Wednesday, April 24, 2013

The Emperor's new clothes: a student names the errors of Rogoff-Reinhart "Austerity"

During 2012, my colleague George Demartino organized a year long series on the role of ignorance - asking questions - in social science. It was a very lively series. Its theme is of even greater relevance today when a beginning economics student at U. Mass. Amherst (George's one-time department also) brought down the Rogoff-Reinhart thesis underpinning "Austerity" economics and harming - through blocking the policies needed to recover from the worldwide depression - a very large number of people from obtaining work or being functional members of society. (h/t Haider Khan)


Academic work is very hierarchical. Professors, who seek or achieve fame and status, sometimes do not check their work carefully and hawk results that catch a wave. Often reviewers, even for the best journals, are careless about "important" work - that of "substantial" people in the profession - or work of people they admire. The fame of the author sometimes overwhelms critical judgement.


This is, of course, less true in the natural sciences than in the so-called social sciences (many theses of sociobiologists, a substitute for old fashioned eugenics, excepted).

In economics, however, results, when sound, are reproducible.


But powerful interests sometimes subsidize academic findings which serve their interests at the expense of a common good (the Koch brothers have even reached into corrupt schools to make appointments). In particular, they widely publicize such findings. Thus, even well-intentioned errors cause harm, and some whose intention is dubious like Richard Herrnstein, co-author of the Bell Curve at Harvard and Arthur Jensen at Berkeley, the authors of monographs and books pushing eugenics particularly toward blacks, can exert or license serious harms affecting the lives of millions of people.


In social science, there is no more startling paradigm of this than the corruption surrounding IQ testing and eugenics. A strong genetic component underlying IQ tests has long been alleged by Hitler, segregationists and defenders of apartheid to underpin the putative superiority of a master race. The 1924 American immigration law refers to "preserving the pure Nordic stock of the United States" and was borne on the wings of World War I IQ testing at Ellis Island, alleging that those who had not yet learned English were inferior in intelligence to Scandinavian immigrants from the 1890s. For instance, Carl Brigham of Princeton asserted this "fact" in his influential 1921 A Study in American Intelligence, but the lack of intelligence here is Brigham's; the earlier immigrants had learned English, lived in America for 20 years, and therefore could identify such innately obvious names as that of the Brooklyn National League baseball team of the 1910s (hint: it is not the Dodgers...).

Nonetheless, the library of the Educational Testing Service in Princeton is, to this day, named for Carl Brigham....


There is no theory of intelligence connected with IQ testing. IQ testing says that "intelligence" is merely what "intelligence" tests test. This is a circular and rather silly operational definition. The test actually tries to predict how students will do in class, race and gender structured schools. Its usefulness for the French psychologist Binet, was initially to help children who have learning differences- something morally defensible... - but it was Americanized and perversely linked to justifying class, race and gender structure by Stanford psychologist Louis Terman.

On the face of it, a well-defined genetic component, given this definition of "intelligence," is rather unlikely.


The claim for such a basis stems from the work of eugenicist Sir Cyril Burt in England. It relies on his once celebrated and now notorious "twin studies." Leon Kamin, the chair of the Princeton psychology department, tracked down errors in Burt's work and published The Science and Politics of IQ (1974).


Burt had conducted studies on the intelligence - IQ scores - of twins from the same egg (monozygotic twins) raised in different environments versus twins from different eggs (dizygotic twins) raised in different environments. One problem stemmed from a very small number of cases, and in addition, many of these were twins in small English villages, one raised by the mother and one by the aunt across the road...

Another came from Burt alleging exactly the same correlations to three decimal places over shifting - nearly doubling - ostensible sample sizes over a number of years...


In 1976, Dr. Oliver Gilley, an enterprising reporter and medical correspondant for the London Sunday Times, deepened the doubts about Burt by discovering a vivid fantasy life. Gilley investigated Burt's co-authors, Ms. Howard and Ms. Conway, who wrote articles in flaming Burtian style in the journal Burt edited defending Burt's findings against any criticism. Burt's journal announced they were Ph.D.s from the University of London. Neither existed...

Burt had not only been knighted for his research in England, but given the Thorndike award by the American Psychological Association in 1971...


