The Dim-Post

April 17, 2013

Reinhart-Rogoff in New Zealand

Filed under: economics — danylmc @ 8:56 am

Here’s fun. The big news in the economics blogosphere today is that a pro-austerity paper published in 2010 by two economists called Carmen Reinhart and Kenneth Rogoff, which argues that reducing public debt will increase economic growth, and which has been cited extensively by right-wing economists and politicians as empirical evidence in favor of austerity in the wake of the GFC, seems to be seriously flawed. Those flaws include an error in an excel formula that excludes certain countries from the dataset (including New Zealand). When you include those countries the historical evidence in favor of austerity disappears. There’s plenty more information here.

Turns out this paper has been cited extensively by Treasury in their pro-austerity advice to the National government. So that might be a fun question for an opposition MP to ask the Finance Minister: are the government’s economic policies the result of a bug in an excel spreadsheet, and if not, how does he account for the current state of the New Zealand economy?

46 Comments »

  1. I didn’t realise the Right were actually relying on research to argue for austerity. The Right has pushed the austerity line since Adam was a boy.Of course, austerity only applies to workers…

    Comment by Ross — April 17, 2013 @ 9:15 am

  2. I can’t see how a post-2014 Labour Government can credibly leave Treasury with any policy advice role.

    Comment by Trouble Man — April 17, 2013 @ 9:17 am

  3. That a core empirical argument for austerity is in doubt due to a UX flaw in Excel (assuming ineptitude rather than evil) is an excellent metaphor for how the modern world works. Or doesn’t.

    L

    Comment by Lew (@LewStoddart) — April 17, 2013 @ 9:28 am

  4. Does the Prime Minister continue to have confidence in his Minister for VLookups?

    Comment by garethw — April 17, 2013 @ 9:37 am

  5. see TVHE for an informed discussion http://www.tvhe.co.nz/2013/04/17/the-excel-error-in-rogoff-reinhart/

    Comment by WH — April 17, 2013 @ 9:51 am

  6. Those flaws include an error in an excel formula that excludes certain countries from the dataset (including New Zealand)

    No, the Excel error (“averaged cells in lines 30 to 44 instead of lines 30 to 49”) omitted five countries from Australia to Denmark.
    Some NZ data were omitted, i.e. certain years — “New Zealand (1946-1949)” — which did not fit the researchers’ expectations.

    Comment by herr doktor bimler — April 17, 2013 @ 10:31 am

  7. the butler did it.

    Comment by petronious — April 17, 2013 @ 10:35 am

  8. 4.Does the Prime Minister continue to have confidence in his Minister for VLookups?

    Does the Prime Minister stand by all his =IF statements?

    Comment by Phil — April 17, 2013 @ 11:18 am

  9. Yeah in fact the opposite of what you said is true – New Zealand isn’t omitted, because so much else is omitted we’re driving the whole result!
    Glad to see us finally getting the macroeconomic credit we deserve…

    Comment by Tom — April 17, 2013 @ 11:26 am

  10. “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”.

    Comment by herr doktor bimler — April 17, 2013 @ 12:05 pm

  11. So where’s the austerity for NZ? The Core Crown Expenditure went up from $58 billion in 2008 to an expected $77 billion in 2015/16 (near enough $70 billion 2011/12), we borrowed an extra $30 billion and Current Account Deficits roll on as before. About all we’ve done is gently pull on the reins and head slightly away from buying Tonka train sets and the like.

    As TVHE says.. dont overestimate the effect of RR on Govts.

    JC

    Comment by JC — April 17, 2013 @ 12:30 pm

  12. Hm, I thought we concluded that high levels of debt simply reduce the options available to a government during a crisis? That the TREND in debt levels was more important (i.e. chance of continuing deficits/surpluses & their sustainability)?

    “4. Not too long ago I reread R&R to ascertain whether they actually present the 90% level as an emergency cliff of sorts. I concluded they did not, although there were some sentences that a reader could take out of context toward confirming such an interpretation.”
    http://marginalrevolution.com/marginalrevolution/2013/04/an-update-on-the-reinhart-and-rogoff-critique-and-some-observations.html

    Comment by Clunking Fist — April 17, 2013 @ 12:52 pm

  13. “We literally just received this draft comment, and will review it in due course. On a cursory look, it seems that that Herndon Ash and Pollen also find lower growth when debt is over 90% (they find 0-30 debt/GDP , 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%). These results are, in fact, of a similar order of magnitude to the detailed country by country results we present in table 1 of the AER paper, and to the median results in Figure 2. And they are similar to estimates in much of the large and growing literature, including our own attached August 2012 Journal of Economic Perspectives paper (joint with Vincent Reinhart) . However, these strong similarities are not what these authors choose to emphasise.”

    http://au.businessinsider.com/reinhart-and-rogoff-respond-to-critique-2013-4

    Comment by Clunking Fist — April 17, 2013 @ 12:54 pm

  14. So I guess it could be too early to sing “Ding dong, the wicked witch (of austerity) is dead”?

    Comment by Clunking Fist — April 17, 2013 @ 12:57 pm

  15. “a… question.. to ask the Finance Minister: are the government’s economic policies the result of a bug in an excel spreadsheet, and if not, how does he account for the current state of the New Zealand economy?”

