Monday, April 22, 2013

When consequences are bad

Knowledge is a public good and increases in value as the number of people possessing it increases.
(John Wilbanks, vice president of science at Creative Commons)

The issue

Let's call it the Reinhart-Rogoff brouhaha, which virtually no one knows about, well, almost no one knows about it, except some economists, public policy types and maybe some literate politicians. It turns out to be important however because it impacts probably the majority of Americans as well as a lot of non-Americans throughout the world.

Carmen Reinhart and Kenneth Rogoff are two well known Harvard economist that have exerted considerable influence on the economic policy of the U.S. and likely in Europe as well. Their influence has been on the side of economic austerity rather than economic stimulation, beloved by not just conservatives and assorted ideologues.

The Reinhart-Rogoff “law” (it's not) states that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows. Debt therefore becomes terrifying, a monster to be avoided, a nightmarish scenario that will destroy civilization. Uh-huh.

(For a clear explanation of the Reinhart-Rogoff controversy see Paul Krugman's article in the NYT, 4/18/13, entitled The Excel Depression).

The science thing and the problem with Reinhart-Rogoff

What we call the modern scientific process had its beginning in the 17th century. It gradually began to systematize knowledge about the natural or physical world and constructed the elements of the scientific process. It has generally worked remarkable well, in part because it's transparent and concerned with HOW things work.

If you take the spectrum of science today you might go from physics to chemistry to biology to medicine to the social sciences, no one area more or less valid than the other—in terms at getting at the “Truth”--but the degree of quantitative validation and specific proof is more demanding in physics, for example, than probably any other area, at least for the moment.

What seems to stand out as you learn the basics of the Reinhart-Rogoff study, which was first published in 2010, is how sloppy the original analysis actually was, in many ways making it easier for those individuals who wanted to to jump on the austerity bandwagon.

It turns out that data was missing, questionable statistical procedures were used and an important coding error was made. Correlations were suggested in the study but those are not the same thing as “cause.”Hypotheses were seemingly offered as facts, but the long and short of the study is that there was never a “90 percent threshold.”

No, economics by any stretch of the imagination can not be called “hard” science at the present time, but the subject could use a far more rigorous process in determining the validity of many of its key concepts, especially in light of its central role in public policy and the impact on individuals. Alan Greenspan, former head of the Federal Reserve Bank, said back in 2008 that, “We were wrong quite a good deal of the time.” Greenspan was a master of understatement.

In fairness, as Paul Krugman has pointed out, there were economists that were skeptical of the original study but it took a 28 year old graduate student from the University of Massachusetts more than two years later to drive a stake through the mystical dogma of the Reinhart-Rogoff study. Reinhart and Rogoff finally allowed researchers to look at their original spreadsheet and—the results couldn't be replicated, replication of course happens to be a basic early step in the scientific process.

Searching for a conclusion

The Reinhart-Rogoff study appears to be a fairly deceptive piece of work, which most likely has led to some unsound economic policies for the United States and some unwanted consequences overseas. Yet, it probably raises some larger questions as well.

If, as we Americans proclaim, at least officially, a democratic society of some kind requires a reasonably informed and engaged citizenry … well, which way are we going?

Second, beware of the “temple priests,” be they from the public or private domain, setting themselves up as the guardians and protectors of our knowledge. We can find them almost everywhere today, classifying documents of one kind or another, claiming patent protection for virtually everything and stifling open inquiry whenever possible—in the name of the public good of course. What will we ultimately decide to do? It requires some effort.

Additional Reading:

Does High Public DebtConsistently Stifle Economic Growth? A Critique of Reinhart andRogoff (Hendon, Ash, Pollin analysis of the Reinhart-Rogoff study, Univ. of Massachusetts, 2013)

The Conscience of a Liberal: Paul Krugman's blog   

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