Tuesday, April 23, 2013

How Weird Is The Weirdness At The WaPo?

Jared Bernstein has issued an estimable blast at the Washington Post called "The Papers: Weirdness at the WaPo," http://jaredbernsteinblog.com/the-papers-weirdness-at-the-wapo , which has been supported by Paul Krugman at http://krugman.blogs.nytimes.com/2013/04/22/building-a-mystery , both linked to by Mark Thoma at http://economistview.typepad.com/economistsview/2013/04/links-for-04-23-2013.html , along with several related jabs coming from good old Dean Baker.  With all this piling on, probably enough has been said about this farce, but I cannot resist piling on with a few more points, particularly as the Washington Post editorial page of Earth Day, 2013 involves idiocies issuing from both Fred Hiatt as Editorial Page Editor as well complete nincompoopery coming from one of my fave whipping boys, that non-economist wannabe economist, Robert J. Samuelson.  Hiatt (anonymously written, but almost surely him) whines that too much is being made of the upending of Reinhart and Rogoff's (RR) finding of a supposed 90% threshold on debt/GDP ratios, and RJS just wallows in silliness about macroeconomics, "the trust in macroeconomic magic has shattered," because there are disagreements among macroeconomists.  Oh my.

First of all, the dustup over RR since the paper by Herndon et al hit cyberspace has been widespread in general.  There have been an enormous number of commentaries by many, way too many to cite now, with this getting picked up by most newspapers and other outlets paying attention to economics, with quite a few observers openly admitting that they were misled by RR's arguments regarding the importance of the 90% threshold.  Even I mentioned it without specifically endorsing it in a local TV interview on fiscal policy not too long ago ("Some people think that 90% is an important threshold," I said.).  While people like Bernstein and Krugman are certainly correct that back in 2010-11 the global austerians probably would have done what they did even without RR, that study clearly was used very widely to support their policies, and this support is now looking extremely embarrassing in the face of the evident failure of their policies to spur economic growth.  The discussion of this has been very prominent in many outlets.

But, until yesterday, this did not include the venerable WaPo, where Hiatt and Samuelson, and some others as well, have been relentlessly pounding for years to support cutting Social Security and Medicare as part of a Grand Bargain, and Hiatt continued to do so at the end of his editorial.  The dustup over RR simply did not get onto their pages, even if Ezra Klein and some others mentioned it in peripheral blogs.  On Sunday in the Business section, Barry Ritholtz mentioned it briefly, but not because it had any importance in itself that was worth talking about, but as an example buried deep in a story about how Twitter has transformed discussion of markets and policy.  Then we get the bizarre editorial by Hiatt and the ludicrous floundering by Samuelson.

Just to pound further on how bad the editorial by Hiatt is, let me note something not commented on by others so far.  In the end, he dismisses the importance of RR, even as he admits that they "acknowledged a coding error."  Right, Fred, but then he proceeds to exonerate them with a massive distortion: "The U-Mass economists' reworking of the data shows an association between a plus-90 percent debt-to-GDP ratio and slower growth, just a smaller one than Mr. Rogoff and Ms. Reinhart found."  He simply cannot let go of the 90% threshold, claiming that somehow Herndon et al confirm it, if more weakly.  That is not what they found.  While there remains a weaker correlation between the debt-to-GDP ratio and slower economic growth, there is no threshold at 90%, none, nada, zip, and what is worse, there never was one in the original RR study itself, even if RR made a big deal about such an alleged threshold.  Hiatt is just a dog who refuses to stop chewing on a nonexistent bone.

Unsurprisingly, RJS is even more pathetic.  Krugman has already noted that he somehow takes seriously Lorenzo Bini Smaghi and Allan Meltzer, both of whom have been massively wrong over the last several years. Old monetarist Meltzer somehow exhibits mystification that monetary policy has its limits in stimulating economies when they are in liquidity traps, and says not a word about spending cuts that have led to several years in a row of steady layoffs by state and local governments in the US, while elevating business fears about Obamacare to a high level of importance, even as the US has grown more rapidly than many nations making no changes in their national health care systems at all. 

