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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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue