interest in the issues that have dominated her research: banking and financial crises and their ripple effects (contagion); capital flows; indicators of world business cycles; and debt (sovereign and private). Mexico defaulted on its massive foreign debt only six months after Reinhart joined Bear Stearns in 1982. “And, boy, was that a learning experience, being in the financial markets and seeing the ripple effects, the contagion, the impact on banks, the volatility. . . . It had a real lasting impact on the things that I would be interested in.”

Reinhart’s path is not well worn by economists. In a profession dominated by theorists and model builders, she made her mark by finding, mining, and organizing data.Â

But she has been in the middle of a firestorm recently over how she and coauthor Kenneth S. Rogoff handled data in a paper that found that when the ratio of government debt to GDP exceeds 90 percent, it begins to become a drag on long-term economic growth. Economists had debated the finding since the paper was first presented in early 2010. But after several economists at the University of Massachusetts last April said they had found calculation and methodological errors and “selective” data omissions in the paper, the academic dispute became a public controversy.Â

Reinhart and Rogoff acknowledged a calculation error but said it did not affect their overall results. They said the other critiques were off base and that their conclusions are solid.Â

Against the grain

Reinhart has a history of going against conventional wisdom. Her first well-known paper, in 1993—with fellow IMF economists Guillermo Calvo and Leonardo Leiderman—questioned the prevailing belief in the IMF and elsewhere that capital was flowing to Latin American countries because of their good economic policies. Instead, the economists postulated, external factors—including a benign global environment and low interest rates—sparked the investment flow, which could stop on a dime if conditions changed. Had they looked at Asia, they would have seen the same issues, Reinhart said. The trio were right: External conditions changed, and, starting with Mexico in 1994, emerging market economies—including in Asia in 1997, Russia in 1998, and Argentina in 2001—experienced a “sudden stop” in capital flows.Â

Several years later, Reinhart and fellow economist Graciela Kaminsky questioned the common belief that crises are spread from one country to another mainly via trade links. Instead, they found such contagion was rooted in then little-studied financial channels.Â

According to Calvo, now at Columbia University and one of the profession’s foremost theoreticians, “Carmen does not fit the mold of the typical academic economist, who spends much of his or her time exploring pointless extensions of the dominant paradigm. She is an original, driven—first and foremost—by strong intuitions, which she then tests by going from a thorough search of available evidence...