While elevating this sort of silliness, even as he admits that George Akerlof argues that at least the policymakers have managed to avoid our falling into a full bore Great Depression, he manages to avoid saying anything substantive about RR.  Only at the very end does he even mention them in his litany of macroeconomic disputes, but not to note that they have been shown to have massively messed up.  No, we get "Last week, a feud erupted over a paper on government debt by economists Kenneth Rogoff and Carment Reinhart. The larger lesson is: We have moved into an era of less economic understanding and control." 

No, RJS, that is not the larger lesson, indeed is not the lesson at all.  This is a feud with a pretty clear outcome.  RR were way wrong, and while those who supported austerian policies are now floundering about making excuses like Hiatt on the opposite page from you, for the vast majority of economists this has been a useful moment of clarity, where people who introduced a lot of silly confusion have been shown to be wrong.  There is not now and never was a 90% threshold, period. Get with it, Robert J. Samuelson, you continue to be more of an embarrassment to your unrelated namesake than ever.

Barkley Rosser


anirrationalviewoftheirrational said...

"He simply cannot let go of the 90% threshold, claiming that somehow Herndon et al confirm it, if more weakly. That is not what they found. While there remains a weaker correlation between the debt-to-GDP ratio and slower economic growth, there is no threshold at 90%, none, nada, zip, and what is worse, there never was one in the original RR study itself, even if RR made a big deal about such an alleged threshold. Hiatt is just a dog who refuses to stop chewing on a nonexistent bone."

[It is an understatement to say that R&R overstated the importance of reaching 90% of debt-to-gdp, as the WaPo piece does. As the HAP paper does, when correcting the data, average economic growth goes from -0.1 to over 2%. Forget the numerical difference--it goes from negative to positive. There is no rough/loose/or other correlation . . . . it's [bleeping different].

Moreover, I agree with Bernstein that the R&R paper was not THE impetus for austerity policies (particularly in Europe where getting into the eurozone was paramount for countries like Latvia and Estonia), but it was a crucial leg for the austerity argument to stand on . . . unless you are the WaPo and others who are attempting to distance themselves from the R&R paper by arguing that the pro-austerity crowd would be chirping even without empirical evidence--yeah, basically arguing the austerity movement goes on without a rational basis.

Of course, some proponents of austerity also sidestep the R&R landmine by noting "other works" which show the need for austerity. They never mention them by name, probably because they have received the same treatment (to a lesser scale) as the R&R study--namely the paper out of the Booth School released in February that RA and PK take a part because of, SURPRISE, questionable data sets. As RA wrote:

I was immediately concerned by the data sample: 20 advanced economies over 12 years. What’s particularly distressing is that just over half of the sample countries are members of the euro zone. In choosing to study advanced economies, the authors specifically note the problem of “original sin” in studies of emerging markets—that countries which borrow in foreign currencies are subject to different debt dynamics—only to then use a sample in which most of the chosen economies are unable to print their own money.

Don Levit said...

While the study probably has some flaws, what can we interpolate regarding those flaws?
1. There still may be a relationship to productivity when looking at debt levels vrsus GDP.
Who says GDP is so accurate?
I understand now we are looking at adding intangibles to GDP.
Is the goodwill of the U.S. the next intangible to be added?
Apparently, our goodwill is worth a lot, since we can never become insolvent.
2. Maybe the ratio should be less than 90%
3. Let's not throw out everything, just because there were some flaws. Does debt have no impact at all on a country's productivity?
Don Levit

Homer Paxton said...

we read you downunder!

Wallfly said...

@Don, yes, as R&R's data shows *too little* public debt (under 30%) leads to slower growth.

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Gnatel G said...

Great post! Keep the reviews coming. Informative and helpful as always. Looking forward to the next review

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