Counterparties: Beef Rogoff

April 16, 2013

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The ur-text of the international austerity movement may have a few damning errors in it — including, it seems, some silly Excel mistakes. Mike Konczal set off a near-riot in the econoblogosphere today with this post, which summarizes a new paper that takes aim at seminal 2010 work by Carmen Reinhart and Kenneth Rogoff. The paper concludes that R&R made significant errors in their work:

The full extent of those errors transforms the reality of modestly diminished average GDP growth rates for countries carrying high levels of public debt into a false image that high public debt ratios inevitably entail sharp declines in GDP growth…

RR’s incorrect stylized fact has contributed substantially to ensuring that “traditional debt management issues should be at the forefront of public policy concerns” (RR 2010a p. 578). Specifically, RR’s findings have served as an intellectual bulwark in support of austerity politics. The fact that RR’s findings are wrong should therefore lead us to reassess the austerity agenda itself in both Europe and the United States.

R&R’s widely-cited research has been adopted by the austerity movement – a movement that Rogoff, for one, has been part of for over a decade. As Tim Fernholz notes, R&R’s work has been praised by Tim Geithner and Olli Rehn, and R&R personally briefed 40 senators on their findings. The main takeaway from R&R has been that countries with a debt-to-GDP ratio above 90% have had a negative growth rate, on average, since 1946.

This notion has huge implications for Europe, where debt-to-GDP ratios are near the theoretical danger zone, and for the US. But three economists at the University of Massachusetts tried to replicate R&R’s 2010 results and found them guilty of excluding data, spreadsheet errors and unorthodox weighting of certain countries.

Missing data from Australia, Canada and, particularly, New Zealand, changed the entire conclusion of R&R’s paper, the authors find. They say that the average growth rate for countries with debt-to-GDP ratios above 90% was 2.2%, not -0.1% as R&R suggest.

Matt Yglesias jokes that “naturally this is going to change everything. Or, rather, it will change nothing.” The Reinhart/Rogoff case for austerity, he says, has always got the causation backwards: low economic growth leads to high levels of government debt, not the other way around. FT Alphaville notes that it’s nearly impossible to directly blame R&R for policy mistakes: their findings were “simply used as a post-hoc justification for policy that was inevitable”. Paul Krugman thinks this could discredit one of the main pillars of the “intellectual edifice of austerity”. Tyler Cowen, for his part, wonders if the mistakes mean he should just pay less attention to economic research.

R&R have issued a quick response their critics, complete with a data table. They don’t mention their Excel error, but they do say that their critics’ findings agree with the main premise of their 2010 paper – that higher debt leads to lower growth. They also note that the BIS, IMF and OECD have all come to similar conclusions. They also warn against turning their work into an endorsement. “We are very careful in all our papers to speak of ‘association’ and not ‘causality’”, they write, a little disingenuously. – Ryan McCarthy

On to today’s links:

Interactive charts of inequality along NYC’s subway lines – New Yorker

Inefficient Markets
The world’s largest carbon emissions market is down 40% to a record low – Reuters

In the past two days, John Paulson has lost more than $1 billion on gold – Bloomberg

“The IMF is now among the strongest voices against excessive fiscal austerity” – Neil Irwin

Five years after the financial crisis, the SEC may finally get around to reforming money-market funds – WSJ

Drop in spending by government officials “may be the largest factor” slowing Chinese growth – WSJ
Chinese growth slows to 7.7% in first quarter – Reuters

Nothing To See Here
Gallery owner tied to the Russian mob indicted for organizing high-stakes poker games – NYT

Bold Moves
The DOJ is invoking wartime powers to extend statutes of limitations for financial crimes – WSJ

Revolving Door
“When corruption problems really get bad is when you don’t even see the corruption” – Matt Yglesias

“It’s not 100 hours of manual labor, or even intellectual labor. It’s 100 hours of being there” – Matt Levine

Possibly Useless Data
When cicadas emerge, markets produce double their average historical returns – Market Watch

John Doerr uses Google Glass to cheat at Scattergories – BetaBeat

EU Mess
No, Germans aren’t poorer than Italians or Greeks – Vox EU

Goldman’s revenue jumps to $10 billion – Goldman Sachs

And, of course, there are many more links at Counterparties.

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