Mystery Economic Theatre 2013

[cheesehead]

Well, the guy on "Marketplace" did say it might be time for investors to consider rebalancing.

[only_human]

This looks interesting. There were three types of errors in a frequently cited paper on economic growth of countries with debt. Five of the 20 countries in an Excel spreadsheet (Australia, Austria, Belgium, Canada, and Denmark) were excluded due to a coding error. This linked article, APR 16, 2013 by Mike Konczal, includes an Excel picture. He says: "Being a bit of a doubting Thomas on this coding error, I wouldn't believe unless I touched the digital Excel wound myself. One of the authors was able to show me that, and here it is."
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems.

In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, "Growth in a Time of Debt." Their "main result is that...median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower." Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan's Path to Prosperity budget states their study "found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth." The Washington Post editorial board takes it as an economic consensus view, stating that "debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.

In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.

They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result.

So what do Herndon-Ash-Pollin conclude? They find "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 as [Reinhart-Rogoff claim]." [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

This is also good evidence for why you should release your data online, so it can be properly vetted. But beyond that, looking through the data and how much it can collapse because of this or that assumption, it becomes quite clear that there's no magic number out there. The debt needs to be thought of as a response to the contingent circumstances we find ourselves in, with mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are. The past guides us, but so far it has failed to provide an emergency cliff. In fact, it tells us that a larger deficit right now would help us greatly.

[UPDATE: People are responding to the Excel error, and that is important to document. But from a data point of view, the exclusion of the Post-World War II data is particularly troublesome, as that is driving the negative results. This needs to be explained, as does the weighting, which compresses the long periods of average growth and high debt.]

I've bolded a line above; it lands directly in Paul Krugman's kingdom. Just for fun, I'm including a Paul Krugman internet prognostication from days of yore:

The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

[only_human]

The 2012 fourth quarterly quarter report on bank derivatives activities from the Office of the Comptroller of the Currency has a lot of data. "Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Four large commercial banks represent 93% of the total banking industry notional amounts and 81% of industry net current credit exposure."

I'm hoping that this is a positive sign:

Net current credit exposure is the primary metric used by the OCC to evaluate credit risk in bank derivatives activities. NCCE for insured U.S. commercial banks and saving associations decreased 3% ($13 billion) to $386 billion in the fourth quarter, as the $188 billion decline in gross receivables (GPFV) exceeded the $175 billion decline in the dollar amount of netting benefits. NCCE peaked at $800 billion at the end of 2008, during the financial crisis, when interest rates had plunged and credit spreads were very high. Although market interest rates are now lower than back in 2008, net current credit exposure is well below the $800 billion peak in 2008.

added: Although it was about $200 billion for the years leading into 2006.

[science_man_88]

http://finance.yahoo.com/blogs/daily...2805.html?vp=1

Reinhart and Rogoff found countries with government debt loads equivalent to or greater than 90 percent of economic output saw their median growth rates fall by 1%. Their average growth rates fell considerably more. In other words, high government debt was bad for economies.

Well now another set of academics at University of Massachusetts at Amherst have replicated the study. They discovered that thee Harvard professors made an Excel coding error in their research – one that mattered for the results, along with a few other issues.

Apparently it's been something some politicians have relied on.

sorry I see it's been brought up already.

[only_human]

Originally Posted by science_man_88

http://finance.yahoo.com/blogs/daily...2805.html?vp=1
Apparently it's been something some politicians have relied on.

sorry I see it's been brought up already.

It's good to have extra coverage. This from your link is helpful:

It’s an academic debate that’s likely to continue and readers can draw their own conclusions.
As for the idea that an Excel error or any other possible problems with the Reinhart/Rogoff paper was wrongly responsible for justifying modern austerity as we know it, Annie Lowrey in the New York Times points out that other studies have found similar results showing higher debt economies suffered slower growth. The studies are from organizations like the International Monetary Fund, the Organization for Economic Cooperation and Development, and the Bank of International Settlements.

[science_man_88]

Originally Posted by only_human

It's good to have extra coverage. This from your link is helpful:

ah but according to one thing at 4:00 into the video says one of the people who made this study error apparently used to run the IMF. if he was at the IMF at the time could this invalidate those studies as well ?

[only_human]

Originally Posted by science_man_88

ah but according to one thing at 4:00 into the video says one of the people who made this study error apparently used to run the IMF. if he was at the IMF at the time could this invalidate those studies as well ?

Nah. I just took a look at the video. It's better balanced than normal fluff reporting. The only thing I conclude is that if the data had been published with the research, errors would have been caught sooner.

[science_man_88]

Originally Posted by only_human

Nah. I just took a look at the video. It's better balanced than normal fluff reporting. The only thing I conclude is that if the data had been published with the research, errors would have been caught sooner.

a rough compound interest of 8% per interest period shows me that based on the basics of compound interest as I know it to pay a 90% GDP debt off in just over 10 interest periods would take around 12.5 to 13% GDP/interest period and that assumes you use all saved interest towards the debt and no borrowing occurs, and it's all at the same interest rate ( which most debt that I have heard of isn't) just my two cents.

[garo]

Originally Posted by ewmayer

Mish's on the Reinhart-Rogoff tempest - I like his friend Peter Tenebrarum's take, which focuses on fundamentals rather than academic studies. Recognize that all deficit spending is deferred taxation, ignore the "Nobel prize winning economists" whose arguments reduce to "there is indeed such a thing as a free lunch" and reason things out from there.

Mish extensively cited R&R when it suited him. Now it is back to fundamentals.
I bet Mish is enjoying the rogering gold got last week.

Ooh and this masterpiece from Tenebrarum.

Empirical studies cannot be used to settle points about economic theory.

This is up there in the annals of faith-based policy-making. Idiot!

[garo]

Originally Posted by ewmayer

...said the resident of a nation which gave up any shreds of sovereignty and which is now completely bank-owned real estate due its own disastrous experiment with "how many debt straws can we load on the camel's back?"

Ah come off it dude! What does that have to do with the point I was making? And being resident in Ireland does not mean I agree with the economic policies of the government. My wife will attest that I had told her in mid-2008 that the country was bankrupt.

[only_human]

On this Reinhart/Rogoff tempest, Mish quotes the LA Times, which pulls in some info from the Slate. One sentence further than the LA Times quoted into Robert Schiller's article in the Slate is this small paragraph (standing alone for emphasis, I suppose):

We should remember this from high school science: Always pay attention to units of measurement. Get the units wrong and you are totally befuddled.

This has been a bit of issue for me. Quite some time back I jumped all over an entry on Dimensional Analysis because of this line in Wikipedia: "Critics of mainstream economics, notably including adherents of Austrian economics, have claimed that it lacks dimensional consistency."

Schiller goes on in the Slate article to say:

Most people never think about this when they react to the headline debt-to-GDP figure. Can they really be so stupid as to get mixed up by these ratios? Speaking from personal experience, I have to say that they can—because even I, a professional economist, have occasionally had to stop myself from making exactly the same error. Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity—or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.

Dimensional inconsistency may not be a serious flaw in this case because what people are actually doing is producing a number and trying to get hunches about behavior. In this case, Economists are acting a bit like Chartists trying to ride the stock market. That's why I bolded part of the last quote above. Economics is less sciency than most other sciences. Economics + politics + policy = TNT