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Famous Austerity Economists: Just Because Our Data Is No Longer Operative Doesn't Mean We Were Wrong
Oh look, Reinhart and Rogoff have taken to the pages of the New York Times to explain why the fact that they were totally wrong with all their data about HIGH DEFICIT DOOOOOM does not actually mean that they were wrong about HIGH DEFICIT DOOOOOM.
Reinhart and Rogoff, in case you are wondering, are two economists who wrote a very famous paper purporting to demonstrate that high public debt to GDP ratio leads to negative economic growth. This paper was then cited by Paul Ryan et al. as justification for shredding what remains of our country's social safety net.
But SHOCKER!, the paper was wrong! As a UMass grad student recently discovered, Reinhart and Rogoff not only based their conclusions off selectively chosen data, they made a serious coding error in the Excel spreadsheet they were working with.
It's cool though. They have written a petulant Op Ed in the Times basically explaining why none of us should WORRY about the data and the methodology they used and the Excel spreadsheet -- it's totally FINE and the original premise of their paper (which purported to demonstrate a causal relationship between high deficits and slow growth) remains sound and the best way to get out of our current economic crisis is still austerity, austerity, austerity!
Here, let us take a tour of this Op-Ed, which uses a lot of words to say basically nothing and then concludes with more calls for austerity! Austerity for everyone, on the house!
LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article “Growth in a Time of Debt,” published in May 2010 in the Papers and Proceedings of the American Economic Review.
Despite the very small actual differences between our critics’ results and ours, some commenters have trumpeted the new paper as a fundamental reassessment of the literature on debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made the same claim in an April 17 essay in The Financial Times , where they also ignore our strong exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a “nonconventional weighting procedure.” It is the accusation that our weighting procedure is nonconventional that is itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of the University of California, San Diego, wrote (without consulting us) that “to suggest that there is some deep flaw in the method used by RR or obvious advantage to the alternative favored by HAP is in my opinion quite unjustified.” (He was using the initials for the last names of the economists involved in this matter.)
Well, there's the thing about that "small actual difference" between the critics' paper and their paper: THEIR paper shows that high deficits lead to a negative growth rate of 0.1%; the critics' paper shows that the same high deficits (90% ratio of public debt to GDP) are correlated with POSITIVE growth of 2.2%.
But yeah, it's a small difference, in the grand scheme of things. For example, right now we are making -.1% interest on our checking account, when you factor in all the fees and everything but this is a "small actual difference" from the roughly 2.2% interest we made on our checking account during the heady days before the 2008 crash. Small difference. Potato, potahto.
As for the rest of that paragraph: we have no idea what they are talking about, but they seem to be upset that their critics said mean words about them and didn't have the decency to ask them first.
As for the accusations of selective omission of data, there is little appreciation that this is archival research, involving constant judgments at every step. The New Zealand data we used was part of the problem that Herndon and his colleagues allude to biasing the results in favor of lower growth at higher levels of debt. We have since incorporated the correct data in our Journal of Economic Perspectives paper.
In other words, yes, we did selectively include data but we were allowed to for some reason that relates to the nature of "archival" research. Anyway your Wonkette is writing a dissertation right now. What a relief that we can just make "constant judgments at every step" to discard data we do not like! This makes things so much easier, we will ask our advisor why she never shared this particular methodological framework with us, given that it will really speed up the writing process.
But whatever, forget about this kefuffle over "data" and "methodology" and "evidence" -- just take our word for it:
We again turn readers to our Op-Ed essay to understand ideas for bringing debt down. To reiterate, there are four solutions: slow growth and austerity for a very long time, elevated inflation, financial repression and debt restructuring. We have long emphasized the need to use the whole tool kit creatively in the aftermath of a once-in-75-year financial crisis.
Yeah...how's that going, all the austerity stuff in Spain and in Greece? Not so well, but no matter, are you going to believe Reinhart and Rogoff or are you going to believe a bunch of Spanish and Greek people who DON'T EVEN HAVE JOBS???