By now, it is well known, at least in wonkish circles, that the economists Reinhart&Rogoff (R&R) made a number of errors in deriving their highly influential finding that debt-to-GDP ratios above 90% lead to slower growth. Kudos to the various academics and bloggers who dug into this—particularly Herndan et al, who most recently found and documented the spreadsheet error and other questionable practices in R&R’s work, Mike Konczal who neatly summarized the critique, and Bivens and Irons, who back in 2010 showed the R&R thesis to be deeply flawed (and here’s a smart oped by Herndon’s co-authors).
Yet, as I noted in my brief review of this the other day, neither the older nor the more recent revelations are likely to have much impact on policy (or even, it would seem, on R&R, whose response has pretty been much been, “yeah, ok…but if we did it right, we still woulda got the same answer”). In the first place, the fatal error in their work was not the spreadsheet error. It was ignoring context (the unique, country, and time-specific reasons why is debt/GDP is rising) and thus conflating correlation with causality, specifically, periods when it’s slow growth leading to higher debt.
Why wouldn’t we expect a reaction from policymakers? Because they’re using research findings the way a drunk uses a lamppost: for support, not for illumination. If the R&R lamppost turns out to be wobbly, the austerions (or climate-change deniers, or supply-siders) will find another one. In this town, I’m sorry to say, you can pretty much go think-tank shopping to buy the result you seek.
All of which brings me to a question of economic epistemology: in such a world as ours, how do we establish knowledge and facts in economics? How do we know what we think we know? Is the epistemological chain, if one exists, reliable—is our society getting what we need to make the best decisions? Doesn’t really seem like it, does it?
There’s a lot more here than I can squeeze into one lil’ ol’ blog, but let me explain a bit. By “chain,” I mean the creation and delivery mechanisms for the information/knowledge, the ones that initially failed in the R&R case: the research community and the media/dissemination function.
In quantitative economics, which this was, there are statistical rules regarding significance and establishing causation, and the peer review process does a decent job at enforcing those rules. But R&R’s paper, like almost everything from think tanks, was not peer reviewed.
So the answer is to only accept peer-reviewed work as economic knowledge, right? Nope. That would be a) too limiting, and b) wouldn’t advance the epistemological cause as much as you think. Peers have their own sets of biases, particularly as gate keepers.
So how can we establish better information? Journalists need better BS meters, for one, but I don’t blame a reporter for getting a finding like “when debt to GDP exceeds 90%, growth slows because of it” from a prestigious economist and running with it. I do blame them for not checking with others first–there are many equally prominent economists who immediately wondered about reverse causality driving R&R’s findings. Checking with skeptics is especially important when the intellectual climate is one that provides knee-jerk support for anything that explains why we should fear high debt levels.
In fact, an understanding of the political motivations and climate may be a lot more important in establishing knowledge than we think, a lesson I hope we learn from this R&R episode.
There is a powerful, deep-pocketed movement, driven by ideology and personal financial interests, to shrink government and deregulate industry, especially financial markets. This movement is greatly facilitated by findings that support debt reduction (as long as it comes from spending cuts, not tax increases, a formulation also congenial to most economists), regardless of the dynamics of the moment (i.e., the business cycle, zero-lower bound on interest rates, large output gaps, etc.). Again, it is not a coincidence that Rep Ryan cites R&R as support for his safety-net-killing budget.
Facts, studies, reports that support that movement should be closely scrutinized, especially at a time like this, when austerity measures are demonstrably working very differently than their advocates claim. That doesn’t mean they will always be wrong, of course. But those who report and amplify such information want to be especially careful. They may be turning on a highly unenlightening streetlamp.
Much more to say about this in coming posts…for now, I’m seeing a fair bit of soul-searching generated by the R&R revelation, and I think that’s very healthy.