Yes, baby boomers are an insufferable lot, always going on about how they were right there when everything changed in America, and sometimes claiming they were the ones who changed everything. That’s nonsense. Most of us were just along for the ride, but the sixties were quite a ride. June 1964, Pittsburgh, the summer before that last year of high school, one of those awkward high-school dates, a concert at the Civic Arena, John Coltrane up there on stage blasting his odd way through My Favorite Things – and then the newsboys running down the aisles with the extra – the Civil Rights Bill had passed. The filibuster had been broken. The world would change, and it did, and Vietnam was next. That war tore the country apart, as did the long hair and all the new music – the Cultural Revolution and all that – as did the assassinations – Kennedy and then King and then another Kennedy. The decade ended with Woodstock, and Nixon in the White House, and all of us with our new college degrees, wondering what to do with ourselves. We had sailed through a turbulent transformation, somehow – but now it was time to settle down and become what we were supposed to be, whatever that was.
That was easy to avoid. Graduate school delayed the ordinariness of what everyone called a responsible life, and then teaching English and music delayed that even further. The pay was lousy but that was the world of big ideas and art and meaning – the sixties stuff. That was fine, but it inevitably came to seem like an avoidance of real life. Something was missing. It was time to move on – in this case to head to Los Angeles, to find a job in corporate America, and it wasn’t that hard to land a job in Human Resources, in Training and Organizational Development. That’s where former teachers end up. Aerospace was booming out here at the time and that would do – and it paid triple a teacher’s salary, to start. This was the real world – they built communications satellites in the building next door and spy satellites in the building beyond that. Things were settled, except things are never settled. There’s always a revolution. In the mid-eighties they dropped desktop computers in every department. Automate – figure out what you can do with these things. That’s all they said.
This is how a former English teacher ends up as a comfortably retired former Senior Systems Manager. Play with those things long enough and you can make them useful, and teaching yourself to program code isn’t a whole lot different than teaching yourself to play piano so you can work with the chord changes of any tune. Work out the underlying structure. It’s all trial and error, and it all started with the killer app of the day, the electronic spreadsheet. The first was VisiCalc for the Apple II in 1979 and the IBM-PC in 1981. The basics were all there, the WYSIWYG interactive user interface, automatic recalculation, status and formula lines, range-copying with relative and absolute references, and formula-building by selecting referenced cells. It was wonderful – you could track everything six ways from Sunday and set up complex relationships and do what-if projections and all the rest. That was followed by the slicker Lotus 1-2-3 in 1982 – far faster with much better graphics, although Borland’s Quattro was prettier. It didn’t matter. Microsoft developed Excel on the Macintosh platform and then ported it to Windows 2.0, and by the late nineties all the others disappeared. The revolution was over, but the world had changed. Set things up right, with the right formulae in the right places, referencing the right cells, and you can see what is and what will happen next, every single time. You can do regression analysis and show amazing trend lines.
All of us in systems got our start in spreadsheets, back in the day, and it was heady. It was fun to amaze others. Hey, do this and this other thing will happen. It’s inevitable, and you could prove it. Salary distribution became rational and Affirmative Action compliance less hazardous and you could show the OSHA folks things were fine – then, moving beyond Human Resources, all business decisions could be played out. He who mastered the spreadsheet could save the world. Those sixties hippies, for all their talk of love and peace, couldn’t save the world. A well-constructed spreadsheet could.
If that sounds absurd, well, maybe it is, as Matthew Yglesias explains:
You’ve probably heard that countries with a high debt to GDP ratio suffer from slow economic growth. The specific number 90 percent has been invoked frequently. That’s all thanks to a study conducted by Carmen Reinhardt and Kenneth Rogoff for their book This Time It’s Different. But the results have been difficult for other researchers to replicate. Now three scholars at the University of Massachusetts have done so in Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff – and they find that the Reinhart/Rogoff result is based on opportunistic exclusion of Commonwealth data in the late-1940s, a debatable premise about how to weight the data, and most of all a sloppy Excel coding error.
