Policy makers in the US and Europe seized on the paper as proof that cutting stimulus and social programs was a good idea, and proceeded to do so with abandon. Of course, right wingers wanted to cut money to social programs anyway, and would have done so regardless, but the paper was held out as scientific proof that it was a solid plan of action.
I won’t comment on how strange it was that Republicans were interested in science at all, given recent efforts to politicize the NSF and micromanage the grant decision process.
The trouble was that the results presented in RR were shown to be based on the selective use of data. Thomas Herndon, a 28-year-old graduate student, obtained the dataset from RR themselves and couldn’t reproduce the results.
In fact, he found that the only way to accurately reproduce the results in RR’s paper that showed that high debt restrained economic growth was to exclude important cases. When including the missing data, high debt was associated with consistently positive growth, though modestly slowed.
Originally, I took the view that this was a case of sloppy science. RR had a dataset, got some results which fit the narrative they were pushing and didn’t pursue the matter any further. Reading Herndon’s paper, however, I changed my mind.Herdon took the data and did what any analyst would do when starting exploratory analysis, he plotted it (see figure on the right). Debt to GDP ratios and growth are both continuous measures. We can do a simple scatterplot and see if there’s any evidence that would suggest that the two things are related.
To me, this is a pretty fuzzy result. Though the loess curve (an interpolation method to illustrate trend) suggest that there is *some* decline in growth overall, I’d still ding any intro stats student for trying to suggest that there’s any relationship at all. There is no way that RR, both trained PhD’s and likely having the help of a paid research assistant, didn’t produce such a plot.
Noting that the loess curve drops past approximately 120%, I calculated the median growth for each country represented. Only 7 countries have had debt to GDP ratios greater than 120% in the past 60+ years: Australia, Belgium, Canada, Japan, New Zealand, the UK and the United States. Out of these only two had (median) negative growth: Belgium (-.69%, effectively zero) and the United States (-10.94%), which has only had a debt to GDP greater than 120% one time. All other countries has positive growth under high debt, even beleaguered Japan. New Zealand can even claim a strong 9.8% growth under high debt. The US, then, is a major outlier, possibly bringing the entire curve down.
As this doesn’t fit their story, RR’s solution was to categorize debt to GDP ratios into five rough classifications, and calculate the mean growth within each group. This is a common trick to extract results from bad data. It’s highly tempting for researchers (and epidemiologists do it far too often), but a bad idea to present it without all the caveats and warnings that should go with it.
I’m not surprised that ideologues such as RR would be so keen to produce the result they did. After all, they published the popular economics work “This Time Is Different: Eight Centuries of Financial Folly” where they try to suggest that budget policy of the US in 2013 should somehow be informed by the economy of 14th century Spain.
I am, however, surprised that reviewers let this pass. If I would have been a reviewer, I would have:
1) pointed out the problems of categorization, where data doesn’t require it
2) noted that categorizing the data (or even plotting it) tears out temporal correlation. For example, one data point from 2008 (stimulus) may be put in the high debt category, but another from 2007 (crash) in the low debt category. While budgets of one year may have little to do with the budget of another, the economy of one year is likely related to the economy of the previous year.
3) questioned the causal mechanisms behind debt and growth. This is obviously a deep question for economists (and not epidemiologists), but of particular import. When does the economy start to react to debt? I’m pretty sure that there is a lag effect as spending bills tend to space disbursements over the course of the fiscal year.
The RR debacle should be a lesson, not only to economists, but to all scientists. While we may always be under pressure to produce results and hope that those results fit and support whatever position we take, shoddy methods don’t get us off the hook. In RR’s case, I would call this fabrication. A good many studies are merely guilty of wishful thinking, but the chance always exists that someone will come out of the woodwork and expose our flaws. After all, that’s what science is all about.
First, the truth is that no one really knows why some products succeed and others don’t. As the purchasing of goods in the market done by multiple individuals whose decisions are often personal and multi-factorial, direct observation and dissection of behavior is nearly impossible.
There are some theories, though (largely from Van den Bulte, 2007). So that I don’t forget, and purely for my own benefit, here’s a breakdown:
1. People who buy early are different from those who buy late. For example, the people who sit in the cold waiting to buy the new iPhone on the day it is released are vastly different from those who wait until the price drops 6 months later. It’s hard to tell who’s smarter. Me, I like heat. (See Rogers, 2003.)
