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Excel Error Contributes To Problems With Austerity Study
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."
No, finite resources do.
When I read the title, I expected a calculation or rounding issue, or an internal range issue from built in components and not "dumb ass user didn't set the range correctly when averaging". That's not an Excel error, that's a user error - Excel did exactly what it was told to do.
Anyone who prefers debt is a fucking idiot and shouldn't be trusted.
That statement is plain daft. It's much too broad. Sometimes debt can be good. For example, getting a mortgage for a home might not be bad. Sure, it would be better to buy with cash and avoid paying all the interest, but if you don't have a pile of cash lying around, you are limited to saving while paying rent. It might actually work out better to get the mortgage.
Also, getting a loan to start a company might be a great way to have enough capital to get to the market quickly and by doing so make a huge profit.
Not all debt is bad. Debt without any plan to pay it off and without evaluating whether the costs of managing the debt outweigh the benefits is bad. The problem is that most political parties these days seem to have a horizon of the next election when it comes to balancing the books. The problem with this sort of debt is that they spend up big and have no real plan to pay it back.
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It's about what you spend it on.
If you spend it on capital goods that allow you to produce more, that's investment.
If you spend it on final use goods, that's consumption
Simple concepts: consumption is not production and not all spending is investment. And yet, look at how Gross Domestic Product is calculated.
GDP = private consumption + gross investment + government spending + (exports - imports)
Set your phasers on "funky"!
Attempting to justify more theft of the public and increased government spending.
It's simple to answer this question, do you want to incur debt or spend money that you have? Anyone who prefers debt is a fucking idiot and shouldn't be trusted.
Wow this brings stupidity to new levels. A report is widely used to justify government cut backs. The report proves to have mistakes in it that would have given a different result - so pointing out the error is "Statist Bullshit"? There would be some justification in arguing that the report does not matter, though for people who previously used it to argue their case this would be hypocritical. But to argue that we should continue to use the incorrect report because correcting it is statist is just dumb.
Reinhart and Rogoff have certainly been warning of high debt levels, but it's wrong to give this study too much credit for what "austerity" there has been across Europe. Most cuts in places like Greece and Spain were fait accompli, once it was clear that the ECB was not going to budge on its inflation target to neither try and boost nominal growth nor to crudely relieve nominal debt levels.
I will grant that the 90% debt/gdp trigger is most likely non-existent, but the rest of their book does yeoman's work in cataloging financial crises. It's a useful antidote to the mass psychological amnesia that is perpetually recurring. "Our new investments our safe and returns will never fall" inevitably leads to "what perfidy caused this?" The cycle has been repeated in remarkably similar ways for nearly a millenium now. We should appreciate the detailed financial history they have created, and chide them for the dubious massaging of the data. Just don't overstate its political implications.
I got a catholic block.
Does High Public Debt Consistently Stifle Economic Growth?
No, finite resources do.
High public debt drains away valuable resources faster than low public debt
Given the same amount of initial resource, a country with high public debt will have smaller chances for recovery
But then again, most economies (other than that of North Korea) are dynamic, and the amount of resource fluctuates
Muchas Gracias, Señor Edward Snowden !
Thank you for using your brain, far too many around here don't bother.
Doesn't anyone who supports big government socialism see that the people encouraging all the debt and deficit spending are *not* the same people paying the taxes, ever? Anyone? Hello?
Good grief.
Debt without any plan to pay it off and without evaluating whether the costs of managing the debt outweigh the benefits is bad. The problem is that most political parties these days seem to have a horizon of the next election when it comes to balancing the books. The problem with this sort of debt is that they spend up big and have no real plan to pay it back.
Therein lies the problem. In my opinion, borrowing should be done to acquire capital for investment; not to simply acquire nice things. I think most people are so used to doing that (e.g. credit card debt,) that they don't really pay attention when the government does it either. Many are even fine with the idea that they can just spend until they are upside down, and then file chapter 7. Governments can't do that (if they did when they do - there will be hell to pay.)
Nice things would be (and this is a classic example libertarians point out) things like national endowment of the arts. If any given artwork isn't worth anything to anybody, then why on earth are we paying somebody to make it? I really don't know if any nice things have come of it, but in the end that is all it is - just a nice thing that we don't actually need in the classical sense, and that money should be going towards paying back debts.
