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Ken Rogoff, Carmen Reinhart, and bad math

Chained CPI Social Security National Debt Economy

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#1 Cait

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Posted 18 April 2013 - 05:31 PM

Has anyone been following this?

http://www.latimes.c...0,4073638.story




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One of the most fearsome statistics in the war against the federal deficit has always been the country's ratio of debt to gross domestic product. When this ratio reaches 90%, the argument goes, watch out -- lower economic growth is on the horizon. And that's scary, because that's where the U.S. has been heading.


This idea comes from Harvard economists Ken Rogoff and Carmen Reinhart, who featured it in a 2010 paper and popularized it in a book entitled "This Time is Different: Eight Centuries of Financial Folly."
Since then, the stat has been cited countless times, including by Rep. Paul D. Ryan in rationalizing the draconian spending cuts in his proposed budgets. Now it turns out the authors may have counted wrong.
A new study by three researchers at the University of Massachusetts finds that Rogoff and Reinhart made several mistakes that invalidate their thesis.





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In their analysis of growth rates of 20 industrialized countries, including the U.S., from the postwar period through 2009, Rogoff and Reinhart excluded data for three countries that had both high debt-to-GDP and high economic growth, which contradicted their finding. They tweaked other figures in a way that minimized overall growth rates for some high debt/GDP countries.

Most important, they made a spreadsheet error that resulted in their leaving five countries out of an all-important average of countries with higher than 90% debt-to-GDP ratios. By restoring the full average, the UMass authors say, the growth rate for countries in that range becomes 2.2%, not the -0.1% cited by Rogoff and Reinhart. That makes the average growth rate at that ratio "not dramatically different than when debt/GDP ratios are lower."


Rules for surviving an Autocracy:

Rule#1: Believe the Autocrat.
Rule#2: Do not be taken in by small signs of normality.
Rule#3: Institutions will not save you.
Rule#4: Be outraged.
Rule#5: Don't make compromises.
Rule#6: Remember the future.

Source:
http://www2.nybooks....r-survival.html


#2 DarthMarley

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Posted 18 April 2013 - 06:08 PM

Indeed, I have.

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“I think it’s totally fair to say it’s embarrassing,” said Justin Wolfers, an economist at the University of Michigan, who added that he had not had the chance to study the results and noted that debates over supposed statistical problems were common in the profession. “But the mistakes that are most embarrassing are the least consequential” to Professor Reinhart and Rogoff’s conclusion, he added.
Other experts said that separate pieces of research had found similar results to the Harvard professors’ paper, using alternative data sets and significantly strengthening the argument that higher-debt economies suffered from slower growth. Those include studies by the I.M.F., the Organization for Economic Cooperation and Development and the Bank for International Settlements.

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The sun still rises in the east. It sets in the west. And a lot of debt is still bad.

http://economix.blog...ebt-and-growth/
"It is not who is right, but what is right that is of importance."

#3 Cait

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Posted 18 April 2013 - 06:48 PM

I don't think anyone argues with the "a lot of debt is bad" thing.  I was wondering if anyone was following this in regards to the panic towards austerity because of the Reinhart/Rogoff paper. Austerity doesn't seem to be helping in other countries.  Too much debt is bad for economies, but too much austerity seems to be bad as well.

I also read [forget where now, sorry] that this math was used in pushing Chained CPI by the Administration because of the "red line" noted in the paper.  If that red line isn't so red, is severe austerity really necessary? And if severe austerity isn't necessary, there is no immediate need to raid Social Security.  

I also read that Reinhart-Rogoff posited that Social Security was part of the debt, when it isn't.  Social Security is a trust fund social program.  It is full of Federal IOU's because it has been raided, but in general, SS isn't debt per se, it is a creditor.  It has financed paying off some of the debt.  

I'm all for balancing the budget.  I don't believe in over spending.  Part of my severe upset with the 2000's was that Republicans spent like Democrats.  But, I'm not for taking from SS when it isn't going to help.  Hell, I'm for paying SS back for what has been raided.  

