Wednesday, April 17, 2013

Economics Smackdown!! Fate of the World Hangs In the Balance!!

Stop the presses.  The economics world is about to be rocked (or is being rocked) by another spectacular, epic fight over the fate of the world.  Well, actually only over some obscure math.
Today the Twitterverse exploded with chatter about a new research paper claiming to find holes in a landmark academic paper that’s been cited to justify extreme austerity measures. By mid-afternoon the authors—Harvard economists Carmen Reinhart and Kenneth Rogoff—had e-mailed reporters a quick reply defending their work.
 “Growth in a Time of Debt” (2010) by Reinhart and Rogoff argues that countries’ economic growth slows when government debt levels rise, with a noticeable breaking point at debt equal to or exceeding 90 percent of gross domestic product.
So economics journalists went bonkers after Mike Konczal of the Roosevelt Institute in New York reported on a new critique (PDF) by three economists from the University of Massachusetts at Amherst—Thomas Herndon, Michael Ash, and Robert Pollin. What makes the UMass study credible is that Reinhart and Rogoff gave the authors the original data, allowing them to try to replicate the results.  Herndon, Ash, and Pollin said they found three important errors in what they described as a working paper.
The Rogoff/Reinhart thesis has been dynamite in the economics world (inexplicably of course; how the notion that excessive debt leads to ruin can be groundbreaking is beyond us mere layfolk), and to be challenged not as a matter of theory, but of computation, is dynamite as well.  Well, maybe not.  Larry Summers wrote an influential paper that was found to be garbage when the conclusions fell apart by removing data from one country, (economic power house Botswana), and he did OK for himself. 

DeLong and Lawrence Summers co-authored "Equipment Spending and Economic Growth" in the Quarterly Journal of Economics in 1991, and "Equipment Spending and Economic Growth: How Strong is the Nexus?" in the Brookings Papers on Economic Activity in 1992. The papers were presentations of an empirical study showing higher social returns to capital equipment investment than would be predicted by the classic Solow growth model. But only a year later, "Reassessing the Social Returns to Equipment Investment," an NBER Working Paper by Hassett, Alan J. Auerbach and Stephen D. Oliner, revealed that DeLong and Summers were just flat-out wrong, and for the most embarrassing of reasons: their results fell apart with the removal of Botswana from their data set:
"DeLong and Summers' own data fail to reject the Solow model for the OECD countries. The same is true even for their full sample of quite heterogeneous nations if we exclude just one country (Botswana). These results clearly refute DeLong and Summers' claim to have uncovered robust evidence of uniformly high social returns to equipment investment."
Hassett's paper was published in 1994 in the Quarterly Journal of Economics -- the same Harvard-sponsored journal that had published the original erroneous DeLong/Summers work. After this embarrassing debacle, Teflon-coated Summers managed to go on with his career, eventually becoming Treasury secretary under Bill Clinton, and then president of Harvard.
Even if the critique turns out to be valid and Rogoff and Reinhart's paper does not hold up, do not weep for them.  Their careers and stature will be intact.  That said, it will be embarrassing for the rarefied air of the Harvard economics department to have been sullied with the notion of professional accountability at the hands of ...BLEH...UMASS.

Of course, the media is quick to turn to the political implications because this relatively meaningless fight over math is an opening by which they can trash the right.
It’s been cited repeatedly in the U.S. and elsewhere to justify budget cuts by policymakers and legislators, House Budget Committee Chairman Paul Ryan among them.
Putting aside the fact that what is being called "austerity" is complete bullshit, the notion that if R-R's calculation are incorrect then massive, debt-fueled government spending is somehow not dangerous, is preposterous.  But then again we are talking about academic economics here.  So, forget Greece, forget the slow-rolling collapse of massively indebted European PIIGs, forget toilet-swirling Argentina...Paul Ryan is a dastardly evil heartless shit because...R-R's spreadsheets!

Regardless of the way this spat turns out, the truth remains, countries DO go bust (with the attendant economic collapse) and they go bust by accumulating too much DEBT.  You don't need a spreadsheet to know that much.


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