    Because debt-to-GDP ratios are the ONLY influence on growth, right?

    Comment by Clunking Fist — April 17, 2013 @ 1:00 pm

  16. I mean, really: you lot sound like those CAGW deniers who discovered that the instrumental record had been grafted onto a graph of tree-ring temperature proxies, when the proxies deviated from the message record.

    Comment by Clunking Fist — April 17, 2013 @ 1:05 pm

  17. Hmmmm, the right wingers seem to get very agitated when their (thin) canons of faith are disturbed. I suppose it is because Marxists and Keynesians have 150 years of serious discussion from all sorts of philosophers and great thinkers to fall back on, whereas the right has got some bitter old Russian tart who wrote a novel, so whatever else they can get they cling to like a spar in a storm.

    Comment by Sanctuary — April 17, 2013 @ 1:59 pm

  18. I mean, really: you lot sound like those CAGW deniers who discovered that the instrumental record had been grafted onto a graph of tree-ring temperature proxies, when the proxies deviated from the message record.

    Wait … so does that mean the evidence for austerity is equally as good as the evidence for CAGW? And does that mean you’re either renouncing your pro-austerity position, or that you’re renouncing your CAGW denial position? Otherwise, I am confused. Again.

    Comment by Flashing Light — April 17, 2013 @ 2:06 pm

  19. “Cited extensively”?

    Eleven matches out of the entire Treasory site with probably thousands of documents. I checked one of those eleven and the paper was one if about 50 referenced.

    As for austerity, when the govt stops borrowing money to pay for social welfare and infrastructure development then that might be austerity.

    Comment by NeilM — April 17, 2013 @ 2:37 pm

  20. 1. Excel formula errors cause me to wake in the middle of the night screaming so I’m kind of sympathetic to RR.
    2. IIRC there are bigger problems with their paper than those stemming from rogue formula ranges. Specifically the 90% threshold is arbitrary and, worse, all they find is a correlation and the odds of reverse causality (low growth leads to higher debt) are very high.
    3. As for Treasury changing their mind. I think this is more likely…https://twitter.com/ECONOMISTHULK/status/316693499678445568

    Comment by terence — April 17, 2013 @ 2:43 pm

  21. Wonderfully deranged blog post, Sanctuary. Are you unaware that 1. There has been no austerity, 2. Marxists and Keynesians are unrelated. 3. NZ Governments have been operating orthodox Keynesian policies for the last 6 years. 4. ‘Empirical Marxist’ is an empty category?

    Comment by tinakori — April 17, 2013 @ 4:18 pm

  22. 17.Hmmmm, the right wingers seem to get very agitated when their (thin) canons of faith are disturbed.

    It’s called “the Internet”, Sanc. Everyone’s default setting is ‘agitated’.
    For once in your life, stop being a dildo.

    Comment by Phil — April 17, 2013 @ 5:17 pm

  23. I’m not sympathetic. Nobody should use Excel for programming unless they have to (there are other luddites in the building forcing you to). Having single cells contain both data and formulas is a recipe for disaster, and it frequently is. There are plenty of perfectly good tools out there (ie., R) which allow replication and fully adjustable scripts, with the data safely contained and infinitely manipulable in transparent ways.

    If they’d used a tool that allowed them a full range of explorations of the full data, they wouldn’t have been forced into their desperate limited cut-offs and exclusions.

    As for Treasury, we’d do well to entirely abolish the institution, and restart with a new department, complete with entirely new staff. Nothing less than a clean sweep will allow us to disavow ourselves of the detachment from reality emanating from that building.

    Comment by George D — April 17, 2013 @ 6:43 pm

  24. “which has been cited extensively by right-wing economists and politicians”

    The only sound position on public debt is repudiation.

    Reinhart & Rogoff are creatures of the IMF and NZ’s M of Finance from whichever party will take their instructions.

    Essentially there is no difference between Wussel Norman & Bill English. NZ the one party state where the so called right & left are joined at the hip.

