The Excel Depression
Published:
April 18, 2013
In this age of information,
math errors can lead to disaster. NASA’s
Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan
Chase’s “ London Whale” venture went bad in part because modelers
divided by a sum instead of an average. So, did an Excel coding error destroy
the economies of the Western world?
Ms. Reinhart and Mr. Rogoff
had credibility thanks to a widely admired earlier book on the history of
financial crises, and their timing was impeccable. The paper came out just
after Greece went into crisis and played right into the desire of many
officials to “pivot” from stimulus to austerity. As a result, the paper instantly
became famous; it was, and is, surely the most influential economic analysis of
recent years.
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.
For the truth is that
Reinhart-Rogoff faced substantial criticism from the start and the controversy
grew over time. As soon as the paper was released, many economists pointed out
that a negative correlation between debt and economic performance need not mean
that high debt causes low growth. It could just as easily be the other way
around, with poor economic performance leading to high debt. Indeed, that’s
obviously the case for Japan, which went deep into debt only after its growth
collapsed in the early 1990s.
Over time, another problem
emerged: Other researchers, using seemingly comparable data on debt and growth,
couldn’t replicate the Reinhart-Rogoff results. They typically found some
correlation between high debt and slow growth — but nothing that looked like a
tipping point at 90 percent or, indeed, any particular level of debt.
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.”
In response, Ms. Reinhart
and Mr: Rogoff have acknowledged the coding error, defended their other decisions and
claimed that they never asserted that debt necessarily causes slow growth.
That’s a bit disingenuous because they repeatedly insinuated that proposition
even if they avoided saying it outright. But, in any case, what really matters
isn’t what they meant to say, it’s how their work was read: Austerity
enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact
and a reason to slash government spending even in the face of mass
unemployment.
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.
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