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Monday, 29 April 2013 10:11

University Grad Student Debunks Major Austerity Theory by Exposing Flawed Stats

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT

 

krugman15It's about time Paul Krugman took a victory lap – and he does in his Monday New York Times column:

 

But just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out.

 

Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.

 

What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

 

Krugman's boasting is long over due, but in specific, this time comes from the most unlikely of sources: a Univeristy of Massachusetts graduate economic student who discovered major statistical errors in the primary research paper (authored by Carmen Reinhart and Kenneth Rogoff) used by advocates to justify austerity measures.

 

Thomas Herndon, the graduate student who received the excel spread sheet after much persistence that Reinhart and Rogoff used to justify their pro-austerity theory, does not accept the viewpoint that the errors were minor:

 

We showed that the negative correlation above 90 is not statistically significant. I don’t see how that confirms their results. We challenged the claim that this (debt-to-GDP ratio of) 90% line exists for all time and space. That’s their claim, looking at two centuries and for all countries ever. But we show that the negative correlation that does exist–and that’s not causation at all–reduces the closer we get to the present time. If you look at the most recent time period of 2000 to 2009, growth in the over 90% category was actually higher than growth in the 60 to 90 category. That also is not at all consistent. One more thing that I’d like to point out–and these are points that I raised in a blog posting–in their public response, they admit the spreadsheet error that was in Table 2 but then they point to Table 1 and they say the spreadsheet error is not in Table 1.

 

In lay terms, Herndon proved that their database and coding was so statistically flawed as to offer little basis for justifying national austerity measures as a viable economic option.

 

In an April 19 column, Krugman discusses the torpedoing of the academic austerity touchstone:

 

In fact, Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality....

 

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”

 

That leaves the empire of austerity advocates wearing no clothes. As Krugman tartly concludes:

 

So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.

 

What the Reinhart-Rogoff affair shows is the extent to which austerity has been sold on false pretenses. For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.

 

The real tipping-point is when a few people hold such a lopsided proportion of assets that they can even force the working class and poor to pay the check.

 

It took a university grad student to reveal research that powered the likes of Americans for Prosperity, ALEC, the Club for Economic Growth and most of the politicians in DC – when it comes to being cheerleaders for austerity – as highly flawed.

 

Why can't the media and other economists be as tenacious as Thomas Herndon – and the Jeremiah of economics, Paul Krugman?

 

(You can read the University of Massachusetts study that finds the "austerity bible" coding errors here. It was co-authored by Mass U Professors Michael Ash and Robert Pollin.)

 

(Photo: Wikipedia)