    Comment by Simon — April 17, 2013 @ 6:52 pm

  25. Bloody hell it’s tin foil hat territory round here now.

    Although phil is spot on with his comment to sancy “For once in your life, stop being a dildo.”

    Comment by Tim — April 17, 2013 @ 6:56 pm

  26. <i.If they’d used a tool that allowed them a full range of explorations of the full data, they wouldn’t have been forced into their desperate limited cut-offs and exclusions.

    No, that’s incorrect. The cut-offs and exclusions in the R-R dataset are because the data for early years in many countries simply isn’t reliable enough. It’s not until countries start adopting the international standards of National Accounting and the like that you get to anything remotely useful for international analysis.

    Comment by Phil — April 17, 2013 @ 7:22 pm

  27. I don’t want to derail what has become and important and cogent debate between left and right on economic policy but feel obliged to, seeing as an even more critical matter has come up with.

    George D – take back your harsh words against Excel!!! While reasonable minds can debate the virtues of debt, stimulus and markets; I think it simply beyond the pale to criticise spreadsheets!!!! They have done more for humanity than all the Keynesian and Monetarists economists stretched end to end!!!!! Such as the simple formula that has let me add an extra exclamation mark to each subsequent sentence!!!!!!

    More seriously George, my guess is that they will have run their regressions in Stata (or maybe even R). And that they’ve simply used Excel for data compilation and sorting. And, to be fair to Excel, it’s not a bad tool for this. More flexible than the graphic interface in Stata at least. And – at least for people like me – much quicker to work with. And if you keep formulas live, audit-able too. Which, after all is how their error was found.

    Ok – enough qualified defence from me. Back to my apostrophe formulas!!!!!!!
    🙂

    Comment by terence — April 17, 2013 @ 7:43 pm

  28. Phil, if that’s the case, then why did they simply not start their sample range from when everyone was reporting to standard. Otherwise, it seems a bit disingenuous and just as methodologically flawed.

    Comment by Trek — April 17, 2013 @ 7:51 pm

  29. The notion that having some restraint on govt spending and borrowing in the bad times is as much cant as the claim that borrowing is always bad.

    There’s this cartoon view popular at the moment that austerity is being leg loose on countries going through temporary difficulty and that spending and borrowing is the only solution.

    The problem is that countries like Greeve aren’t going through some temporary market aboration. Their economy had been mismanaged for quite done time, billions have been borrowed only to feather the nests if the the rich and the govt bureaucracy, tax evasion is a wide spread sport and what is on offer is yet even more money as long as some changes are made to ensure that money doesn’t go to waste as well.

    It’s not quite the situation Keynes had in mind when advocating stimulus lead recovery.

    And the US the debate is about how many trillions to print.

    Comment by NeilM — April 17, 2013 @ 8:26 pm

  30. Who would buy a second hand car from an economist?

    Comment by peterlepaysan — April 17, 2013 @ 9:26 pm

  31. “So that might be a fun question for an opposition MP to ask the Finance Minister: are the government’s economic policies the result of a bug in an excel spreadsheet, and if not, how does he account for the current state of the New Zealand economy?”

    Danyl, you do understand that the massive deficits the government has been running equate to expansionary monetary policy right? Why are you so clever yet so thick?

    Comment by Swan — April 17, 2013 @ 9:31 pm

  32. ^^ I mean fiscal policy

    Comment by Swan — April 17, 2013 @ 9:33 pm

  33. Swan, not thick just heavily reliant on green party electoral success

    Comment by grizzlygumption — April 17, 2013 @ 10:12 pm

  34. Wonderfully deranged blog post, Sanctuary. Are you unaware that 1. There has been no austerity,

    To be fair, Sanc was obviously responding to the odd spew of posts by Clunking Fist, who did seem a tad frazzled. And it was CF who mentioned austerity.

    Comment by steve — April 17, 2013 @ 10:18 pm

  35. Ross, JC, NeilM, Tinakori & Swan:

    I ask once again: when is austerity not austerity? When it’s socialism for the rich and austerity for the rest.

    Comment by deepred — April 17, 2013 @ 10:19 pm

  36. At deepred, the less well off aren’t just being asked to pay a price for the avarice of the rich but of they middle class as well.

    I can’t think of a solution to that but framing the argument like it’s Itchy and Scratchy probably wont help.

    Comment by NeilM — April 18, 2013 @ 1:30 am

  37. I’ve heard rumours that Sydney might soon find itself short of gay divorce lawyers.

    Comment by NeilM — April 18, 2013 @ 1:39 am

  38. Throughout the crisis, NZ’s public debt has been nowhere near Reinhart-Rogoff’s magical 90% of GDP level, and it has no prospect of breaking the 90% barrier unless we see another three rounds of ahem-revenue-neutral tax cuts, so the study should have had no relevance to New Zealand policy even if you believed it.

