Statistic cited to defend austerity partially based on Excel error

How bad did Reinhart and Rogoff get it?

 

Reinhart and Rogoff

It's always hard to work out how much policy is based on actual evidence, rather than the preconceptions of politicians and policymakers, but if any research has had an effect, it's surely Carmen Reinhart and Ken Rogoff's 2009 book This Time it's Different. It's the source of a claim which has outgrown its roots, and come to be cited in policy debates worldwide: that growth drops precipitously if the ratio of debt to GDP rises above 90 per cent. But now, a new paper shows that that claim is partially the result of some astonishing oversight – including an error in the authors' Excel spreadsheet which excluded five countries from the analysis.

The book itself examines the link between the ratio of debt to GDP and growth rates in a raft of countries from World War II onwards. It finds that the higher the debt to GDP ratio, the lower real growth in those countries – and that there is a massive drop of debt to GDP ratios rise above 90 per cent, when the average growth rate becomes slightly negative.

To be fair to Reinhart and Rogoff (or R&R, as the cool kids do not say), the claim they make has been spun out of proportion by supporters keen to use it for political ends. The authors don't explicitly present the 90 per cent level as a cliff, just highlight what the data says; and they don't draw a causal inference, speaking, as they point out today, "of 'association' and not 'causality.'"

Herndon, Ash and Pollin

Even so, however, no other researcher has been able to replicate their "association", and no satisfactory explanation has been given as to why that is. Until now. The new critique, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff" by Thomas Herndon, Michael Ash and Robert Pollin (HAP, in economistspeak), is damning. It highlights three inaccuracies in R&R: "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics".

Of those, the first is the most painful, albeit the least important. Reinhart and Rogoff simply added up their spreadsheet wrong. Mike Konczal's report on the paper illustrates the error: the blue box encloses the cells which R&R used to estimate the average; notice how it doesn't go all the way to the bottom? It should:

Missing out the last five rows – particularly Belgium, which had an average growth rate of 2.6 per cent during the years it had a debt to GDP ratio above 90 per cent – changes the average from -0.1 per cent to 0.2 per cent.

That error explains why no-one else could replicate R&R's findings – but the other two problems cast further doubt on whether even the 0.2 per cent figure is acceptable.

The HAP paper finds that R&R exclude certain years in certain countries for no documented reason. These include five years in which New Zealand has a debt to GDP ratio of over 90 per cent. With those years included, the average growth during New Zealand's six years above the threshold is 2.58 per cent; with them excluded it plummets to -7.6 per cent. Similar, albeit smaller, results are found for Australia and Canada, which are also excluded for short periods immediately after the war.

Finally, the HAP paper addresses the way in which R&R weight the results. Each country's data is averaged out, and then the average of those averages is found. That has the effect of valuing the 19 data points that the UK offers above 90 per cent debt/GDP – which average 2.4 per cent growth – with the same weight as the single year that New Zealand offers, when growth was -7.6 per cent.

With all the criticisms applied, the HAP paper reports that the average growth rate for years with a debt/GDP ratio is not -0.1 per cent, but 2.2 per cent. The steep drop-off at 90 per cent disappears; and the credibility of those who cited it should take a hit.

Reinhart and Rogoff Respond

But Reinhart and Rogoff aren't taking it sitting down. With an astonishing turnaround, they have issued a response – published at 3am Boston time – which addresses the critique.

They concede the Excel error – "full stop" – but give a defence for the other two points. The full data for the years excluded was not available when they did their research, they argue, and so while it may make sense to include now, they cannot be held responsible for its absence:

This charge, which permeates through their paper, is one we object to in the strongest terms. The “gaps” are explained by the fact there were still gaps in our public data debt set at the time of this paper.

They also defend the odd choice of weightings, saying that:

Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.

That is, they argue that just because there is more data for Britain than New Zealand, that does not mean Britain should be weighed more strongly, since that runs the risk that its "peculiarities" might alter the result.

The problem is that neither approach is obviously preferable. While R&R have a point, so to do HAP – which leaves us in the position of questioning the viability of such analysis in the first place.

But R&R make one final defence:

[Herndon et al], too, find lower growth associated with periods when debt is over 90 per cent. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt.

They published this table, via Business Insider, to make the claim clearer:

Does it even matter?

But here's the thing: Reinhart and Rogoff's claim that the HAP paper agrees with them is more evidence of the supreme obviousness of their associative claim. "A high ratio of debt to GDP is correlated with low growth in GDP" is not an interesting finding, it's as close to a mathematical truism as economic statements come. Reinhart and Rogoff's paper is only important insofar as people have read two things into it which aren't true: firstly, that high debt to GDP ratios cause low growth; and secondly, that there is a discontinuity at 90 per cent, where things get much, much worse.

