[Vision2020] Did a coding error basically destroy the economies of the Western world?

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

------------------------------
April 18, 2013
The Excel Depression By PAUL
KRUGMAN<http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html>

In this age of information, math errors can lead to disaster. NASA’s Mars
Orbiter crashed
<http://www.cnn.com/TECH/space/9909/30/mars.metric.02/>because
engineers forgot to convert to metric measurements; JPMorgan
Chase’s “London Whale” venture went
bad<http://baselinescenario.com/2013/02/09/the-importance-of-excel/>in
part because modelers divided by a sum instead of an average. So, did
an
Excel coding error destroy the economies of the Western world?

The story so far: At the beginning of 2010, two Harvard economists, Carmen
Reinhart and Kenneth Rogoff, circulated a paper, “Growth in a Time of
Debt<http://www.nber.org/papers/w15639.pdf?new_window=1>,”
that purported to identify a critical “threshold,” a tipping point, for
government indebtedness. Once debt exceeds 90 percent of gross domestic
product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired
earlier book on the history of financial crises, and their timing was
impeccable. The paper came out just after Greece went into crisis and
played right into the desire of many officials to “pivot” from stimulus to
austerity. As a result, the paper instantly became famous; it was, and is,
surely the most influential economic analysis of recent years.

In fact, 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<http://www.washingtonpost.com/opinions/debt-reduction-hawks-and-doves/2013/01/26/3089bd52-665a-11e2-93e1-475791032daf_story.html>,
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.

Over time, another problem emerged: Other researchers, using seemingly
comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff
results. They typically found some correlation between high debt and slow
growth — but nothing that looked like a tipping point at 90 percent or,
indeed, any particular level of debt.

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University
of Massachusetts<http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/>to
look at their original spreadsheet — and the
mystery of the irreproducible results was
solved<http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems>.
First, they omitted some data; second, they used unusual and highly
questionable statistical procedures; and finally, yes, they made an Excel
coding error. Correct these oddities and errors, and you get what other
researchers have
found<http://www.oecd-ilibrary.org/economics/public-debt-economic-growth-and-nonlinear-effects_5k918xk8d4zn-en>:
some correlation between high debt and slow growth, with no indication of
which is causing which, but no sign at all of that 90 percent “threshold.”

In response, Ms. Reinhart and Mr. Rogoff have
acknowledged<http://blogs.ft.com/ftdata/2013/04/17/the-reinhart-rogoff-response-i/>the
coding error, defended their other decisions and claimed that they
never asserted that debt necessarily causes slow growth. That’s a bit
disingenuous because they repeatedly insinuated that proposition even if
they avoided saying it outright. But, in any case, what really matters
isn’t what they meant to say, it’s how their work was read: Austerity
enthusiasts trumpeted that supposed 90 percent tipping point as a proven
fact and a reason to slash government spending even in the face of mass
unemployment.

So the Reinhart-Rogoff fiasco needs to be seen in the broader context of
austerity mania: the obviously intense desire of policy makers, politicians
and pundits across the Western world to turn their backs on the unemployed
and instead use the economic crisis as an excuse to slash social programs.

What the Reinhart-Rogoff affair shows is the extent to which austerity has
been sold on false pretenses. For three years, the turn to austerity has
been presented not as a choice but as a necessity. Economic research,
austerity advocates insisted, showed that terrible things happen once debt
exceeds 90 percent of G.D.P. But “economic research” showed no such thing;
a couple of economists made that assertion, while many others disagreed.
Policy makers abandoned the unemployed and turned to austerity because they
wanted to, not because they had to.

So will toppling Reinhart-Rogoff from its pedestal change anything? I’d
like to think so. But I predict that the usual suspects will just find
another dubious piece of economic analysis to canonize, and the depression
will go on and on.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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