This research has been quoted in recent years and has been the basis of Government Policy like Austerity programs in Europe and also of Paul Ryan budget proposals and investor decisions. Unfortunately, for such an important research the data was not vetted properly.
When researchers have looked at the data and the Excel spreadsheet behind the research they found significant issues. They are summarized below for us non-economists:
http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problemsThere are 3 types of errors in the data:
* Selective Exclusions
* Unconventional Weighting
* Excel Sheet Coding Error
This is actually a big deal and why peer reviewing process is important. So, these errors combined that out the basis of 90% debt being the cut-off point of fiscal cliff. There is probably a cut-off but it is much less clear cut than it used to be. Meanwhile, the Austerity prescriptions should be re-reviewed and adjusted.
Comments
" Taken together, the authors of the new paper reckon that average post-war growth above the 90% threshold ought to have been reported at 2.2% rather than -0.1% (see chart)."
This is a big error...
bbc.co.uk/news/magazine-22223190
As the Economist and others have pointed out, they committed a fundamental error of science in arguing that higher debt caused slower growth, whereas all their (misrepresented) data showed was a correlation between these variables. In fact, others have argued that the direction of causation was more likely to have been the reverse: that the case could more easily made that it was periods of slower growth that led to rising debt (e.g., that periods of higher unemployment or rising retirees lead to less tax revenue coupled with more government outlays).
In addition, they argued that bond markets demand significantly higher interest rates when the debt-to-GDP ratio got too high. While this has been the case for countries that don't control their own currency (Think Greece and other euro-zone countries.), markets have taken an entirely different view of countries that issue their own currency and therefore which simply can't default. (Think Japan, with near zero rates while having a very high debt ratio.)
What a shame when economists abandon science to play politics.
US in particular controls its currency and only issues debt in its own currency. Japan is in similar situation. Most of the Japanese dept is in yen.
Thanks for the link. I learned something new - never saw the word "swingeing" before
Regarding cause and effect - the Economist suggests that while the original authors were not careful in mass media articles, they were more cautious in their "academic" papers. Maybe, but they stepped right up to the line by asking early in their paper: "what is the long run macroeconomic impact of higher levels of government debt?" Not significance, not implication, but impact - conveying a causal factor.
In the conclusion to their paper, they write what suggests a preexisting bias:One of the comments posted to the Economist's article even suggests that by encouraging governments to act on this 90% cliff, they are in fact creating the "debt intolerance" effect they have claimed to have discovered.
Finally, it's worth remembering that correlation does not imply causation in either direction. There can be underlying (latent) factors that cause both effects being studied.
This new method of calculating CPI, called "chained CPI", will not only lower SSI COLA increases, but many State and Municipal Pension that use SSI COLA increases in their claculation as well.
The compounding effect of COLA increases on pension payments are significant...so this is one more way of deflating debt obligations...puts some chains on the CPI.
Much of this came out of Simpson Bowles committee which was a bipartisan body of work. As others in Washington posture... Simpson Bowles quietly rolls out.
Only-the-apocalypse-will-stop-simpson-and-bowles
"The commission first met on April 27, 2010. [2] A report was released on December 1, 2010, [3] and although the Commission was supported by over 60% of the members (11 out of 18), [1] and an equal number of Democrats and Republicans, the report did not reach the 14-vote threshold required to formally endorse the blueprint and have it sent to Congress for approval." [4]
The complete Wickipedia entry: National Commission on Fiscal Responsibility and Reform
[1] "In a 11-7 Tally, the Fiscal Commission Falls Short on Votes - Interactive Feature". NYTimes.com. 2010-12-03. Retrieved 2012-12-01.
[2] Agustino Fontevecchia (2012-04-18). "JPMorgan Chief Jamie Dimon Asks For Simpson-Bowles Now". Forbes. Retrieved 2012-12-01.
[3] Lillis, Mike. "Pelosi flips, backs Bowles-Simpson plan she had called ‘simply unacceptable’ - The Hill's On The Money". Thehill.com. Retrieved 2012-12-01.
[4] Rowley, James (2012-10-04). "Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action". Washington Post. Retrieved 2012-12-01.
Not just "a" report, but the "final" report was released on Dec 1, 2010:
"On Wednesday, December 1, 2010, the National Commission on Fiscal Responsibility and Reform held its sixth public meeting to discuss the nation's mid- and long-term fiscal challenges. At the meeting, the Commission released its final report, The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform." (Embedded link to report in original: http://www.fiscalcommissions.gov/meetings.)
Perhaps worth noting is that an official vote may never have been taken. It was scheduled for Dec 3, 2010, and still listed as an "upcoming meeting".
Edit - Yet there are declarations like this one from Andy Stern, asserting that there was a vote: "On December 3, 2010, I voted 'no' on the Simpson-Bowles report presented to the National Commission on Fiscal Responsibility and Reform."
Edit - PBS/Need to Know also reporting that a vote was taken: "The committee vote taken on December 3, 2010 ..."
(Various edits and changes go to show that I should check more thoroughly before carefully, thoughtfully, inserting my foot into my mouth.)
http://www.ritholtz.com/blog/2013/04/colbert-demolishes-reinhart-rogoff/
"That report needed to achieve a super majority (or the equivalent to 14 of the 18 members voting Yes) to move on to Congress for approval. The committee vote taken on December 3, 2010 resulted in only 11 “yes” votes. ...Without the requisite super majority within Simpson-Bowles, the committee’s report could not be presented to Congress for a vote."
Not mentioned in practically any report on S-B (including PBS/Need to Know) is an alternative blueprint offered as part of the S-B deliberations that addressed the "deficit problem" in an entirely different way.
References on that alternative:
http://blogs.reuters.com/great-debate/2012/10/24/the-sham-of-simpson-bowles/
http://www.evanstonroundtable.com/main.asp?SectionID=15&subsectionID=26&articleID=3275
http://voices.washingtonpost.com/ezra-klein/2010/11/rep_schakowsky_we_have_not_had.html