AlterNet: Grad Student Debunks Academic Claims of Harvard Profs Who Drove Global Austerity

AlterNet / By Lynn Stuart Parramore 163 COMMENTS
Meet the 28-year-old Student Who Exposed Two Harvard Professors Whose Shoddy Research Drove Global Austerity
Economists Carmen Reinhart and Kenneth Rogoff, the academic champions of austerity, are exposed.

April 18, 2013

The world of economics has just changed, and somebody has some 'splaining to do! Please savor the following twisted tale of bad math, academic folly and pundit hubris.

Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in political and economic circles. These two Harvard economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad.

Their historical data appeared impressive, as did their credentials. Policy-makers and journalists cited the paper to convince the public that instead of focusing on the jobs crisis that was hampering recovery, we should instead focus on deficits. The deficit hawks jumped up and down with excitement.

But something didn’t smell right.

Progressive economists I knew were shocked at what appeared to be the shoddiness of the research and the absurdity of the conclusions. In their paper “A World Upside Down? Deficit Fantasies in the Great Recession,” Thomas Ferguson and Robert Johnson observed that R&R had truncated their sample of British data in a way that skewed their conclusions, eliminating more than a century of data in which British debt loads exploded but economic growth raced ahead (see pages 11-13). The always savvy Marshall Auerback called them out in a blog for New Deal 2.0, which I edited at the time, criticizing the relevance of the cases they had used to justify their conclusions.

But plenty of pundits took their suspect arguments as gospel. The editorial board of the Washington Post declared that "debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." The economists cited were Reinhart and Rogoff, whom the WP passed off as speaking for the entire field. A new Washington consensus was born, and the public was hammered with the idea that cutting jobs, stripping away vital public services and letting infrastructure crumble was a good way to get the economy going. Most any ordinary person on the street would probably intuit that this made no sense, but there was this Academic Research By Esteemed Persons, so the argument was over.

Enter Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts, Amherst, the heroes of this story. Herndon, a 28-year-old graduate student, tried to replicate the Reinhart-Rogoff results as part of a class excercise and couldn’t do it. He asked R&R to send their data spreadsheet, which had never been made public. This allowed him to see how the data was put together, and Herndon could not believe what he found. Looking at the data with his professors, Ash and Pollin, he found a whole host of problems, including selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and this jaw-dropper: a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.

Herndon, Ash, and Pollin write: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49...This spreadsheet error...is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category."

A coding error! Reinhart and Rogoff had been so sloppy in their work that they had not bothered to check their own spreadsheet.

When you fix R&R's problematic methodology and coding errors, you get a very different result that – guess what? – does not support austerity and shows that countries can most certainly cross the phony debt-to-GDP “threshold” and grow.

In their newly released paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Herndon, Ash and Pollin show that "when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower."

Herndon, Ash, and Pollin have set off a firestorm, with those who long suspected that R&R's work was crap shouting hallelujah and defenders scrambling to figure out a way to support deficit hysteria despite the body blow to their theory.

Bottom line: The foundation of the entire global push for austerity and debt reduction in the last several years has been based on a screwup in an Excel spreadsheet and poorly constructed data.

Reinhart and Rogoff are on the defensive. As Mathew O'Brien at The Atlantic put it, "this is the academic's version of the dream where you're naked in public." They have screwed up royally. They have also done a great deal of damage to the world. As Paul Krugman has observed, their replies to their critics have thus far only compounded the confusion. They need to come clean, stop talking like their mistakes are minor, and own up to the enormity of their errors. And a big round of applause goes to the folks at U Mass Amherst for getting to the bottom of this insanity.

Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of 'Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.' She received her Ph.d in English and Cultural Theory from NYU, where she has taught essay writing and semiotics. She is the Director of AlterNet's New Economic Dialogue Project. Follow her on Twitter @LynnParramore.

Republicans Call Obama's Tax, Program Cuts Program: Class Warfare

Obama Plan to Cut Deficit Will Trim Spending by $3 Trillion
By HELENE COOPER, New York Times, published: September 18, 2011

First half of the article reads as follows. (Click here for complete New York Times article including Republican claims of class warfare.)

(I would argue from the left that Pres. Barack Obama's Medicare, Medicaid cuts are class warfare; the Republican right call Obama's tax policies class warfare. The problem is that we have no left third party to challenge him.)

WASHINGTON — President Obama will unveil a deficit-reduction plan on Monday that uses entitlement cuts, tax increases and war savings to reduce government spending by more than $3 trillion over the next 10 years, administration officials said.

The plan, which Mr. Obama will lay out Monday morning at the White House, is the administration’s opening move in sweeping negotiations on deficit reduction to be taken up by a joint House-Senate committee over the next two months. If a deal is not struck by Dec. 23, cuts could take effect automatically across government agencies.