Reinhart and Rogoff themselves disavow the first claim, writing that:

We are very careful in all our papers to speak of "association" and not "causality".

And the second claim has been put to bed by the Herndon et al paper. There is no major drop at 90 per cent, because that was an artefact of incomplete data, errors in coding, and an odd weighting system.

(Incedentally, the 90 per cent discontinuity was a red herring anyway, because it only exists due to the fact that R&R broke up their data into bands 30 percentage points wide. Anyone focusing too heavily on it as a "magic number" simply failed to read the methods section)

And so we are left in much the same place we were beforehand. There remains no evidence that high debt causes GDP growth to slow, rather than slow GDP growth causing high debt. And that lack of evidence will have precisely no effect on public debate, because it's basically all data-free anyway.

There is one change, though. The thesis that Excel is the most dangerous piece software in the world just got a massive boost.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Workers' rights after Brexit? It's radio silence from the Tories

Theresa May promised to protect workers after leaving the EU. 

In her speech on Tuesday, Theresa May repeated her promise to “ensure that workers’ rights are fully protected and maintained".  It left me somewhat confused.

Last Friday, my bill to protect workers’ rights after Brexit was due to be debated and voted on in the House of Commons. Instead I sat and watched several Tory MPs speak about radios for more than four hours.

The Prime Minister and her Brexit Secretary, David Davis, have both previously made a clear promise in their speeches at Conservative Party conference to maintain all existing workers’ rights after Britain has left the European Union. Mr Davis even accused those who warned that workers’ rights may be put at risk of “scaremongering". 

My Bill would simply put the Prime Minister’s promise into law. Despite this fact, Conservative MPs showed their true colours and blocked a vote on it through filibustering - speaking for so long that the time runs out.

This included the following vital pieces of information being shared:

David Nuttall is on his second digital radio, because the first one unfortunately broke; Rebecca Pow really likes elephant garlic (whatever that is); Jo Churchill keeps her radio on a high shelf in the kitchen; and Seema Kennedy likes radio so much, she didn’t even own a television for a long time. The bill they were debating wasn’t opposed by Labour, so they could have stopped and called a vote at any point.

This practice isn’t new, but I was genuinely surprised that the Conservatives decided to block this bill.

There is nothing in my bill which would prevent Britain from leaving the EU.  I’ve already said that when the vote to trigger Article 50 comes to Parliament, I will vote for it. There is also nothing in the bill which would soften Brexit by keeping us tied to the EU. While I would personally like to see rights in the workplace expanded and enhanced, I limited the bill to simply maintaining what is currently in place, in order to make it as agreeable as possible.

So how can Theresa May's words be reconciled with the actions of her backbenchers on Friday? Well, just like when Lionel Hutz explains to Marge in the Simpsons that "there's the truth, and the truth", there are varying degrees to which the government can "protect workers' rights".

Brexit poses three immediate risks:

First, if the government were to repeal the European Communities Act without replacing it, all rights introduced to the UK through that piece of legislation would fall away, including parental leave, the working time directive, and equal rights for part-time and agency workers. The government’s Great Repeal Bill will prevent this from happening, so in that sense they will be "protecting workers’ rights".

However, the House of Commons Library has said that the Great Repeal Bill will leave those rights in secondary legislation, rather than primary legislation. While Britain is a member of the EU, there is only ever scope to enhance and extend rights over and above what had been agreed at a European level. After Brexit, without the floor of minimum rights currently provided by the EU, any future government could easily chip away at these protections, without even the need for a vote in Parliament, through what’s called a "statutory instrument". It will leave workers’ rights hanging by a thread.

The final change that could occur after we have left the EU is European Court rulings no longer applying in this country. There are a huge number of rulings which have furthered rights and increased wages for British workers - from care workers who do sleep-in shifts being paid for the full shift, not just the hours they’re awake; to mobile workers being granted the right to be paid for their travel time. These rulings may no longer have legal basis in Britain after we’ve left. 

My bill would have protected rights against all three of these risks. The government have thus far only said how they will protect against the first.

We know that May opposed the introduction of many of these rights as a backbencher and shadow minister; and that several of her Cabinet ministers have spoken about their desire to reduce employment protections, one even calling for them to be halved last year. The government has even announced it is looking at removing the right to strike from transport workers, which would contradict their May’s promise to protect workers’ rights before we’ve even left the EU.

The reality is that the Conservatives have spent the last six years reducing people’s rights at work - from introducing employment tribunal fees which are a barrier to justice for many, to their attack on workers’ ability to organise in the Trade Union Act. A few lines in May’s speech doesn’t undo the scepticism working people have about the Tories' intentions in this area. Until she puts her money where her mouth is, nor should they. 

Melanie Onn is the Labour MP for Great Grimsby.