Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

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-- Brad Delong

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Tuesday, April 16, 2013

Two R's Missing 'Rithmatic

Wow - via Steve Benin at Maddowblog and Jared Berstein we discover that the oft-cited Reinhart and Rogoff study that "indicates" that a country's debt level leads to economic contraction at levels above 90% of GPD has been shown to be totally bogus.

They made an error setting up their Excel spreadsheet for the calculations, and the math came out wrong. [This is really inexcusable sloppiness]

Not only does this matter, it is REALLY important, because their study has been used as the justification for austerity by people like Paul Ryan who want to gut social programs in the U.S., and the economic union authorities in Europe who are destroying themselves with austerity.

It's still true that with correct math the data really does show higher debt *correlating* with lower [but still significantly positive] growth.  Here is Bernsein's graph showing the R&R results along with the corrected results.

However, even if R&R had gotten it right, the austerians are making two other fundamental [and ideologically driven] errors in judgment. First off, when you do a data mash-up like they did, it's easy to get the causation reversed. It's quite likely [and realistically seems very sensible] that slow growth causes the need for high debt, not the other way around.

Second, if a high debt to GDP ratio were really a problem, it would make more sense to grow GDP rather than go into an austerity mode that is likely to shrink GDP. [Exactly what happened in the U.S. to cause the "golden age" after WW II] This is the denominator effect. Make the denominator [here, GDP] larger, and the ratio becomes smaller.

This is really very simple. But it is way beyond the capability of somebody like Paul Ryan.

Critical analysis leads to the truth. But that will not matter to Ryan. His mission is to kill social security, not solve any of the nation's problems, and, as Bernstein points out, "It’s not like facts are driving this debate."


BadTux said...

"It’s not like facts are driving this debate."

Ah yes. Those silly "facts" things that have a liberal bias. Alrighty, then!

- Badtux the Snarky Penguin

Jerry Critter said...

Facts seem to often get in the way of republican arguments.