2. There are market leaders that other people like to follow. People buy products because they want to imitate others, who might mostly be those who pick up on fads early, i.e. there are “innovators” and “imitators.” People who bought to iPhone 1 (what did that look like?) early showed it to their friends, who bought one, too. (see Bass, 1969)
3. People buy products autonomously, because of influence from above, or because of peer influence. Some people buy stuff caring little for anyone else. Some people buy stuff because an authority said it was a good idea. Some people buy stuff because their friends do. (see Riesman, 1950 and Schor, 1998)
4. Purchase decisions depend on social status. Some people buy stuff because they want to emulate those higher on the social ladder than they are. Similarly, those on top buy new stuff because they don’t want to fall behind or be unseated as a high profile consumer. Some people tend to want to buy slightly more car than they can afford, so that they can feel more like those with more money than they have. The stratified nature of society, thus, perpetuates a system of striving to consume more beyond one’s means. This desire is, of course, endless. (see Simmel 1971 and Burt 1987)
5. Marketing is a two step process. Ads are only effective at influencing behavior of leaders, who, in turn influence their followers. I call this the “Economist effect.” Only a few sad people (such as myself) read the British magazine, the Economist. When the Economist endorses a Presidential candidate, it would seemingly have little effect since only about .0028% of the American populace is paying attention. However, the readership of the Economist consists of educated and well positioned people who have the capacity to influence large numbers of people who don’t read the Economist. On numbers alone, an endorsement from that newspaper would seem meaningless, but as a conduit to the less engaged, the effect could be considerable. (Fortunately, though, no one cares what I think.) (see Lazarsfeld, 1944)
6. There are risks to adopting new products, fashions, etc. Very, very poor people are very similar to very, very wealthy people in that they have nothing to lose by taking adopting new products or behaviors. Ever think about the crazy stuff that some homeless people wear? Is it any crazier than high fashion? Think of Juggalos vs. Comme de Garcons. (I don’t know anything about fashion; that was all I could come up with). People in the middle, however, have a lot to lose by dressing crazy, so they end up really boring. (see Homans, 1961)
I’ll take an aside from Kenya to write on an excellent article I found on Bloomberg on the subject of economic “uncertainty.” During the run up to the 2012 election and the subsequent debates on the now almost forgotten “fiscal cliff,” Republicans and their faithful believers spread wacky ideas that American business was crippled by not knowing what their tax rate would be in 2013.
Caroline Baum on Bloomberg claims, rightly, that this was a manufactured panic, though I would argue that our academically challenged politicians seriously believed what they were peddling.
Republicans in Congress claimed that businesses were sitting on cash, unwilling to invest until they knew what their tax rate would be next year (as if tax rates are ever set in stone). What’s more, raising taxes on “job creators” would bring the U.S. economy to its knees.
The premise behind this is fantastical. If businesses are sure that they’ll make a profit, they’ll invest the money today. I think it’s ridiculous to assume that single digit tax increases will somehow get in the way of moving ahead with business.
She points out, though, that the whole thing was fantasy:
– The private sector added 675,000 jobs, making it the second-best quarter since the recession ended in June 2009.
– Business spending on equipment and software rose 12.4 percent annualized, the biggest increase since the third
quarter of 2011.
– Business sales rose an annualized 4.2 percent (assuming no change for December), the strongest quarter of 2012.
The most perplexing part of the whole “kowtow to the American economic elite or else you’ll be unemployed” idea is the notion that somehow CEO’s hand out jobs like candy. “Job creators” don’t create jobs unless there is demand for products, either domestically or abroad (don’t forget that the US is an export giant). Republicans, so opposed to handouts, imply that somehow it is the responsibility of business to provide jobs without the expectation of return.
This is, of course, the government’s responsibility! It is exactly why we continue to invest in infrastructure improvement, have unemployment insurance, provide food stamps and bolster national defense. These expenditures are made knowing that returns are unlikely, but the infusing of cash into the economy keeps important sectors afloat and reduces overall volatility.
