One of the most politically important economics results of recent years has been the paper by Reinhart and Rogoff on the link between high sovereign debt and low GDP growth. This work is something I’d been following for a while, as R&R’s book was one that I’d admired greatly. Their work claimed to show a strong negative correlation between sovereign debt/GDP ratio and ensuing GDP growth, and was reported as saying that 90% debt/GDP ratio marks a cliff that an economy falls off, killing future growth. This was seized upon by proponents of austerity as proof that budget cuts can’t wait.
As reported here and here by Paul Krugman, and here and here by Matt Yglesias, it now turns out that the result isn’t just theoretically misguided, it’s bogus. Economists who struggled to reproduce the results finally isolated a whole raft of errors and dubious hidden assumptions that completely undermine the conclusion. Only the most blatantly ridiculous fault was an error in their Excel spreadsheet formula that caused them to exclude important sections of the data from their computation. You’d think that this couldn’t get any worse, but instead of apologising abjectly, R&R have tried to argue that none of this was really essential to their real point, whatever that was.
My main thoughts:
Do economists really do their analysis with Excel? I find this kind of shocking, like if I found out that some surgeons like to make their incisions with flint knives, or if airline pilots were calculating their flightpaths with slide rules. Once you accept that premise, it’s not surprising that they made a blunder like this. I’m not a snob about technology. Spreadsheets are great for doing payrolls, and for getting a look at tables of numbers, and doing some quick calculations. But they’re so opaque, they’re not appropriate to academic work, and they’re so inflexible that it’s inconceivable to me that someone who analyses data on a more or less regular basis would choose to use them. Continue reading “What’s the Matter with Economics?”
The Oxford and Cambridge vice-chancellors wrote privately to Chancellor George Osborne saying his plans risked undermining the culture of university philanthropy. UK universities, which raised some £560m from charitable gifts last year, want him to rethink. Ministers want to stop tax avoidance. Mr Osborne says he is shocked by thescale of legal tax avoidance by multi-millionaires. Under current rules, higher-rate taxpayers can donate unlimited amounts of money to charity and offset it against their tax bill to effectively bring the amount of tax they pay down, sometimes to zero. But from 2013, uncapped tax reliefs – including those on charitable donations – are to be capped at £50,000 or 25% of a person’s income, whichever is higher… An Oxford University spokeswoman said that the government’s own policy emphasised the role of private and philanthropic investment, rather than the public purse. “A step that penalises the government’s own approach seems ill-considered.”
Hmmm. How about this alternative statement:
The university’s own justification depends on its promoting self-consistent argument, rather than specious self-serving sophistry. “An argument that contradicts the university’s own raison d’etre seems ill-considered.”
Not long after I finished my PhD in probability theory, a significant fraction of the field was devoured by the financial mathematics moloch. Particularly in Europe, probability theory positions disappeared, to be replaced by openings in financial mathematics, which either went unfilled or cycled among a very few senior researchers and a few quick-change opportunists (and, gradually, their fledgeling academic progeny).
Everyone felt they had to get in on the action, and of course there was a certain amount of positive feedback. When many jobs chase few graduates, it generates huge demand among students for training in such a demonstrably burgeoning field. Obviously, the academic feedback was limited by the fact that most of the eager young ‘uns were seeking employment in banks, not in academia — but the banks were hiring as well. Anyway, just about 10 years ago, a Dutch colleague asked me if I might be interested in joining his own institute’s planned financial mathematics group, for which they were proposing to create TEN new positions. My reply was that finance did not interest me as a topic of research, but I added that there was something unseemly — bordering on unethical — in mathematicians’ headlong chase after banking lucre. The current generation of mathematicians is the trustee of a vast and powerful system of analysis, whose creators were supported, honoured, and financed by public institutions. What is it but a crime, when we abscond with the fruits of this scholarship, and sell it off (cheaply) to banks, who will use it to extract billions of dollars from financial markets? Continue reading “Where the money is…”