The underlying facts that support the idea that austerity creates prosperity – the Republican truth of all truths – are wrong. It was a coding error. Yglesias points to Mike Konczal for all the details but is most interested in the spreadsheet part:
At one point they set cell L51 equal to AVERAGE(L30:L44) when the correct procedure was AVERAGE(L30:L49). By typing wrong, they accidentally left Denmark, Canada, Belgium, Austria, and Australia out of the average. When you fix the Excel error, a -0.1 percent growth rate turns into 0.2 percent growth.
Yep, it was a typo, and Yglesias discusses the implications:
This is literally the most influential article cited in public and policy debates about the importance of debt stabilization, so naturally this is going to change everything.
Or, rather, it will change nothing. As I’ve said many times, citations of the Reinhart/Rogoff result in a policy context obviously appealing to a fallacious form of causal inference. There is an overwhelming theoretical argument that slow real growth will lead to a high debt to GDP ratio and thus whether or not you can construct a dataset showing a correlation between the two tells us absolutely nothing about whether high debt loads lead to small growth. The correct causal inference doesn’t rule out causation in the direction Reinhart and Rogoff believe in, but the kind of empirical study they’ve conducted couldn’t possibly establish it. To give an example from another domain, you might genuinely wonder if short kids are more likely to end up malnourished because they’re not good at fighting for food or something. A study where you conclude that short stature and malnourishment are correlated would give us zero information about this hypothesis, since everyone already knows that malnourishment leads to stunted growth. There might be causation in the other direction as well, but a correlation study wouldn’t tell you.
Yep, the theoretical basis of austerity economics is piffle, but that might not matter:
The fact that Reinhart/Rogoff was widely cited despite its huge obvious theoretical problems leads me to confidently predict that the existence of equally huge, albeit more subtle, empirical problems won’t change anything either. As of 2007 there was a widespread belief among elites in the United States and Europe that reductions in retirement benefits were desirable, and subsequent events regarding economic crisis and debt have simply been subsumed into that longstanding view.
We believe what we want to believe. Over time we assume it’s true, although Paul Krugman says it’s not quite that simple:
I’m wondering a bit if I have been too cynical – or at any rate, cynical in the wrong way. For my vague, unquantifiable sense is that the debacle is changing the conversation quite a lot, even among the guys in suits. And it was the coding error that did it.
Now, the truth is that the coding error isn’t the biggest story; in terms of the economics, the real point is that R-R’s results were never at all robust, both because the apparent relationship between debt and growth is fairly weak and because the correlation clearly goes at least partly the other way. But economists have been making these points for years, to no avail. It took the shock of an outright, embarrassing error to shake the faith of the Very Serious People in a result they really wanted to believe.
The point is that the next time Olli Rehn, or George Osborne, or Paul Ryan declares, sententiously, that we must have austerity because serious economists (i.e., not Krugman and friends) tell us that debt is a terrible thing, people in the audience will snicker -which they should have been doing all along, but now it has become socially acceptable.
Those snickers make Krugman happy:
Will this translate into actual policy changes? Well, Keynes told us that ideas, not vested interests, are dangerous for good or evil; so maybe, just maybe, that coding error will turn out to have been a real force for good.
Matthew O’Brien sees how things are now changing:
Austerity has been a policy in search of a justification ever since it began in 2010. Back then, policymakers decided it was time for policy to go back to “normal” even though the economy hadn’t, because deficits just felt too big. The only thing they needed was a theory telling them why what they were doing made sense. Of course, this wasn’t easy when unemployment was still high, and interest rates couldn’t go any lower.
Well, they got their theory, and then it blew up on them. O’Brien notes how key Europeans are now backing down a bit, as is Bill Gross, the manager of the world’s largest bond fund:
The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth much like equity investors, and to the extent that too much austerity leads to recession or stagnation then credit spreads widen out – even if a country can print its own currency and write its own checks. In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP. The question in terms of the long term and the short term is how quickly to do it.
O’Brien notes that’s quite a reversal for Gross, who now sounds like Krugman here:
“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as FDR was about to prove him right by trying to balance the budget too soon, sending the United States economy – which had been steadily recovering up to that point – into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.
