Austerity policy caused by spreadsheet error by SIGNYM

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Austerity policy caused by spreadsheet error

POSTED BY: SIGNYM
UPDATED: Friday, April 26, 2013 14:06
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Thursday, April 18, 2013 5:23 AM

I believe in solving problems, not sharing them.

Quote:
In the world of economic luminaries, it doesn't get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age. Both have served at the International Monetary Fund. Reinhart was a chief economist at investment bank Bear Stearns in the 1980s, while Rogoff worked at the Federal Reserve, passing through Yale and MIT before landing at Harvard.

Their study, which found economic growth slows dramatically when a government's debt exceeds 90 percent of a country's annual economic output, has been cited by policymakers around the world as justification for slashing spending. Former U.S. vice presidential candidate Paul Ryan, a Republican congressman from Wisconsin, is one influential politician who has cited the report to justify a budget slashing agenda.

http://news.yahoo.com/student-took-eminent-economists-debt-issue-won-0
95347790--business.html

The original paper concludes that public debt ratios of over 90% GDP cause negative growth (-0.1%) ie, recession. But when an economics graduate student tried to replicate the results using the same data in the original paper, he failed over and over.

The authors sent him their spreadsheet, and in it, he found that the authors had excluded nations with periods of high debt AND high growth, without explanation. The authors also did not "weight" the data properly to account for the fact that some nations had only a few years in one regimen or another, while others had decades. And in addition he found a simple spreadsheet error- somebody forgot to update the spreadsheet, and failed to include a whole set of data.

ALL of the errors - improper data selection, improper data weighting, and failure to update the spreadsheet... biased to data in one direction: to show that high debt causes recession. Instead of a -0.1% recession, the graduate student found a growth rate of +2.2% at 90% debt to GDP.

I know that economists are famous for their fancy models and intricate math, but this spreadsheet was primitive, certainly not what I was expecting of world-famous men or a world-famous paper.

Yanno, in our line of work we use spreadsheets... a lot. We have to evaluate data, and the things these guys did broke some very fundamental rules of data handling, which ANY QA/QC person cuold tell them:

1) NEVER discard data, unless you can assign a real error to a data point (ie I screwed up. or The machine hiccuped or We had a power outage). Data can be discarded without cause, but ONLY if it is a true statistical outlier... and it takes an awful lot to be a true outlier. Outlier data is WTF?? data. Also, when you start eliminating MULTIPLE "outliers" from a data set- as these men did- you're on very shaky (one might say indefensible) ground.

2) ALWAYS check the bases of your calculations. Sometimes it can be pretty subtle, but in this case- when the original authors failed to time-weight their data- it is quite evident.

3) ALWAYS have someone reproduce your results. It is helpful to be able to put in a "dummy" set of data with a known answer to check the process.

Wow, Europe in a tailspin because two famous guys mis-managed data?

I don't think this was on purpose- after all, if they thought they had done something wrong they would never have shared their spradsheet. Their errors were most likely unconscious. But as Stephen J Gould wrote in The Mismeasure of Man,

Quote:
The most erroneous stories are those we think we know best - and therefore never scrutinize or question.

Including spreadsheets and economic dogma. The paper told the money-men what they wanted to hear, and few people peeked behind the curtain to see if it was true. When they did, they failed to reproduce the results but they were ignored, or they figured it was something they did wrong.

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Thursday, April 18, 2013 7:10 AM

NEWOLDBROWNCOAT

Saw this one myself over on Yahoo and meant to post on it.

Coupla thoughts:

1. According to sources, Paul Ryan's budget proposals were based largely on their conclusion.

2. ALL of the errors they were caught in add up to biasing the results in one direction. They couldn't have gotten more support for their conclusion by deliberately cheating than they did by these "errors". Where are the "climate-gate" folks? These guys were either careless to the point of incompetence or crooked.

3. The authors, themselves, either in their original paper or the follow-up letters, admit to a correllation of the factors, but not causuality. ( Don't think I spelled either of those big words correctly.) In other words, those phenomenon are found together, but they can't prove that either one causes the other, or which caused which, or if it's just a coincidence.

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Monday, April 22, 2013 9:53 AM

NEWOLDBROWNCOAT

Variation on the old light bulb joke I saw somewhere:

"How much is 2 and 2?
Ya get various answers depending on who you ask: 22,4, 3.9999+, 4.000000001,
until you get to the economist.

His answer: " What do you want the answer to be?"

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Monday, April 22, 2013 9:58 AM

1KIKI

Goodbye, kind world (George Monbiot) - In common with all those generations which have contemplated catastrophe, we appear to be incapable of understanding what confronts us.

I saw this as well.

It reminds ME of an old 'Murphy's Law' joke that goes around in hard-science circles: first plot your chart, then select your data.

PART of the answer is the inadvertent spreadsheet error, but MOST of the answer is cherry-picking the data; something that is viewed as scientific fraud when it occurs elsewhere.

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Friday, April 26, 2013 4:29 AM

SIGNYM

I believe in solving problems, not sharing them.

