I have no words....If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.
I'm sure Fox News will be all over this just like they were with "Climategate"! We know they just want academic accountability. But seriously though, this paper was obviously an attempt at academic fraud, given that no economist can go through even undergraduate without rigorous statistical training.
Yet because there are only 7 data points possible, it completely changes the result. This is a very high profile economic report coming from two very influential Harvard economists. Consider that they accidentally left out their -7.9 data point from New Zealand:
Not only does removing the NZ data point instead make the average much higher, the data looks more reliable than the full dataset as the standard deviation has almost been cut in half. Leaving out one data point from such a small set has big consequences. Their 6 data points: ave: -0.07, s.d.: 3.83
All 7 data points: ave: 0.26, s.d.: 3.67
No NZ data point: ave: 1.43, s.d.: 1.73
Reinhart-Rogoff respond edit; not saying i agree with either side or anything, just figured this would be relevant to the conversation.
Thanks. This is not a very convincing rebuttal, IMO. They point to other studies that seem to support their reported findings, and only go halfway to addressing the issue of weighting episodes of unequal years equally. They make no mention of excluding countries from the averaging.
Yeah, it's bullshit, though. They found a tiny math error amongst a giant sea of agreement and the blogs are all freaking out. EDIT You know, having watched this out of the corner of my eye all day, I'm less and less wont to defend R&R. All economists are liars but when you have to tweedle the data in such a way that other economists can't even see the way you've tweedled it you're a douche. I retract my statement.
Is it? Dropping 5 countries from the average is a human error, but this: Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that the U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight. In case that didn't make sense, let's look at an example. The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K. It's hard to see how that doesn't make their findings nonsensical. Maybe it's because I am in research, but in science, it's not enough to fall in 'near agreement' with previous literature (and even here, the notion of 'agreement' is debatable) even if your methodology is bunk. Presenting a false analysis as a factual one makes it more difficult to make informed decisions, or to overturn previous interpretations in light of new or better evidence. Basically, if you are not going to do it right, don't do it at all. Otherwise, you screw everything up for everyone that is trying to understand how the world works. These two presented cherry-picked and massaged the data that fit a narrative. It doesn't matter to which degree the narrative is true or not.Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.
It doesn't make their findings nonsensical because it isn't a condemnation of the paper's gestalt. I've got This Time It's Different on my bookshelf. I haven't cracked it open yet. Mauldin leans on it heavily, and he's been pretty accurate so far. My bias comes from the number of sources that lean on R&R and the fact that the new paper's findings were presented as an ambush. That said, this looks like much ado about nothing to me, probably because of my current reading.
While the actual data might suggest that the paper's 'gestalt' isn't wrong (and the difference between negative growth or 2.2%, regardless of the trend, is a big deal for policy decisions made by a country with 90% of GDP in debt), it does reveal that what they presented weren't actually findings; and that's no small issue. Also their response is terrible. Not only do they not mention leaving countries out of the average, they say It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small but don't address treating one isolated year of -7.9% as equally large. Finally, they try to get away with saying both It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign. and By the way, we are very careful in all our papers to speak of “association” and not “causality” since of course our 2009 book THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises. It's a dishonest and jumbled response to a dishonest presentation of data. Maybe all economics is like this. I personally doubt it. But if it is, then FTS, it's useless.It doesn't make their findings nonsensical because it isn't a condemnation of the paper's gestalt.
Here's why austerity probably wasn't a bad thing still. Agree or disagree. But at the end of this remember that if you live in the U.S. you owe the rest of the world $52,000 in government debt per capita. It's one of the highest per capita debts in the world. If the economy is growing as it was for most of their data points (1946-2009 were in all pretty good years for the economy of the first world nations studied), then growth and debt isn't that big of a deal. You keep making more money and you keep spending a larger percentage of that and you are seeing the same returns on your investment so you keep making more nominal money. There is no problem as long as there is continued growth. But when you hit a revenue shortage you face debts that you can suddenly not pay. You have promised liabilities in the form of government programs to people and you no longer have the cash to make it happen, no matter how good of an investment in your government's future you may think it to be, and no matter how much returns those investments may bring in later. You don't have the cash, you're bankrupt. Austerity measures are spending cuts so that you can make the bills you have to make instead of bills that are nice investments. If you are spending based on expected raises at work and then you lose your job, you probably don't have money to go back to school and improve your chances of making that much money again. This is the essence of austerity. If, in this analogy, you took out student loans to make up the difference and invest in yourself again, everything is better if you can get another job and resume growth. If you can't, you're even more screwed because you have more debt and no more revenue. Most importantly, the study (even with the adjusted results) still shows that growth tapers off after the 60-90 percent Debt/GDP ratio from 2.8 between 30-90 to 2.2 above that. If anything, we could interpret this to mean that there is a small but significant difference in return on investment. So we could say investment is a good idea up to a point, and after that, you are borrowing money at a higher risk to receive less reward. I also think that it is worth mentioning that all of these countries are managed well financially. Can you imagine how different the results would have been if they had included all countries of the world?
I don't believe the argument is whether or not austerity is or isn't a good thing. The real debate is not 'if', but 'when'. Keynesian economics suggests that you reduce your deficit during times of growth, not during a contraction. Home finance analogies fall short in the fact that there is no analogy for a Central Bank. Of course financing debt should become a drag on growth, but the question is 'how much?', and knowing that, you can plan the best move to get out of a contraction. Too much stimulus and you create unnecessary future obligations, too much austerity, and you wallow in a sluggish economy for unnecessarily long. That's why the exact numbers here matter, and why a difference of -0.1 and +2.2 for a 90% GDP of debt is quite important.
You can't call any of these 'exact numbers' in any sense though. As nice as it would be to have a road map to economic success, these are samples without controls like almost all economic science. Everything you see is an analysis of an extremely complex system with an excel sheet. Exact numbers do matter, but we don't have them. Maybe if reducing the deficit was practiced at any time in the United States then we could talk about 'if' and 'when' but I say better late than never. We simply do not have enough data to move beyond common sense yet.
I agree that all these numbers are very debatable. Well, in recent history, it was practiced by the Clinton administration. But IMHO common sense says: don't treat a country's budget like that of a household. The EU is giving us plenty of present day examples of why austerity in a contraction leads to more contraction. By far, the biggest contributor to the recent deficit was loss of revenue due to contraction, and actually, the US deficit is shrinking as we speak as the economy continues to add jobs. Clinton didn't get a surplus due to austerity measures, it was due to an economic boom. Common sense says we should have continued to pay down the debt at that time when we could have without causing a contraction.Maybe if reducing the deficit was practiced at any time in the United States then we could talk about 'if' and 'when' but I say better late than never.
We're close to on the same page. I agree that our currently high deficit is due to revenue vs expenditures which have grown wildly out of balance in the recession. And I agree that Clinton's budget surplus was due to economic growth, but Clinton also increased taxes and reduced spending in social welfare programs - austerity. And even then, it was only 3 years before Bush screwed it up.