A seminal academic paper by Reinhardt & Rogoff has been
used by conservative central bankers, politicians, and pundits from here
to the EU to justify austerity cuts (because their analysis showed that
higher sovereign debt levels result in low or even negative GDP growth). So we
have to cut in order to have growth. But it turns out that they were
wrong (either deliberately or not).
A UMass Amherst econ grad student was trying to reproduce
their results, and R&R were kind enough to give him their original
spreadsheet. Well it turned out that there were "coding errors,
selective exclusion of available data, and unconventional weighting of
summary statistics", and after those were rectified, then their original
conclusions were invalidated. Now it looks like countries with even
>90% debt/GDP can still have 2.2% GDP growth (wouldn't we love to
have that much growth, and our carried debt is about 100% GDP). 
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Yeah, this whole episode has been pretty illuminating.
The
paper was pretty clearly shenanigans from day one. The question is the
link between slower growth and higher debt. It's fairly obvious that
slower growth can cause higher debt: if you make less money than you
expect, your debt will generally be higher. R-R were attempting to prove
causality in the opposite direction, that having more debt causes
slower growth. That would be an interesting result. But you can't just
demonstrate it by showing there's a correlation between debt and growth,
because correlation doesn't tell us in which direction the causation
runs, and we've got a plausible theoretical story for why it should run
from slow growth to higher debt. So even if their math were tip top,
they still wouldn't have proven what the austerians wanted them to have
proven.
The so-called "coding error" actually
isn't a big factor. Of the overall error, from R-R's -0.1 to the
corrected 2.2, roughly 0.1 of that is the "coding error." The rest is
their selective picking of the data and their weird weightings (they
took the average growth rate for each "episode" and averaged those all
together, ignoring duration, so a 10-year span of 2% growth in one
country and a 1-year span of -4% growth in another country averaged to
-1%). But the "coding error" is so easy to explain and so asinine that
it makes for great TV. Honestly, if they hadn't made that error, this
probably wouldn't have been nearly as big a story, even though that was a
tiny error, and it's clearly an honest mistake where the others smack
of cherry-picking your data and methodology to fit pre-selected
conclusions.
Also, I think it's sad that this
gets called a "coding error." The issue is that they had an Excel
formula which should have been "AVG(E30:E49)", and instead they put
"AVG(E30:E44)" (44 instead of 49). That's not "coding." It's data entry.
A "formula error" at best. But it's not math or computer science that
we're talking about here. They just typed the wrong number into the
cell.
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I didn't read the original R&R paper and haven't followed their story, but as you said - it seems pretty ridiculous that they could make a counter-intuitive causation argument while only armed with heavily massaged archival data that happened to show a correlation. Yeah, I've seen plenty of that data cherry-picking and massaging until the result is pleasing (I have unfortunately participated in it too).
LOL, "coding" sounds cooler than "typo", and technically Excel is a programming language - albeit a very graphical, limited one. :) Most Americans can't perform a square root without Google. Frankly I have rarely seen old folks (and esp. profs) who are competent in Excel - I wonder if R&R actually made the goof themselves, or one of their student slaves instead and it wasn't detected?
I guess the lesson is: don't base sweeping policy on a single controversial source, even if it's from famous authors. Try to get a 2nd or 3rd validation, and even better - research all the counter-arguments to see if they have merit. But I guess that would be too rigorous and "fair and balanced" for ideologues.
Well another lesson is - NEVER give out your data analysis files except under subpoena! And then you might want to wipe your hard drive first and say it was "user error". :)
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Agreed. I think for all peer-reviewed academic publications (and
for-the-public gov't studies too), all the raw data and analyses should
be made available. Let enthusiasts pour over it at their leisure, and if
the authors did their work properly, they should have nothing to hide.
To err is human, to leave errors undetected to cause harm day after day
is American.
But I think the debt-GDP growth connection is clearly not
open-and-shut (even when that paper was published, otherwise all
nations should have adopted austerity), and case-specific factors can
affect things. Japan has been at or near the top in terms of debt/GDP
for some time. They also had a lost generation and a decade-long
"recession", arguably because the gov't didn't spend ENOUGH on Keynesian
stimuli. But Japan's sovereign debt was mostly internal (Japan owed its
people, not China like us) and at very low interest rates, so the
"burden of debt" was not as risky and crippling as say Greece, where
Germany is charging blood money rates (maybe for good reason since they
are a higher default risk, but I think their repayment terms are more
punitive than prudent). I guess using a company as an analogy, leveraging to the hilt is not a problem as long as you use the money on "smart" projects that give you returns well in excess of your borrowing costs. But as we saw, leverage can blow up at times when interest rates go up or income declines (then you need to take out new, worse loans to pay off your old loans that are coming due). But that is the case that J described: lower growth/revenue leads to more debt, not the other way around.
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First, china owns a very small amount of our debt. Strong majority is govt or us public owned.
Also, low revenue causes debt just as much as it causes
austerity. Lower revenue means you either spend less to compensate or
dont but it need not cause debt.
Of course the reality is the us is functionally incapable of significantly reducing spending so sort of a moot point.
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Well if you look at new borrowing over the last 10 years, I
think China and the Middle East hold more share than domestic buyers
(recession caused flight to perceived safety and higher demand for US
Treasuries, which drove down yields). But overall, yes the biggest investor of US debt is Social Security.
I agree, if we lack the political will to cut spending
(meaning the big drivers of spending, like Medicare and defense), it is a
challenge - but then there is always the revenue side of things. Though
there seems to be just as little will to tackle tax reforms too. I forget which journalist/historian it was, but he was saying that Athens and Rome's declines exhibited some of the same features: heavy military spending with little strategic gains, political corruption and gridlock, and social apathy to hold leaders to account.
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