Sometimes it just seems to me that leaders look to big ticket items [Defense/SS] and begin salivating at a faux quick fix to runaway spending.  Everyone just buys into it precisely because they are big ticket items.  The Left goes after the Defense Budget, and the Right goes after SS and entitlements. Everyone believing that these [one or the other, depending on what side of the aisle you favor] will "solve everything", when I believe it is just lazy leadership and cheap political theatrics.  What if the math is wrong and cutting SS does nothing to help?  And, further austerity in fact harms the economy?

Rules for surviving an Autocracy:

Rule#1: Believe the Autocrat.
Rule#2: Do not be taken in by small signs of normality.
Rule#3: Institutions will not save you.
Rule#4: Be outraged.
Rule#5: Don't make compromises.
Rule#6: Remember the future.

Source:
http://www2.nybooks....r-survival.html


#4 DarthMarley

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Posted 19 April 2013 - 04:03 AM

Austerity has worked pretty much everywhere at some point in the past.
But sure, in terms of policy, if half-measures of austerity don't work, and half-measures of keynsian stimulus don't work, what then?
And why?

Some people do not desire austerity at all.
For such people, this is a bit of reassurance that maybe their opponents are really quite wrong.

In terms of US spending and debt, medicare and SS are the big problems. It isn't just debt, but also demographics.
Sane options such as incrementally raising eligibility ages for SS retirement benefits don't seem politically possible, but is the obvious answer to a big part of the problem.
As for Medicare,a more socialized medicine approach will keep that sector of public spending high.
"It is not who is right, but what is right that is of importance."

#5 Omega

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    Maktel shcree lotak meta setak Oz!

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Posted 19 April 2013 - 05:20 AM

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In terms of US spending and debt, medicare and SS are the big problems.
Any particular reason you exclude military spending when it's a big a line-item as SS and medicare?

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As for Medicare,a more socialized medicine approach will keep that sector of public spending high.
How might you reconcile that statemet with the fact that countries with socialized medicine universally spend less on healthcare than we do, by a good margin?

#6 DarthMarley

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Posted 19 April 2013 - 08:30 AM

View PostOmega, on 19 April 2013 - 05:20 AM, said:

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In terms of US spending and debt, medicare and SS are the big problems.
Any particular reason you exclude military spending when it's a big a line-item as SS and medicare?

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As for Medicare,a more socialized medicine approach will keep that sector of public spending high.
How might you reconcile that statemet with the fact that countries with socialized medicine universally spend less on healthcare than we do, by a good margin?

Because in terms of size of non-discretionary budget going forward, they are the top two expenditures.

I don't get why you want me to "reconcile" my predictive statement about future events with yours about historic data.
Metrics matter in that discussion. But beyond that I don't get why these statements must be mutually exclusive.
PP/ACA will increase medical spending in the US, as it guarantees payment. Some might think that this would conflict with claims that it will also reduce quality of care and lead to rationing, but such claims are not mutually exclusive either.
"It is not who is right, but what is right that is of importance."

#7 DarthMarley

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Posted 19 April 2013 - 08:40 AM

View PostCait, on 18 April 2013 - 06:48 PM, said:

I don't think anyone argues with the "a lot of debt is bad" thing.  I was wondering if anyone was following this in regards to the panic towards austerity because of the Reinhart/Rogoff paper. Austerity doesn't seem to be helping in other countries.  Too much debt is bad for economies, but too much austerity seems to be bad as well.

http://theumlaut.com...r-its-own-good/

The deep links are fun in that one. I have been following the "Coordination problem" blog for a while.
I imagine they have linked to a Keynsian oriented blog who also fights the good fight against politicization of a somewhat mathematical and scientific discipline.

The physics crackpot link is also funny;
http://www.cognition...ns-calculations

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Are they simply deranged?
One may consider that these people fail in their scientific work, and fail to understand their own failure, simply because they are unhinged. In which case there would be no point in studying them. Like most (good) null hypotheses, this one has a lot of prima facie support. Signs of pathology are everywhere to be found - which of course is part of the fun of crackpot-watching.

"It is not who is right, but what is right that is of importance."



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