How not to Excel: Austerity economics paper is coding-flawed

Apr 18, 2013 by Nancy Owano weblog
Excel

(Phys.org) —Required reading for those examining the cause and effect of bread lines: Two papers, one published in 2010 and the other published just this month, poking holes into the 2010 study and inciting a global wave of publicity. The 2010 paper, by Harvard economists Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt." claimed that as countries see debt/GDP going above 90 percent, growth slows dramatically: High levels of national debt lead to low or negative economic growth. The paper was supported by those involved in policy debates from the U.S, to Europe, calling for austerity measures as a panacea to balance budgets and ease high levels of national debt, turning back a perceived tide of continued negative economic growth.

This month, however, University of Massachusetts academics said the 2010 study had errors. The real headline-maker by those viewing the new study turned out to be that, among the weaknesses found, was a coding error in Excel.

The new report is a turning point in long-standing controversy over the 2010 paper, as other sought to replicate the results drawn in the two authors' presentation, yet they were unable to do so. The authors of the new paper, "Does High Public Debt Consistently Stifle ? A Critique of Reinhart and Rogoff," by Thomas Herndon, Michael Ash, and Robert Pollin, figured out why other scholars had such a difficult time replicating the results. Examining the data spreadsheet used in the 2010 study, the University of Massachusetts authors discovered several flaws.

The Excel error was not the primary problem but part of a number of weaknesses, according to the three authors. In addition to the Excel spreadsheet errors, they said they identified excluded data, and what they said were unusual weightings of statistics from which the two authors' conclusions were drawn. The abstract of the newly published paper said, "Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period."

In addition, the authors wrote that, "Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth."

At the same time, one of the co-authors, Ash, told Businessweek that the new , in examining the 2010 study, did indicate a modest diminishment in growth in countries suffering large debts but not like the stagnation or decline in the study by the Harvard authors.

In response, according to the Financial Times, Rogoff and Reinhart acknowledged the Excel spreadsheet mistake: "Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point," they said. At the same time, they defended their basic research conclusion regarding higher debt leading to slower growth.

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antialias_physorg
4.3 / 5 (11) Apr 18, 2013
The critique points are valid. However, it seems only common sense that if you continually spend more than you earn (even if that helps stimulate growth) then at some point you'll crash and burn.

Stimulating the economy only makes sense if that ever leads to a state in which nations earn more than they spend on keeping the economy alive.

Whether GDP vs. debt is a good indicator or not is pretty much immaterial to this.
verkle
1.9 / 5 (23) Apr 18, 2013
Was this article written by President Obama?

You don't need a physics degree or even know how to use Excel, in order to understand that spending more than you have on a consistent basis will put yourself in a graver and graver situation. That is not where we want to be led. Neither for our country, nor for the organization we work for, nor for our families, or for ourselves individually.

Birger
2.6 / 5 (9) Apr 18, 2013
Verkle: "spending more than you have on a consistent basis will put yourself in a graver and graver situation"

You are talking about INDIVIDUAL debt.
National debt are more complicated -consider the US economy in 1937 when the debression had mostly faded; austerity economics was introduced to pay for the Big Deal. The resulting loss of consumer demand promptly brought back the depression. The economy recovered during WWII when the wartime spending served as history's greatest economic stimulus package. After the war, the debt was repayed without problem, since the economy was vital enough to generate the wealth.

You can ask a certain Dick Cheney who once said "deficits don't matter"!
QuixoteJ
1.7 / 5 (15) Apr 18, 2013
In response, according to the Financial Times, Rogoff and Reinhart acknowledged the Excel spreadsheet mistake: "Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point," they said. At the same time, they defended their basic research conclusion regarding higher debt leading to slower growth.
Attention climatologists: this is how you're supposed to respond to other reseachers finding flaws in your reports.
tekram
3.1 / 5 (7) Apr 18, 2013
Deficits only matter when the other party is in charge.
The corollary to that is: the spreadsheet is wrong, so what?
Milou
2.5 / 5 (13) Apr 18, 2013
"...You can ask a certain Dick Cheney who once said "deficits don't matter"!"

Cheney is a deficit in every way.
Jeddy_Mctedder
2.6 / 5 (15) Apr 18, 2013
the 800 pound fallacy in the room is that economics is a mathematical redubile science when it is in fact a social psychology examination of the chaos system of voluntary and involuntary transactions we call 'the economy'.

the original paper was not necessary or useful in confirming common sense understandings that too much debt breaks the financial footing of individuals as well as groups. the follow up paper pointing out flaws in the original paper further demonstrates how deeply blinded acemics can be by their own 'expertise'. if this isnt merely out of blindness than all these studies are merely the results of the economics of the academy; the publish or perish business model produces a lot of uncessary trash to justify asking for gramts and salaries. ironically much of these grants are financed by spending made possible by issuing more public debt in the treasury market.
Phil DePayne
2.3 / 5 (12) Apr 18, 2013
This is just the economic news I was looking for-do they need an Excel/VBA developer? Ive been looking for a job for months now
VendicarE
3 / 5 (10) Apr 18, 2013
Not only was there a suspicious error in their spread sheet, but their statistical analysis is deeply flawed.