Reinhart and Rogoff defended their paper, but the grad student, Thomas Herndon, stuck to his guns.

http://www.businessinsider.com/herndon-responds-to-reinhart-rogoff-201
3-4

Meanwhile, the ECB is looking at perhaps maybe moderating their anti-government stance, after torpedoing the economies of Portugal, Ireland, Greece, Spain, Italy, and even France. Talk about a destruction whirlwind. They're like the trickle-downers here: no matter how many times their treatment makes the illness worse, they still bleed the patient. Now, THAT is a truly religious conviction!

On the other hand, while I can say with confidence that austerity doesn't work, I can't say that "easy money" improves the economy. The REAL problem isn't debt, it's the great inequity of wealth and income. Poor people aren't much of a market- as China is finding out, now that Americans are spending less. It's hard to believe, but we are still stuck at the same level of inequity that we were in 1929. Nothing has changed since 2008- all of the big money went to big money.

That vast inequity- the one that led me to predict that we were going to crash months before it happened (even as rappy kept insisting the economy was "ON FIRE!") is still there. It cause the Great Depression back then; why do we think it will do differently now???

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Friday, April 26, 2013 6:55 AM

NEWOLDBROWNCOAT

Quote:
Originally posted by SIGNYM:
It's hard to believe, but we are still stuck at the same level of inequity that we were in 1929. Nothing has changed since 2008- all of the big money went to big money.

Let's not suggest that we're " still stuck " at the same level as 1929. That implies a static, unchanging state. Economic matters got better for a LONG time after 1929, and then GOT WORSE due to economic policy choices. And now we're "BACK" to 1929...

I remember 1957, when my dad, a working stiff, made $ 3000 a year, but was able to afford to pay CASH for a new car. I remember 1969 as maybe the peak of the American economy, when I made $ 1.68 an hour, but could afford to live on that. I remember 1991, when I was working full time, making good money, and could afford to raise 2 little girls, before the Bush 41 Recession . That was the ONLY time during my working life when I had a job, was working steady overtime, and saw MY OWN hours cut to 32 hours a week. Other times, other places, my co-workers got their hours cut, but never me or the folks in my department.

It has been shown time and time again that putting money into the bottom of the economy makes it go- pay it to the poor or the blue collar workers, and they spend it, on groceries, on clothes, on home appliances, on new cars, on food, drink, TV's, and entertainment. And THAT MONEY PAID to many businesses, in MANY small transactions, makes DEMAND. And then businesses produce products to meet that demand, which means buying materials, and new equipment and paying wages and hiring more workers.

Dolly Levi Gallagher put it best: "As my late husband Ephraim used to say, 'Money is like manure. It doesn't do any good unless you spread it around."

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Friday, April 26, 2013 7:18 AM

SIGNYM

I believe in solving problems, not sharing them.

One of the problems with suggesting a solution is that economists assume that you're supporting Keynesianism. The problem with Keynes' solution is that he didn't target where moeny should go; in his view (if I understand it correctly) is that it's sufficient to just increase the money supply. There is the thought that if you increase the money supply, all you'll do is increase inflation. But in a situation where there is already "excess production capacity" it is easy enough to increase production, therefore the defintion of inflation (too much money chasing too few goods) doesn't hold.

The other misunderstaning that I find hard to dislodge is that the government is somehow increasing the money supply above and beyond what it was. The point is that during the ramp up to the collapse, the money supply was ALREADY inflated.

How?? Not by the government, but by the banks. They're able to loan money they don't have. Then, the loans that they make serve as collateral for even MORE loans. All in all, banks were able to loan out about 80X what they had in actual cash. That kind of credit injection creates a bloated money supply. Since the credit was targeted to a specific purchase (homes), the increased money supply geared towards a specific asset simply created an asset bubble.

There is nothing magical about managing the money supply. If you drastically increase credit (effective money supply) in one asset class, you'll create a bubble. If you increase money supply to the average consumer when production is at 100%, you'll create inflation. So, don't do that. The only magic involved is the sleight of hand that banks and other financials engage in when making money out of thin air. When banks are able to do THAT, it becomes very difficult indeed to manage the money supply, because they can create a roller-coaster of too much credit, followed by collapse.

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Friday, April 26, 2013 2:06 PM

NEWOLDBROWNCOAT

Didn't Keneysian theory work pretty well from the 1930's until 1980-something? And then along came "trickle down/ Stockmanism/ voodoo econimics", which never proved Keneysianism WRONG, as I remember it. And Stockman later admitted that he faked the data he used, didn't he?

And as I understood it, Keynes only approved of deficeit spending and unbalanced budgets to a small degree and for a short period of time. And, of course, Congress ran huge deficeits for a VERY LONG time, so what happened wasn't predictable or justifiable by his theories. But it seems like they were flexible enough and accurate enough to cope for many years, even when abused..

That's how I remember hearing it explained in the one one-semester class on Econ I took as general ed way back in the 70's.

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