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Austerity and the Reinhart-Rogoff Fiasco

April 25, 2013 Leave a comment

You may have heard recently about how an obscure graduate student from UMass debunked a very influential paper from very influential professors at very influential Harvard recently. Indeed, it was a takedown.

Empirical economists Carmen Reinhart and Kenneth Rogoff’s oft-cited paper “showed” that governments reaching or exceeding a debt-to-GDP figure of 90% experience comparatively much lower growth. Turns out the whole thing was riddled with errors. I happen to agree that bad things are coming to countries that over-leverage themselves, but there is simply no way that a study like this was going to be correct, from its very inception.

Put aside for the moment the fact that the word austerity seems to have no useful meaning outside of rigid ideological parameters, meaning those who care more about politics than reality (read: 99% of economists) are talking at cross purposes. The real problem here is methodological. There is simply no way a spreadsheet of math problems based on aggregations of trillions of data points can tell you anything useful about whether a very general fiscal policy, with no set definition anyway, will have particular effects. It is all fantasy.

The most important point, though, is that we learn the right lesson from this. On the one hand, fancy math does not have the ability to tell us whether austerity, as a general matter, is correct. Anyone who thinks so is probably an idiot.

On the other hand, anyone who thinks that errors in fancy math prove the opposite position, is an even bigger idiot.

This is because they make a compounding error – on top of assuming that the methodology¬†could give us useful evidence¬†if it didn’t have its errors, they also assume that the absence of this evidence is evidence of their opposing position. This is a logical fallacy: absence of evidence for position A will never be evidence for position B. (If you’re interested in seeing a prime example of such massive idiocy, feel free to click on this link. I warn you, it isn’t for those with fragile stomachs.)

Ultimately, it is critical not to get caught up in the economic flame war without evaluating first principles. Neither side is right. And neither side seems to know why. In the meantime, I suppose we could just stand back and enjoy the show.

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