April 19th, 2013
Foundation of austerity built on Excel spreadsheet error! Sorry about losing your job.
Two Harvard economists — Carmen Reinhart & Kenneth Rogoff — analyzed macroeconomic data from 18 countries for a 2010 American Economic Review article. Special attention was given to seven nations that had experienced periods of high debt. They looked at the public debt-to-GDP (gross domestic product) ratio. They concluded that growth slows when the ratio exceeds 90%. Austerity aficionados grabbed onto the R&R magic threshold to justify making debt reduction top priority. Sadly, austerity is but one economic theory, one with drastic implications (economic, health & justice) for people subjected to cutbacks in necessary social services that only government can or will provide.
American politicians embraced austerity citing R&R as evidence. House Budget Committee Chairman Paul Ryan famously cited R&R when he presented his budget. The politicians now pushing for cuts in Social Security and Medicare cite R&R. States and cities have gone broke. Self-imposed sequestration at the federal level has deprived people of human services — Meals on Wheels, Head Start, Chemotherapy for cancer patients relying on Medicare, etc. Misery somehow justified by the R&R model.
Turns out the adage — garbage in/garbage out — is still true about data. Economists — Thomas Herndon, Michael Ash, Robert Pollin — at the Univ. of Massachusetts Political Economy Research Institute (PERI) could not replicate the R&R findings. So, they asked for the raw data.
Oops. Turns out R&R entered wrong figures for New Zealand. They had excluded four years of growth data in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation.
The PERI study findings contradicted R&R: when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not −0.1 percent. The justification for austerity is an error, a lie by any other name.
Astute economists caught this error and the implications.
Dean Baker of the Center for Economic and Policy Research:
Since R&R country weight their data (each country’s growth rate has the same weight), and there are only seven countries that cross into the high debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)
This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R’s work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R’s work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences. …
The corrected Reinhart and Rogoff paper would be telling us to kiss Social Security and Medicare goodbye completely and tighten our belts with some real tax increases.
Of course we are not hearing such calls, because the paper itself was not actually the basis for policy. Rather its finding were being used to provide cover by those who wanted to cut Social Security, Medicare and other programs that enjoy high levels of public support. It would be impossible to garner the political support needed for cuts to these programs on the merits, so the politicians pushing these cuts were happy to use the erroneous findings from Reinhart and Rogoff to advance their agenda.
The Reinhart and Rogoff paper was not used only to argue for cuts to popular social insurance programs, it was also used to argue against government efforts to boost the economy and create jobs. The opponents of these policies argued that efforts to spur the economy would prove to be counterproductive because Reinhart and Rogoff showed us that higher debt levels would mean slower growth.
New York Times columnist and economist Paul Krugman wrote:
Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.
For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.
Do you think any apologies or re-hirings will soon follow the identification of the error?
This entry was posted on Friday, April 19th, 2013 at 12:48 pm and is filed under Commentary by G. Namie, Employers Gone Wild: Doing Bad Things, Fairness & Social Justice Denied. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.