Sadly that is lost among posters like the one just above you, who I think probably constitute a majority. I hear many talk about how a subset of Americans don't want to adopt European policies just for the sake of not being like Europe. Ignoring that the reverse is also true (it certainly is) there is also that subset who want to simply follow Europe's lead just for the sake of doing so. I don't think that is a wise idea given the current Eurozone crisis.
There was a time when the roles were reversed - the US tended to follow Keynesian thought more than Europe. That was the great depression. And as it turns out, the US fared far far worse than Europe.
The great depression wasn't caused by the stock market crash, by the way. The crash simply created a panic, but on its own it didn't cause the mess that followed. After the crash, the unemployment rate was about what it is now - floating between 9 and 10 percent, even showed signs of recovery for a brief period. Things didn't get really bad until the government tried to "fix" things. Smoot-Hawly for example, designed to create jobs, raised domestic prices dramatically and dropped exports by half. Domestic production and exports rise and fall with one another, for those who don't know. That followed by heavy deflation, prohibition, FDR declaring bullion as contraband, the new deal, among a bunch of other things that were supposed to "improve humanity" (the prohibitionists identified themselves as progressives, by the way) and only made things much worse.
Notice below how you see the dow begin to recover up until Smoot-Hawly
https://en.wikipedia.org/wiki/File:1929_wall_street_crash_graph.svg
(Strange world we live in how Republicans wanted tariffs, Democrats did not, and now things are reversed with Unions heavily lobbying for tariffs to protect their jobs.)
What do I know though, I'm just another one of those libertarian whackos who still believe that Keynesian theory was shattered when it proposed that stagflation can't possibly happen, but it did anyways.
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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."
Why should the UK be given more weight? There's only one such country, not 19 such countries. And the UK data in question is highly correlated (it all comes from the same debt over the same span of time, not 19 different points in the UK's history).
In addition, the rebuttal ignores two stretches of data:
RR examines three data samples: 20 advanced economies over 1946{2009; the same 20 economies over roughly 200 years; and 20 emerging market economies 1970{2009. We repli- cate the results only from the first sample as these are the most relevant to current U.S. and European policy debates, and they require the least splicing of data from multiple sources. We focus exclusively on their results regarding means because these have generated the most widespread attention. On their website, Reinhart and Rogo provide public access to coun- try historical data for public debt and GDP growth in spreadsheets with complete source documentation.3 However, the spreadsheets do not include guidance on the exact data series, years, and methods used in RR.
It's worth noting here that the rebuttal is willing to take data from the period just after the Second World War where a number of countries had high debt and were transitioning from a total war economy (that is, an economy totally focused on winning a particular war to exclusion of everything else, including economic growth) to a normal one - including the 19 year series of the UK mentioned above, and periods of excluded (excluded that is from the original study for unknown reasons) data from Australia, New Zealand, and Canada. All of these incidentally show high economic growth combined with high debt.
If we're excluding data series due to their irrelevance to current economies, why should these be counted? The US and Europe haven't been in a total war economy since the end of the Second World War. So it is to be expected that one would not see the economic gain (whether or not the debt is present) that one saw in the immediate post-war period.
The original research seems weak for a number of reasons, but I'm not willing to call it "fishy" on the basis of a rebuttal which makes its own "fishy" assumptions.
The only real resources that fluctuate are labor and renewables
I guess you are not in the high tech field
As one in the tech field since the 1970's, one very real resource that I count on is BRAIN-POWER, aka, ideas
Timber can cut into wood for burning, or could be turned into tables and chair by carpenters, or could be used for building a dormitory, or, in the hands of master crafter like Stradivarius, becomes his world famous violins
Muchas Gracias, Señor Edward Snowden !
It means less flexibility.
More liability.
Less freedom.
More waste.
Say what you will about this study, the governments of the western world are living beyond their means.
The US government for example is spending about 50k per US household.
The median income of US households is about 49k.
That alone should tell you there is a problem.
To paraphrase Emperor Augustus: "things that can't go on forever - don't."
These governments are spending well beyond their means and the only way they can presume to maintain it even for a time is through massive inflation. Which will harm the economy, raise interest rates, and generally transition any country that chooses this path into a second world country.
And even this won't be enough because having destroyed your credit and dealing with increasingly higher interest rates it will only be a matter of time before you can't inflate the currency fast enough to paper over your debt.
And when that happens... anarchy... blood... social collapse.
People need to stop deluding themselves that they can magic the debt away as if it won't exist if you don't believe in it.
It isn't a six year old's imaginary monster. It's our civilization's very real debt. And it will bring us low if we don't bring it under control.
