Corporate Culture: Austerity programs based on faulty calculation

Harvard Kennedy School professor Carmen Reinhart and Harvard University professor Kenneth Rogoff argued in their 2010 NBER paper that economic growth slows down when the debt/GDP ratio exceeds the threshold of 90 percent of GDP.

These results were also published in one of the most prestigious economics journals – the American Economic Review – and had a powerful resonance in a period of serious economic and public policy turmoil when governments around the world slashed spending in order to decrease the public deficit and stimulate economic growth.

Yet, they were proven wrong. Thomas Herndon, Michael Ash and Robert Pollin from the University of Massachusetts tried to replicate the results of Reinhart and Rogoff and criticised them on the basis of three reasons:

• Coding errors: due to a spreadsheet error five countries were excluded completely from the sample resulting in significant error of the average real GDP growth and the debt/GDP ratio in several categories
• Selective exclusion of available data and data gaps: Reinhart and Rogoff exclude Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). This exclusion is alone responsible for a significant reduction of the estimated real GDP growth in the highest public debt/GDP category
• Unconventional weighting of summary statistics: the authors do not discuss their decision to weight equally by country rather than by country-year, which could be arbitrary and ignores the issue of serial correlation.

The implications of these results are that countries with high levels of public debt experience only “modestly diminished” average GDP growth rates and as the UMass authors show there is a wide range of GDP growth performances at every level of public debt among the twenty advanced economies in the survey of Reinhart and Rogoff. Even if the negative trend is still visible in the results of the UMass researchers, the data fits the trend very poorly: “low debt and poor growth, and high debt and strong growth, are both reasonably common outcomes.”

What makes it even more compelling news is that it is all a tale from the state of Massachusetts: distinguished Harvard professors challenged by empiricists from the less known UMAss. Then despite the excellent AER data availability policy – which acts as a role model for other journals in economics – has failed to enforce it and make the data and code of Reinhart and Rogoff available to other researchers.

Coding errors happen, yet the greater research misconduct was not allowing for other researchers to review and replicate the results through making the data openly available. If the data and code were available upon publication already in 2010, it may not have taken three years to prove these results wrong, which may have probably influenced the direction of public policy around the world towards stricter austerity measures. Sharing research data means a possibility to replicate and discuss, enabling the scrutiny of research findings as well as improvement and validation of research methods through more scientific enquiry and debate.

http://openeconomics.net/2013/04/18/reinhart-rogoff-revisited/

In the US, Nobel prizewinning economist Paul Krugman said the unravelling of Rogoff and Reinhart's paper was a hammer blow to Republicans who had campaigned for spending cuts to reduce Washington's 100% debt-to-GDP level.

Austerity advocates around the world who have been influence by the faulty spreadsheet include the neocon UK Chancellor George Osborne. In a speech in February 2010, said: "Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by professor Ken Rogoff, former chief economist at the IMF, and his co-author, Carmen Reinhart." The chancellor then quoted the finding from their paper: "The latest research suggests that once debt reaches more than about 90% of GDP, the risks of a large negative impact on long-term growth become highly significant."

Will there be a response from our local austerity advocates? ... did they also use faulty figures to prop up their economic arguments?