Excel Error Contributes To Problems With Austerity Study 476
quarterbuck writes "Many politicians, especially in Europe, have used the idea that economic growth is impeded by debt levels above 90% of GDP to justify austerity measures. The academic justification came from a paper and a book by Kenneth Rogoff and Carmen Reinhart. Now researchers at U Mass at Amherst have refuted the study — they find that not only was the data tainted by bad statistics, it also had an Excel error. Apparently when averaging a few GDP numbers in an excel sheet, they did not drag down the cell ranges down properly, excluding Belgium. The supporting website for the book, 'This time it is different,' has lots of financial information if a reader might want to replicate some of the results."
The Excel error is making the rounds as the cause of the problems with the study, but it's actually a minor component. The study also ignores some post-WWII data for countries that had a high debt load and high growth, and there's some fishy weighting going on: "The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K."
Note the legal disclaimer (Score:3, Informative)
In Holland at least, financial products must carry a legal disclaimer stating that past performance is no indication for the future.
What is this entire flawed study? Trying to predict the future, from past performance.
The Dutch economy is an open economy heavily dependent on the performance of the rest of the world. It doesn't much matter what our leaders do, the rest of the world dictates the state of the Dutch economy. So how do you compare its performance with the rest of world? It doesn't matter what our debt is, it matter how many products Germany ships through Rotterdam. But still, these economists try to compare how The Netherlands fared with X debt against the US which has a totally different economy. How different? The US is one of the bigger countries and is #1 in agri culture. The Netherlands is one of the smallest countries and is #2 in agri culture. Why? Every American black and white cow was created by a dutch boy sticking his arm up a cow. And jerking of a bull. The US exports low value agri cultural products, the Netherlands high value.
But it means the SAME industry, is COMPLETELY different. Baby cow production US style is cowboys and homo sexuality in the prairy. Dutch baby cow production is bestiality and high tech in the desolate north.
It is interesting to note that politicians who claim to want the best for big business are NEVER themselves successful big business owners AND that the successful big business owners never ever agree with them. Wallstreet likes the Republicans supposedly (but the two top financial newspapers advised voting against Romney because even a socialist in the white house would be better) but people like Warren Buffet and Richard Branson sing a very different tune. They think the best way to beat a recession is to spend. Not spend recklessly but invest in the future not in handing out tax cuts to buy votes.
Be wary of any leader who leads out of an ideology and not what is needed right now. Would you go to a doctor whose every answer is "lets amputate"? No? Then why vote for a politician whose every answer is "cut taxes, spend less, except on the pork project I need to get re-elected"? Real leadership is looking at what needs to be done and then do it. Not just have a one size fits all slogan.
Correlation is not causation. (Score:2, Informative)
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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."
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Nope. "has a[n] effect" is a claim of causation. In reality, all they found was a correlation. And by "reality", I of course mean "made up fantasy land where they can't use excel properly".
-- FatPhil (AC, as I'm away from home and don't remember my password)
About the authors: (Score:5, Informative)
Carmen Reinhart: (Chief Economist) Bear Stearns -> IMF -> Harvard
\-> married with Vincent Reinhart: FED -> (Chief US Economist) Morgan Stanley.
famous quote: "Secretary Paulson Makes the Right Call" The Wall Street Journal, Sept. 16, 2008:
"In other words, some government aid might ultimately have to be directed toward financial firms whose failure would otherwise threaten the financial system.
The politicians now running for office should also appreciate that their grand ambitions for new spending programs or tax cuts may have to be tempered by the need to rescue financial firms."
Kenneth Rogoff: IMF -> Harvard
Comment removed (Score:3, Informative)
Re:Dubious Proposition (Score:4, Informative)
Crises which happened in a world without central banks are profoundly different than those after. In that what was ignorance and foolishness is now malign or incompetence.
If you read the re-analysis of RR, with the correct data, you see that there is nearly no correlation between debt level and growth. And indeed, crises happen randomly, and so do the rise and fall in debt level. sometimes they meet, but it turns out that most of the time it's just bad luck.
Should you pile on any amount of debt? probably not. But you also should not worry much about it.
Re:High debt is bad. (Score:5, Informative)
"The US government for example is spending about 50k per US household. The median income of US households is about 49k."
These statements do a great job of conflating median and mean. If you're comparing per household spending to per household income, you don't want median because a small proportion of American households take home a huge amount of income.
The mean per capita income in 2012 was $42,693 [1]. Per capita spending by the federal government was $11,260 [2]. Total spending including state and local government spending was $19,015.7 [2]. This means that the federal government would be fully fundable with only revenue increases, even with lower taxes than much of western europe.
The US has a long-term health care problem. In the short term, the US has a small revenue problem and a very large austerity problem (which is actually causing long term harm to the economy). The US, currently, does not have a spending problem from an economic point of view.
If you want to argue that the US has a moral spending problem like many austerity/deficit hawks, feel free, but don't conflate that with an actual economic argument.
[1] http://bber.unm.edu/econ/us-pci.htm
[2] http://www.usgovernmentspending.com/year_spending_2012USdn_14ds1n_F0#usgs302
Re:Excel error? (Score:5, Informative)
Improv is dead (18 years dead), FlexiSheet is in early Alpha (no binaries available for download). Neither would be appropriate for this situation. It would be like suggesting Hurd over Linux. Quantrix or similar financial modeling software would be more appropriate, but a) they're expensive, b) they're limited in scope.
SPSS and R are very good at statistical analysis. Quantrix, MapleSoft, IBM Algorithmics, and other software is for financial data modeling. None of those is particularly appropriate for sharing data in a useful format with peers. Excel is.
Re:High debt is bad. (Score:5, Informative)
You're not going to get hate mail. But you will be told you are wrong, because using the simplistic idea that "debt is bad" to plan an economy is ridiculous How would you explain how startups are successful? When they start, their income to debt levels are completely off the mark, but with investment of capital to improve efficiency and drive sales, eventually they can be profitable regardless of how much their debt to income ratio was.
With large economies, the principles are the same. If you borrow money to fight wars, there's very little chance of receiving a return on the initial investment, as the Iraq War has proved: over three trillion dollars spent, and nothing but one million veterans with a lifetime of expensive treatments to care for it. If America had instead spent that money on infrastructure improvements, like renewable energy, fiber-to-the-home, or even an improved commuter rail network and efforts to modernize the government itself, we would all be doing very well just as we did during the Space Race. Even making common sense changes, like decriminalizing harmless drugs and ending our for-profit prison system and replacing it with a reasonable mental health infrastructure would not only save us money through simple budget changes, but it would also have extensive monetary effects by reducing recidivism, which frees up police to focus on actual crimes instead of trying to continue functioning as a moral goon squad.
If you want to understand why America is in such deep trouble financially, all you have to understand is that we lowered taxes for everyone, especially the super wealthy, at a time when we also spent three trillion dollars we did not have on unnecessary wars.
That's why it's so frustrating to see rambling nonsense like yours modded as insightful. Debt it not scary. It's a concept that we have invented and one that we can redefine or simply do away with using a debt jubilee, or a national reorganization as done by Iceland. Paper money only causes anarchic collapse when people go hungry. And even when there is a massive economic collapse, like the Great Depression, America did not devolve into cruelty. FDR told the rich to pay back the money they swallowed up, and they did, and our economy was further assisted by a massive government spending program, including complete takeovers of private industry for a brief period of time. And that's fine because private enterprises are usually massively inefficient hierarchies controlled by internal politics rather than innovation (see: Microsoft).
Nowhere in your diatribe against debt do you make any coherent points with supporting evidence from reality. But that's just libertarian economics in a nutshell, I guess.