I also love that they're whining about these austarity measures when many of these countries are still increasing the amount of debt they owe. In many cases, they're simply slowing down... not reversing course.
If a country can at least tread water without building additional net debt then it's got the situation under control.
But many do not. The US does not. We spend more every year and the tax recipes and economic growth are not remotely keeping up.
I know I'm going to get hate mail for this... It's what comes of having an open forum.
But you can't wish the numbers away through denial. It's like arguing with the Sun.
I've decided to stop wasting my time responding to AC trolls/sockpuppets... so if you want a response from me... login.
Wow, what a horrible moderation. Troll? Really? Looks like the idiots from 4chan have mod points today, or maybe a disgruntled MBA. You are entirely correct, I had an undergrad psychology prof say that there isn't a psychologist that there's another calling him a gold-studded liar, the same could be said for economists, who seem to ignore results. Example: Cut taxes on the rich for job creation, ignoring all of history. Even after the Bush cuts (among other mistakes) ruined the economy.
However, rather than being stupid, IMO economists are simply dishonest. Most people who worship money are.
Waste your points on me, 4channers, so you won't mod good comments like the parent's down. This is ridiculous. Please, slashdot, bring back the old metamoderstion (or give me a few ponts, haven't had any in ages).
Free Martian Whores!
You know that Germany has relatively low unemployment compared to the rest of Europe because many youth learn trades instead of being jobless? Same for Austria and Switzerland.
Austerity affects everyone. It kill opportunities, it stifles social mobility, it removes funds from research and long term investments. There are no good aspects to austerity, except that at the top you fall less than those at the bottom so you are comparatively better off. But to rejoice in that makes you a horrible person.
You are entitled opinions, but not facts.
Not much I can add, except that maybe people who use the term, "Libertards" seem universally to be idiots. But that's just an entitled opinion of mine.
At some point the country with more debt has had more money than the other one. What matters is what the country is doing with that extra-resource. As a example, in June 1999, Google was 25 millions in debt, a considerably worst shape than my local kebab place.
Debt is just an indicator. That's what's wrong with the current austerity measure in Europe. It does not matter what a Country is doing with its money, Europe only cares about the yearly balance sheet and does not give a damn about the future of the country.
I don't know your political persuasion, but something tells me you are quite generous.... ...with other people's money, and never your own.
Anyways, some of the most well known (in terms of media spotlight) libertarians are very charitable, like Penn Jillette. I call him out in particular because he has some words of wisdom that somebody such as yourself probably will never understand:
It's amazing to me how many people think that voting to have the government give poor people money is compassion. Helping poor and suffering people is compassion. Voting for our government to use guns to give money to help poor and suffering people is immoral self-righteous bullying laziness.
People need to be fed, medicated, educated, clothed, and sheltered, and if we're compassionate we'll help them, but you get no moral credit for forcing other people to do what you think is right. There is great joy in helping people, but no joy in doing it at gunpoint.
People try to argue that government isn't really force. You believe that? Try not paying your taxes. (This is only a thought experiment -- suggesting on CNN.com that someone not pay his or her taxes is probably a federal offense, and I'm a nut, but I'm not crazy.). When they come to get you for not paying your taxes, try not going to court. Guns will be drawn. Government is force -- literally, not figuratively.
I don't believe the majority always knows what's best for everyone. The fact that the majority thinks they have a way to get something good does not give them the right to use force on the minority that don't want to pay for it. If you have to use a gun, I don't believe you really know jack. Democracy without respect for individual rights sucks. It's just ganging up against the weird kid, and I'm always the weird kid.
http://www.cnn.com/2011/OPINION/08/16/jillette.atheist.libertarian/index.html
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The UK has had much higher debt ratios in the past. It equalled 30 years of tax revenue after the war with France and Spain in the early 19th century. It took most of the century to pay it off
So? That was the UK's greatest period of growth and relative prosperity. It's often cited as an example of debt not impeding growth. Similarly the US had federal debt of 125%/GDP after WWII, and post-WWII was our greatest growth period. It helped that the debt was mostly internal (i.e. War Bonds were held by Americans, so paying off the debt meant paying Americans). AFAIK the same was true of the UK after the Napoleonic wars.
However, I'm not saying debt isn't important, just that it's not the only or the ultimate evil. Other things can be worse, and can justify increasing the debt.
With US defense spending at 23% of the federal budget and welfare 11%, I wonder why you choose to call it a "welfare state" rather than a "military state"?