Hot on the heels of my last column about statistics gone awry, a new “scandal” has gripped the economics profession.
I refer to the recent revelations of a graduate student’s finding that two of the world’s leading economists, Carmen Reinhart and Kenneth Rogoff, made an egregious Excel mistake.
In a working paper, they show that a government debt-to-output ratio of 90 percent will tip a country from positive to negative growth. A debt overhang of 90 percent or more, and an economy will not go gentle into that good night (apologies to Dylan Thomas).
So, policymakers read this and discern that to avoid economic Armageddon they must rein in government largesse.
And we’ve seen ramifications of this policy, most stridently in Europe. Where to start?
Iceland, Ireland, Spain, Italy, Greece, Portugal, France, Cyprus and a bunch of countries that haven’t (yet?) made the headlines.
The problem is, Reinhart and Rogoff conveniently left out some data, did some questionable calculations and made some honest coding mistakes.
Turns out, high debt-to-GDP ratios doesn’t necessarily have a negative effect on growth, which has been oft demonstrated in previous research.
Ironically, it also countermands some of their own analysis that essentially shows that there is not a “one-size-fits all” debt-to-GDP ratio, it depends on the country.
Consider Spain and Germany: Is anyone worried about Germany’s economy? What about the Spanish one? In 2010, the German debt-to-GDP ratio was 82 percent while in Spain it was 61 percent, no panic in Germany, lots in Spain.
And what of the credit-card study conducted by Moody’s Analytics I discussed last month? Brouhaha, and for no discernible reason I could find.
Yet these studies are treated with some respect, which is troublesome as neither of them were subject to a critique. They are both working papers with no referee for checks and balances.
And this is problematic, that a famous name or institution can influence policy that affects millions, almost with impunity.
To imagine that on the eve of the financial crisis many economists were spending a lot of time congratulating themselves believing they had “cured” business cycles.
At the beginning of the Great Recession, I cautioned that a deep recession shouldn’t be the primary concern for policymakers, but a sustained Japanese-style recession that drags on for years most assuredly could.
That appears to be the current state of Western and periphery economies – sluggish and uninspiring economic performance.
No, economists haven’t figured it out, and admitted so at a recent International Monetary Fund conference in Washington, D.C.
Economics is an inexact science. Billions of economic decisions are made every day, and there is no way to predict them all.
I’m beginning to see the attraction and need for Italian Prime Minister Silvio Berlusconi: The opera which surrounds him is a constant reminder of just how inexact we are.
sonora_t@fortlewis.edu. Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.