It’s ironic, given the anti-Keynesian bent of the Republican Party that prevents them from admitting it, that the US’s economic contraction in the last quarter of 2012 was due to defense cuts and had nothing to do with any type of fantastical “uncertainty.”
OK, back to bednets and Kenya.
- Timeline of the Saharan Crisis (NYT)
- To little fanfare, the United States recognizes the Goverment of Somalia for the first time since 1991. (NYT)
- The free market at work: Cerberus is having trouble dumping gun maker Freedom Group. No one wants to tarnish their image by owning the company. Looks like a fire sale is about to happen. I still maintain that Bloomberg should buy it and shut it down. (Bloomberg)
- Another noble call to treat firearm injuries as a public health problem, comparing firearms to tobacco. As they note, firearms are not tobacco, which is unsafe at any level of consumption. To help reduce injury and death, we need a broad based approach. Of course, they wrote this article with no health from the NIH. (JAMA)
- The Fed failed to predict the Great Recession. Someone at the Fed had to see it coming, though. This uncovers a major structural flaw in the Fed. Designed to mitigate crises, it in’t incentivized to act when times are good. (Bloomberg)
- The lessons of past slavery need to inform present day business owners, policy maker and slavers to improve working conditions. (History News Network)
- Bio-fuels and world hunger(food prices). This guy has the right idea, but misses a couple of important points. First, though the share of corn going to ethanol has been increasing, corn production as a whole has been increasing. Second, he misses that food price increases and volatility have been following the general trends of stock market since 2000, discounting the role of bio-fuels as a cause. Trading food like oil explains the oil like patterns in food. A good article though. (Conservable Economist)
- Developing countries are trading with each other more than they are exporting goods to wealthy countries. Mutual trade and accountability could do much for creating regional stability and stable governments. (Economist)
- Japan and China need to end this petty bickering before it becomes the end of us all. How far will they take this silly game? (Economist)
And to round this up, a graphic of US troop deployments which presents a picture vastly different from what some of my liberal comrades would like to believe. The Obama admin would do well to advertise this reduction more forcefully.:
Ben Bernanke, Chairman of the Federal Reserve, came and spoke at the University of Michigan today. Of course, I make sure never to miss an opportunity to check out high ranking government offices ask when they come and speak.
Bernanke addressed what one would expect, fiscal cliff issues, the debt ceiling and the role of the Federal Reserve itself.
The fiscal cliff: He started by reiterating the position that Obama took at his noon press conference. Namely, that Congress has no choice but to approve a raise of the debt ceiling as it has nothing to do with future spending, but rather covers spending that has already been approved by Congress. To not approve an increase in the debt ceiling would lead the US to default of its financial obligations and create chaos in the world economy.
This is, of course, completely true. People are basically suggesting that the government should save money by not paying the light bill. Shutting down the government may sound like a revolutionary affair, but the results would be disastrous, and as the interest on these bills would continue to accrue, we’d just end up losing money in the end.
The role of government in mitigating financial disasters: Bernanke discussed parallels of monetary policy between the Great Depression and the Great Recession, pointing out that efforts to reign in the depression were too cautious and conservative. Government may not do very well in times where the markets do well (since it doesn’t really have to do anything), but has much to do during a financial crisis.
Though a personal observation, the response to the Great Recession was far too conservative. We needed more stimulus, not less and the notoriously slow reaction of The United States Congress held us back in the end. Petty bickering and political brinksmanship shot us in the foot. We’ve certainly seen economic growth since, but unemployment gains have been anemic.
Global economic issues: Though Americans seem to be under the mistaken impression that the united States lives in a bubble, the truth is that we live in an interconnected world. Though the US has seen comparatively impressive gains compared with the rest of the world since the crash, continued problems in Europe and slowed growth in the emerging economies has held us back.
I’m not sure how one gets around China’s slowing pace of growth. Some of that is the result of intentional policy changes to cool down exports in order to create a stronger domestic market there. The Europeans, at the very least, are working to create a unified central bank, which should help mitigate problems in the future. How all the individual political players work this out, will remain to be seen.
