I was going to write a blog about how Paulson has screwed his investors, but there’s plenty of time for that and something more interesting came out today.
One of the fundamental studies used to define the politics of the past few years was a 2009 book by the Harvard economists Rogoff and Reinhard (henceforth R&R) called ‘This Time is Different’. Their most politicised result – backed by extensive statistical analysis – is/was that once government debt reaches 90% of GDP growth basically drops to zero.
The conclusions are obvious: government ‘spending’ should be drastically cut to stay below that red line, and it was surprisingly influential.
How interesting that the calculations have now proven false and the selection of data itself unsound.
I always assumed economics departments were full of the same pedants that prowl chemistry labs. Apparently not – R&R conveniently provided their own data and it’s taken until now for someone to actually check their premier conclusion.
The wrong approach anyway
Unfortunately it’s basically impossible to do meaningful statistical analyses on the national data that everyone actually wants to look at. We would all love simple answers to questions like, ‘how many people do I need to fire to hit a total spending number, or should I just not bother?’
As far as I can tell this is intrinsic. For example, there have been only a handful of distinct global cycles in the past century, and each was associated with a ‘phase’ of the economy. How can you compare GDP data for a country that was mobilising for Word War 2 – prepared laboriously by hand – with today?
It is sheer folly to compress a whole economy into a handful of statistics: GDP, inflation, crude measures of weath, and expect to come up with anything actually useful.
Typically you have to ignore the basically unquantifiable effect of changing political structures and environments to come up with one relationship, say, the impact of debt on GDP.
It’s almost funny
The absurd reality that this argument was used to fire people, cut benefits, shelve investment plans and screw funding for things like basic scientific research. Ofcourse, there book was so successful as it resonated strongly with the times, and in particular a brand of conservative politics, so it wouldn’t make sense to give them too much credit.
But it would only be a mild exaggeration to say their research formed the academic bedrock of respectability for the austerity movement.
A constant irritation
The whole thing reminds me of the ‘stocks v bonds’ debate that got way too much airtime a couple of years ago. These arguments all depended ENTIRELY on your start and end point.
If markets halve over a six month period, it doesn’t matter how far you go back, you are still not going to get a meaningful answer. To put it another way, when markets double, all your results change. Even if you took an entire century of price history the problem remains.
Even the better ways of doing this kind of research are invariably dependent on the inclusion or omission of a particular decade.
There is no god hidden in the data. Things do happen for reasons though, and wouldn’t it be better to get as broad and understanding as possible, with as much granularity in the reliable data we actually have?
The whole thing depended on the kiwis
Instead, it turned out that incorrect statistics for four years of New Zealand’s history completely reversed the story.
To be fair (and I read the book years ago) it didn’t seem as they were thumping any particular bible. Unfortunately the same is not true of their supporters and the likes of Paul Ryan who earnestly paraded their research as evidence. Now the facts have changed, what will happen to his opinion?
Austerity for Losers
The moral flavour of the discussion is a little nauseating anway. Those who agree saving is prudent and profligacy immoral (and who could disagree with virtues like that) naturally support austerity, barely bothering to consider the rather numerous differences between, say, a person and a state.
Not that I have anything against Cameron et al using this to win an election – they are, after all, politicians – but I remember thinking it was kind of silly that they had backed themselves into such a corner. They could have stayed the moral party and still left themselves the wiggle room that they could now use to create something of a legacy .
The state should have cashed in on the weird markets of the day
The crisis was incredibly harmful across swathes of society. It was also an opportunity to invest as cheaply as will likely be possible in our generation, and that opportunity has largely been squandered.
Projects with marginal economics but substantial societal value could actually have been done profitably. Not only woudl that have improved things, but it would actually lower your future tax burden.
There is a huge difference between money spent and debt swapped for an income generating asset. With the oversimplifications of R&R and their like, this is mostly ignored.
A Settled Debate
Since a number of countries took varied, almost graded approaches to the crisis, perhaps future academics will come up with the right answer to what we should do now, though by then naturally it will be too late.
Most likely they will then write a pithy book, publicise false generalisations and get the problems of their own time completely, utterly and harmfully wrong.