For example they excluded periods of high growth and high deficits, for no particular reason. They also aggregated some periods of high growth and high deficits and equated years of such growth to months of reduced growth to reduce the apparent correlation.

Both of the authors of this paper were LIBERTARIAN ECONOMISTS, and the results were widely distributed by LIBERTARIAN PROPAGANDA GROUPS like CATO, CEI, AEI, Heritage etc.

It is just more LIBERTARIAN/RANDITE LIES that have been exposed.
VendicarE
3.3 / 5 (13) Apr 18, 2013
Correct.

"Stimulating the economy only makes sense if that ever leads to a state in which nations earn more than they spend on keeping the economy alive." - Antilias

This is why the Borrow and spend policies of Ronald Reagan, George Bush 1 and George Bush 2 have been so disastrous for America.

Those traitors foolishly spent America into Oblivion during periods of reasonably good economies, and in the process habituated the U.S. economy on ever increasing levels of debt.

Further, the Republican Economic mismanagement was designed to borrow massive quantities of money for the purpose of giving it to the wealthiest Americans and Corporations through exceptionally generous tax breaks, and leave the U.S. middle class on the hook for he majority of the debt incurred.

Of course the wealthiest individuals and corporations promptly took their windfall and moved much of it offshore to tax free havens outside the U.S. where it remains.

This Libertarian/Randite economics has been a disaster.
Dunbar
2.6 / 5 (10) Apr 18, 2013
The critique points are valid. However, it seems only common sense that if you continually spend more than you earn (even if that helps stimulate growth) then at some point you'll crash and burn.


You have a fundamental misunderstanding of economics. Economics at a national level is not the same as home economics; one has entire university departments dedicated to its study, the other does not - it's a simple money in, money out list.

If you have a debt at the national level you can lower interest rates below the inflation rate and the debt will vanish. You can also issue bonds, and then "print" money to buy those bonds, essentially owing the money to yourself. The money supply is elastic. For the average mom feeding a family, it is not.
Czcibor
2.3 / 5 (12) Apr 18, 2013
If you have a debt at the national level you can lower interest rates below the inflation rate and the debt will vanish. You can also issue bonds, and then "print" money to buy those bonds, essentially owing the money to yourself. The money supply is elastic. For the average mom feeding a family, it is not.


In case of US? Yes, because US dollar is so far treated as main reserve currency. In case of other countries it is not so. Such moves would generally scare of foreign investors and in normal (recent were NOT normal) years boost inflation.

With whole study I have one more problem. Is high debt a problem or more a symptom of underlying structural problems? I mean for example Japan - the very high debt is an outcome of efforts of trying to stimulate economy by high spending. However first was a burst of bubble and problem with growth, while high debt is the outcome, no the other way around.
Czcibor
1.4 / 5 (9) Apr 18, 2013
High cost of servicing foreign debt should be rather the problem for growth. Not exceeding a fixed threshold.
VendicarE
3.6 / 5 (9) Apr 18, 2013
The Fed can certainly lower interest rates - as it has. But this does not constrain banks and credit card companies to do the same.

Further, lowering FED interest rates will drive investors in the Foreign Exchange market away from the dollar and into other money that returns more "value". This will in turn devalue the U.S. dollar and make imports cost more and reduce the relative value of the money in U.S. bank accounts.

Printing does the same, but more directly.

However it will also lower the price of U.S. exports,

"If you have a debt at the national level you can lower interest rates below the inflation rate and the debt will vanish." - DunBar

Conservative Whiners like RyggTard are too illiterate to realize that a 2 percent inflation rate lowers the value of debt by 2 percent per year.

In the case of the Massive American debt, this translates to 340 billion per year.

So in terms of "value", a yearly deficit of 340 billion a year results in a static value CONT...
VendicarE
3.6 / 5 (9) Apr 18, 2013
CONT... static value of the total debt in a 2 percent inflationary environment.

Other effects of reductions in the value of the U.S. dollar include loss of investor confidence in U.S. firms and in the American Dollar in general due to it's direct loss of value.

American corporations also need to show yearly increases in profits of a minimum of the inflation rate in order to tread water.

Determining which of the various effects are to be enhanced and which are to be reduced is a complex equation that has no real optimal solution since the exact effects are uncertain.

One thing that is known however is that Extremist Republicans like RyggTard who demand an immediate reduction of government deficit spending to zero would be responsible for increasing U.S. unemployment to 40 percent, and push the U.S. economy into a Grand Depression if they got their way.

VendicarE
3 / 5 (6) Apr 18, 2013
That is one problem.

"High cost of servicing foreign debt should be rather the problem for growth." - Cizibor

Reducing the value in U.S. bank accounts and the associated side effects is another.
dnatwork
5 / 5 (6) Apr 18, 2013
A few commenters have said "Of course you can't continually/consistently borrow and spend..."

You have added the "continual" part, but no one on the Keynesian side has ever wanted to do that. They want the government to borrow when money is free and spend that money to stimulate economic growth for the future. There was a period when the government was paying negative interest on Treasury bonds a few years ago.