Mr. Obama will call for $1.5 trillion in tax increases, primarily on the wealthy, through a combination of closing loopholes and limiting the amount that high earners can deduct. The proposal also includes $580 billion in adjustments to health and entitlement programs, including $248 billion to Medicare and $72 billion to Medicaid. Administration officials said that the Medicare cuts would not come from an increase in the Medicare eligibility age.

Senior administration officials who briefed reporters on some of the details of Mr. Obama’s proposal said that the plan also counts a savings of $1.1 trillion from the ending of the American combat mission in Iraq and the withdrawal of American troops from Afghanistan.

In laying out his proposal, aides said, Mr. Obama will expressly promise to veto any legislation that seeks to cut the deficit through spending cuts alone and does not include revenue increases in the form of tax increases on the wealthy.

That veto threat will put the president on a direct collision course with the House speaker, John A. Boehner, who said last week that he would not support any legislation that included revenue increases in the form of higher taxes.

Mr. Obama’s proposal is certain to receive sharp criticism from Congressional Republicans, who on Sunday were already taking apart one element of the proposal that the administration let out early: the so-called Buffett Rule. The rule — named for the billionaire investor Warren E. Buffett, who has complained that he is taxed at a lower rate than his employees — calls for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers.

That proposal, which was disclosed on Saturday, was met with derision Sunday by Republican lawmakers, who said it amounted to “class warfare” and a political tactic intended to portray his opponents as indifferent to the hardships facing middle-class Americans.

Richard D. Wolff: Austerity Politics Descends on US States

Austerity Politics Descends on US States
Monday 22 August 2011
by: Richard D. Wolff, rdwolff.com | News Analysis -From Truthout.org site.

Last week, Democratic Governors in New York and Connecticut repeated the austerity politics of Greece’s Prime Minister Pappandreou and Portugal’s Socrates. In doing so, they likewise imitated the austerity politics of their Republican and Democratic counterparts across virtually all 50 states. Austerity for labor and the public is everywhere capitalism’s Plan B. Even capitalists now see that capitalism’s Plan A failed.

You will recall that Plan A entailed a crisis-response program of bailing out the banks, insurance companies, large corporations, and stock markets to achieve “recovery.” The theory behind Plan A – we used to call it “trickle down economics” – was that recovery would spread from financial markets and financiers to everyone else. It never did. So now the same servants of capitalism who imposed Plan A are dishing out Plan B.

Governors Cuomo in New York and Malloy in Connecticut had very similar Plan B’s. They threatened the public employee unions and the people of their states in nearly identical ways. Either the unions accept new contracts with wage freezes and raised contributions to their health insurance plans (and other declines in their basic remuneration) or the governors would fire tens of thousands of unionized state workers. In Connecticut the state workers first voted to reject and then re-voted to accept that contract. In New York the state workers accepted on the first vote.

Let’s be really clear on what the two governors were doing. They were forcing a very painful either/or onto the mass of people who elected them. Each governor said: I will either fire many thousands of state workers and thereby impose drastic cuts in public services on the entire citizenry or I will subject tens of thousands of state employees to significant cuts in their wages and benefits.

Each Governor spoke and acted as if those were the only two choices even though that is blatantly untrue. Each Governor refused to even consider an obvious alternative Plan C: increasing taxes on corporations and the rich enough to avoid either public service or wage cuts. Instead each governor snubbed his nose at the public by forcing unions to choose between two awful options.

The public employees unions voted to accept serious cuts in pay and benefits. That was in the face of the latest government figures showing US consumer price inflation now running at between 3.5 and 4 % per year. The contracts that state employees accepted in New York and Connecticut give them 0% wage increases in the first two years and less than 2 % per year increases in the last years of their contracts. In addition, New York workers accepted unpaid furlough days while both states’ contracts involved higher health insurance premiums and copays to be charged to state workers. These are serious reductions in state workers’ standards of living. They will thus reduce their expenditures, thereby hurting communities, businesses and other workers.

The states will thus learn the same lessons learned in Greece and Portugal and wherever austerities are governments’ Plan B’s. Austerities make difficult, painful, and unjust capitalist crises more so.

Corporations and the rich bankroll the parties and governors who design and impose Plans A and B while avoiding Plan C.

And so matters will remain unless and until corporations’ profits are no longer available to their boards of directors to enrich themselves and major shareholders and to buy politicians’ servitude. The best response to capitalism’s crisis, to its failed Plan A and to its unjust Plan B would be Plan D: to change how we organize productive enterprises in our society. Profits should be distributed by the democratic decision-making of all those who produce and depend on them, the workers and affected communities.

The twists and turns of this global capitalism system, painful as they are to endure, nonetheless also move it toward a confrontation with alternative D. The real question is whether the advocates and supporters of Plan D can be organized, mobilized and focused on achieving their goals in that confrontation.

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RICHARD D. WOLFF
Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan

Click to original Truthout site for Wolff's bio.