In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.
Krugman has been making this argument for a long time:
The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem – a depressed economy and mass unemployment – worse.
The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity – and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.
Now the stupid spreadsheet error helps a bit, although O’Brien adds a word of caution:
The Reinhart and Rogoff Excel imbroglio hasn’t exactly set off a new Keynesian moment. Governments aren’t going to suddenly take advantage of zero interest rates to start spending more to put people back to work. Stimulus is still a four-letter word. Indeed, the euro zone, Britain, and, to a lesser extent, the United States, are still focused on reducing deficits above all else. But there’s a greater recognition that trying to cut deficits isn’t enough to cut debt burdens. You need growth too. In other words, people are remembering that there’s a denominator in the debt-to-GDP ratio.
As least something changed:
But austerity doesn’t just have a math problem. It has an image problem too. Just a week ago, Reinhart and Rogoff’s work was the one commandment of austerity: Thou shall not run up debt in excess of 90 percent of GDP. Wisdom didn’t get more conventional. …
But now austerity doesn’t look so conventional. It looks like the punch-line of a bad joke about Excel destroying the global economy. Maybe, just maybe, that will be enough to free us from some defunct economics.
Perhaps so, but there’s this gem from Erskine Bowles, on news of the Excel error:
“I have obviously read the report and have referenced it a number of times,” Bowles said. “I know they had a worksheet error in the report, and my understanding is that does make a difference.”
Other things matter more than correct data:
“What it doesn’t change is the common sense and my own personal experience in both the public and private sector that when any organization has too much debt that is an enormous risk factor, and your risks go up, then people lending you money will want more money for their money,” he said.
“My best guess is that whether the 90 percent number is the number or not, I don’t know,” he said. “That is obviously up to question. But the fact that adding more leverage to a company or a not-for-profit or a government’s balance sheet does increase risk and therefore increases the return that somebody is going to expect on their capital is absolutely a fact.”
It is? CNBC’s John Carney doesn’t think so:
We’ve added massive amounts of leverage to the government balance sheet, more than tripling the debt since the turn of the century. The average interest rate on the federal government’s interest-bearing debt has fallen from 6.537 percent in January 2000 to 1.992 percent today. The link between public debt and “the return that somebody is going to expect on their capital” just doesn’t exist.
Carney also cites Lloyd Blankfein with this:
Blankfein, Goldman’s chairman and chief executive, said if you have a deficit, that choice is taken away from you because markets will react. He said the U.K. must stay the course.
“You would like at this part of the cycle not to cut, to push out austerity and not to shrink the economy,” Blankfein said.
“But if you have a big deficit you lose that optionality. The choices get taken away from you.”
This is almost sad. Blankfein, it seems, is still reading from the discredited austerity script. Some aide should write him a memo on the U Mass paper before he says anything else embarrassing.
Krugman sums it up:
Reinhart and Rogoff have acknowledged the coding error, defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth. That’s a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But, in any case, what really matters isn’t what they meant to say, rather it is how their work was read: Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.
So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policymakers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.
That was all of it. Let the rich be rich. Jettison those who aren’t. They’re only deadweight. These folks just needed a likely-sounding cover because they couldn’t say that, but now they have a problem:
Reinhart-Rogoff shows the extent to which austerity has been sold on false pretenses. For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of GDP. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policymakers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.
So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.
That may be so. Those jokers didn’t get the first revolution that changed everything, the sixties, either. They’re still pissed off at all the wild-eyed idealistic hippie fools everywhere, even if those wild-eyed idealistic hippie fools are now in their own late sixties and conventional grandparents, sitting quietly in the sun, dozing off – but in a world where things are now far better for minorities and women, and far more tolerant than they’d like. The world did change. That they didn’t get the eighties data revolution is no surprise either. The data, now corrected, show what’s what – do this and this other thing will happen. It’s inevitable, and you can prove it, but they say what that doesn’t change is their common sense and their own personal experience.
No, it doesn’t change that. It just should have changed that. There’s always a revolution.