When money costs the government, uh, money, then it stops making sense to borrow, so Keynesians say you should stop. This will be exactly when the private sector is generating enough jobs to create workers who can afford to buy stuff (generate demand).
Husky
3.4 / 5 (5) Apr 18, 2013
the difference between individual debt and u.s. national debt that you can't send the repo man to the u.s. government.
VendicarE
3.4 / 5 (5) Apr 18, 2013
Correct.

"You have added the "continual" part, but no one on the Keynesian side has ever wanted to do that." - dnatwork

Keynesian economist fully recognize the reality that the Borrow and Spend economic policies of the Republicans - intended to bankrupt the nation and "starve the beast" - is a plan that is based on pure treason.

"There was nothing the least bit brave about Paul Ryan's GOP budget that would slash the social safety net and enrich the already rich. Ryan's work – like all his work – is partisan cowardice based on a long-held Conservative strategy – Starve the Beast."

http://open.salon...ntion_it
po6ert
1 / 5 (3) Apr 18, 2013
people with money are willing to spend 1000000 usd to get a green card which allows them to particpate in the federal debt which is about 60,000 per person. for them it is a no brainer. you on the other hand a free to go live in a country with a very low debt, if you can find one that will let you have residence like saudi arabia
joemostowey
5 / 5 (4) Apr 18, 2013
Borrowing money today will actually result in lower deficits tomorrow, IF that money is used to stimulate the economy, create jobs in education and infrastructure. The cost of both these systems rise greater than the rate of inflation, and investing now decreases costs later. The Virginia transportation system show the failure of the starve the beast mentality of the conservative mind.

Today's costs to fix and expand the system to accommodate the increase in population are in the trillions, creating a need for a massive influx of funding. Yet this could have been alleviated if over the last thirty years minor (pennies per gallon) increases had been implemented every three years. There would have been no crisis as today. To be continued...
joemostowey
5 / 5 (4) Apr 18, 2013
Continuation:
The same principal applies to spending/costs in both Government and private sector debt and profits. Since the deregulation era of reaganomics, the money supply available to the consumer has been steadily dwindling, a crisis hidden by inflation and easy consumer credit. The advent of fees to every aspect of financial life for the average consumer/wage earner has proven the old ad adage of don't eat too far down the food chain, meaning as the spending power of the wage earner has fallen below the ability of the consumer to create growth financially, causing businesses to fail and the economy to collapse. Less money in the consumer economy robs the investment economy of its value, destroying markets, and causing stagnation across the board. when more than 20 percent of the available wealth becomes tied up in the capital economy, it robs the consumer economy of fuel. When the capital economy is taxed in proportion to its growth, and those taxes spent by - continue
ab3a
3.7 / 5 (3) Apr 18, 2013
In related news, I have a spreadsheet which demonstrates that over 80% of all spreadsheets contain errors.
joemostowey
5 / 5 (3) Apr 18, 2013
the government domestically that influx of money into the consumer economy creates demand in the private sector and increases the value of investments in the capital economy.

As government spending and Jobs have fallen IE. "cuts" so too has the consumer economy shrank.
VendicarE
5 / 5 (2) Apr 18, 2013
Very good post by ioemostowey.

I note that the rate of consumption increase is now fundamentally determined by the rate of designed decline in product quality.

The ability of the consumer to consume has practical limitations that have been reached.

Economic growth is then a function of increasing prices and decreasing product quality to force new purchases.

Every additional purchase represents true economic waste.
zaxxon451
5 / 5 (1) Apr 18, 2013
True distribution of wealth in the US:
http://economy.mo...h-video/
FastEddy
1 / 5 (9) Apr 22, 2013
The Fed can certainly lower interest rates - as it has. But this does not constrain banks and credit card companies to do the same. ... Printing does the same, but more directly. ... "If you have a debt at the national level you can lower interest rates below the inflation rate and the debt will vanish." - DunBar

Conservative Whiners like RyggTard are too illiterate to realize that a 2 percent inflation rate lowers the value of debt by 2 percent per year. ...


Being wrong for all of the right reasons is still Wrong!

Inflation is the cruelest tax of all.

All inflation is caused by government, government prints the money and government can too easily print too much.
FastEddy
1 / 5 (9) Apr 22, 2013
True distribution of wealth in the US: http://economy.mo...h-video/


This is a totally bogus view of reality. What is wealth? answer: it is not measured in money at all, specifically not in inflated dollars.

So, pile all of the money "owned" by the top 1% in the middle of Kansas. Then let anyone and everyone have at it. Within 90 days the top 1% would recover it all. (This is the idea behind the current "stimulus" give aways, that this would somehow "redistribute" the top 1%'s "wealth".)

This "redistribution" will simply allow those who can acquire vast sums to do it all over again, this time much more easily. It is all a simple matter of credit and credibility. Those who can, do ... and are able to do so again and again. Those who can not make do, will find it even harder to make do after this "redistribution", thus any redistribution would be of poverty, not wealth and not money.