    Comment by bradluen — April 18, 2013 @ 4:23 am

  39. Should I Worry About the Budget Deficit and Public Debt While the Economy Is Weak? A Handy Guide for Confused Treasury Officials and Ministers of Finance

    1. Is the public debt a problem in itself? If gross public debt is forecast to approach 90% of GDP, you might at least work out whether Reinhart-Rogoff makes a shred of sense or not. If, on the other hand, the worst gross debt forecasts peak below 50% of GDP, go to 2.
    2. Is the bond market telling you to shape up? If the bond rate is high and rising, you might need to take steps to keep the market happy. If on the other hand the bond rate has been brushing against record lows, go to 3.
    3. Is inflation out of control? If core inflation looks Muldoonian, it might be time for some straight talk with your central banker. If on the other hand your core inflation is in the lower half of the target range, go to 4.
    4. Has the economy completed its recovery? If growth is strong and unemployment has returned to pre-recession levels, then it might be time to start paying down debt to prepare for the next recession, just like that nice Dr Cullen did. If on the other hand you haven’t yet strung together two straight quarters of strong growth and unemployment has been struck above 6% for years, go to 5.
    5. You do not need to worry about the budget deficit and the public debt. Go buy a frigate or something.

    Comment by bradluen — April 18, 2013 @ 6:34 am

  40. Very droll Bradluen but can I point out that Mr English appears to have adopted part of point 5 in so far as he has approved building plenty of Roads of National Significance. Personally I think a new frigate is waaay cooler maybe one of these perhaps:

    Comment by TerryB — April 18, 2013 @ 8:31 am

  41. Bradluen, brilliant.

    I see the righties are adopting their usual tactic in the face of failure – blame shift (personal responsibility is not for Galtians) and claim that the real problem is that the hair shirt isn’t hairy enough. It is a strange alternate reality, where the GFC was caused by over-regulation, and Obama is a goat headed shape-shifter who we can kill if we stare at the TV long enough.

    Comment by Sanctuary — April 18, 2013 @ 9:17 am

  42. Interesting article, thanks. Makes me even more distrustful of economists than I was already🙂

    Something worth remembering in the debt vs GDP debate is why there is debt in the first place. In the case of the GFC it was a direct result of the financial crisis. The financial crisis was a direct result of deregulation of the finance sector. Deregulation was a direct result of neoliberal ideology that free markets know best. That is the root cause of this whole debate in the first place.

    Replace neoliberal ideology with a more balanced approach and I’m sure you will get growth in either high or low debt scenarios. Simply because you won’t have the economy having catastrophic meltdowns every 20-30 years.

    Comment by Seb Rattansen — April 18, 2013 @ 10:09 am

  43. > As for austerity, when the govt stops borrowing money to pay for social welfare and infrastructure development then that might be austerity.

    When governments stop borrowing to to pay for tax cuts for the wealthy, then that might be austerity. Of course many governments (not NZ’s) aren’t borrowing as much as they’re printing money.

    Comment by Ross — April 18, 2013 @ 12:56 pm

  44. “I suppose it is because Marxists and Keynesians have 150 years of serious discussion from all sorts of philosophers and great thinkers to fall back on, whereas the right has got some bitter old Russian tart who wrote a novel, so whatever else they can get they cling to like a spar in a storm.”

    Adam Smith is not Russian, even if some reports do suggest he is a tart.

    Carl Menger. William Stanley Jevons. Leon Walras. Ludwig von Mises. F A Hayek. David Hume. Milton Friedman. Tarts all, and baby eaters, too, I dare say.

    (“Marxists… have 150 years of serious discussion..” far out! I can see why you brought Karl up: http://virtualstoa.net/2011/02/07/karl-marx-not-a-cat-person/ )

    Comment by Clunking Fist — April 18, 2013 @ 2:21 pm

  45. Relevant:
    http://crookedtimber.org/2013/04/17/new-tools-for-reproducible-research/

    Comment by herr doktor bimler — April 18, 2013 @ 3:22 pm

  46. “If the bond rate is high and rising, you might need to take steps to keep the market happy.”

    Yep very good bradluen easy to impress the sheeple. eh.

    Meanwhile in the real world it’s the market that takes the steps.

    More than 60% of NZ government debt has been hedged against a default. That puts NZ public debt in the same basket as Peru, Ukraine & Hungary. Given NZ’s alleged credit rating the hedge should be well below 20%.

    2. Is the bond market telling you to shape up?

    Hell yes go back to point 1.

    Comment by Simon — April 18, 2013 @ 5:18 pm


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