Move to require auditing of the Fed: He mentioned the recent movement by House Republicans to require full auditing of the Federal Reserve. Bernanke argued that the Fed is already subject to an independent private sector reviewer. The GAO is also able to examine the Fed’s books and evaluate the inner workings of the at agency. What the GAO cannot do is evaluate specific monetary policy of the Fed. The reason for this, is that the Fed is an independent agency and a unique private-public mixture. If the GAO, or any other government body were able to say, audit and evaluate the implications of raising or lowering interest rates, the Fed would then become less than independent and be subject to the short term political interests of Congress.
Given the batshit nature of this particular Congress, we can be assured that this would result in chaos for the world economy. For proof, one would consider the policy roots of the financial crisis itself. Governments are not incentivized to reign things in when people are profiting. A politically compromised Fed would be even less likely to attempt to control an asset bubble. I’m not sure where I stand on this issue, but an independent central bank is not unique. The Bank of Japan also operates outside the political sphere of the Diet.
I’m pretty sure House Republicans knew all too well that the Senate wouldn’t approve the Bill. They had nothing to lose by signing it.
As Bernanke kept repeating, the “dual mandate” of the Fed is to manage price stability and maximize employment. It can be offered that the Fed, in fact, serves only the interest of the very wealthy. This may certainly be true. It has been my experience, however, that the intentions of policy makers are manifold and often what appears to be self-serving, is actually intended to serve the greater good. Knowing this, I tend to give policy makers the benefit of the doubt and at least listen to what they have to say (rather than have Ron Paul do all the talking for them).
I feel that Bernanke is no exception. I am definitely not stating that I trust him implicitly, or that I think that the policies of the Fed, or any other economic policy, are flawless. On the contrary, the brunt of the financial crisis can be attributed to poor policy making. However, it is irresponsible to disregard agencies such as the Federal Reserve. But it’s worthwhile to hear a man out.
Today I encountered a discussion, where the participants emphatically maintained that the current US economic woes are to be blamed in part on increased US defense spending during the Iraq and Afghanistan wars. I countered and claimed that they have no relation at all. Of course, these people hate me now (thinking I was merely being difficult for the same of being difficult), but that’s ok. I’m used to it.
To test this hypothesis, I took data on US GDP (adjusted to constant 2005 dollars) and combined them with data on US defense spending (adjusted to constant 2010 dollars). The results can be seen to the left. The red line is defense spending. The blue line is GDP.
As I maintained, there is no obvious relationship between defense spending and economic growth. There are a couple of major blips in GDP growth, namely the collapsing of tech equities in the early 2000′s and the economic meltdown on 2007/8. There are no events in US GDP for drops during Clinton nor sudden increases in defense spending following 9/11.
In fact, as defense spending dropped pre-9/11, you can see the US economy was plugging along just fine. As defense spending went up post 9/11, the US economy maintained the same trajectory, minus the economic bumps.
Now, at first glance, this is a little more convincing. But when you take the events into consideration, it is less so. The two major economic events of the 2000′s, namely the equity bust, and the financial meltdown both resulted in sudden jumps in the unemployment rate. 9/11 and the troop surge did not. In fact, as spending was doing up, unemployment was going down. If we look back into the nineties, we can notice that even though defense spending was declining, unemployment was up, then down again. In short, given the context, there is no real reason to assume that two related.
I am NOT an advocate for war. I am though, an advocate for evidence backed claims. There is little evidence to suggest that increased defense expenditures during the Bush years affected our economy.
We can claim, if we like, that federal revenues might have been greater had the wars not happened. These revenues, it is argued, could have been allocated to education or infrastructure improvements, for example. However, it has to be noted that the wars weren’t funded out of federal revenues. They were funded out of low interest bonds. Thus, as those bonds had not been serviced at the time that this data was collected, there is, again, even less reason to assume that the wars negatively impacted the economy.
Now, we can certainly make arguments over how much defense spending is too much and what the potential long term effects of servicing the war debt will be. I argue, though, that our elected representatives are much more interested in financing the military than, say, welfare programs for the needy. It would take a great leap of faith to assume that, if the military were closed tomorrow, monies targeted for defense would automatically be transferred to providing health care to poor people. I also argue that, long term, the expenditures that came out of the financial crisis will be, in comparison, more difficult to service.
The war cost us politically, but was a bargain economically. To me, that’s a much more frightening state of affairs.