In "scientific" psychology, that error concerning powerful social prejudices is hard to refute is evident even from this brief account.


IQ testing is a startling example of prestigious pseudoscience, spawning eugenics and used to justify racist immigration, anti-miscegenation and sterilization laws (for "feeble-minded" women) in the US, England, and surpassing them, Nazi Germany...


Charles Murray and Richard Herrnstein cite an article from Ms. Howard and Burt in their influential, corrupt and false The Bell Curve (1990)...

It was reported prominently in the psychological literature that Burt was a fraud - Leslie Hearnshaw, Burt's official biographer who had spoken at his memorial service and set out to defend him, sadly acknowledged this in his 1979 book - and that Burt had misleadingly touted his own research through the voice of a made-up "colleague." Yet Richard Herrnstein - allegedly a scholar and a full professor at Harvard - and Charles Murray cited these "results" 11 years later in a book which made the front cover of Time magazine...


When the rich need ideas to justify themselves (or ideas to march by), exposing fraud and serious error - that is, scientific activity seeking the truth - will only destroy one version of the fable. More will be produced - the hydra will have many heads - by those hungry for money and fame...


Gilley also found that Burt, as a counselor to the London School System, had written such evaluations as "this is a typical slum monkey with the muzzle of a pale face chimpanzee."

Burt always knew, he reports, that his brightest children "were blondes." He did "estimated" IQs on the handful of twins he encountered (to use the verb "studied" in this context would be inappropriate).


Arthur Jensen, an arch-racist and enemy of "Head Start" early education programs for poor children but who feigned research in educational psychology at Berkeley, went to see Burt's housekeeper when he "got wind" of Kamin's research through the first talks Kamin gave (Burt was an old fashioned English don). Jensen wanted to look at Burt's records - the data and the original drafts - on the twin studies. She - who else but the housekeeper?...- had all of Burt's unpublished drafts, research notes and correspondence, but there was no evidence for the claims made in Burt's published articles. Jensen abandoned the quest...


Just now, in economics, there is a scandal of broadly similar proportions from the standpoint both of error posing as science and nefarious moral consequences. That is the widely circulated claim by Rogoff and Reinhart, two Harvard economists, that there is a limit on a reasonable debt to national product ratio of "90%" - after this, the economy allegedly falls off the "fiscal cliff" we have heard so much about - and that cutting back government programs, particularly programs for the poor involving education and health care (common good sustaining program on any reasonable notion of social and political commonality) is the antidote.


Rogoff was chief advisor to the International Monetary Fund which has specialized in imposing austerity in poor countries - once again, cutbacks to programs for education and medical care for ordinary people - in order to pay back debt largely occasioned by governments' buying weapons from the United States and other elite purposes. See Cheryl Payre, The Debt Trap and Walden Bello, Dark Victory.


Paul Ryan (an airhead posing as a serious person, one taken very, very seriously in the American commercial media and politics, companion of Romney and author of the new House Republican Budget) repeats "90%"...90%...90%." So do retrograde economists for the European Commission which has mired Europe in a growing depression...


It is a home truth of economics, discovered by John Maynard Keynes, that in a depression, a stimulus affecting poor people can get the economy moving again. The poor spend what they earn locally, to buy food and other necessities. Employing them has a multiplier effect on the economy.

In contrast, austerity, connected with tax cuts for the rich, does the opposite. The wealthy spend on an eighth house in Montecarlo or invest in China or, even more uselessly from the standpoint of combatting the depression, save the money. But even their spending is often a net loss to the domestic economy.


Thomas Herndon is a student at a radical economics department, the University of Massachusetts at Amherst. He took a methodology course asking students to try to reproduce, as an exercise, the results of famous papers. He figured out that Rogoff and Reinhart had made an error. He couldn't believe it and it took him some time to convince his professors. For even radicals in academia, are often impressed by status..."It couldn't couldn't be..." They told him to look more deeply, that he would figure out what they done.

But at last they agreed "it is," and recommended Herndon write to Rogoff and Rinehart to see their evidence and calculations. He got their spreadsheets and found further errors (see below).


Put differently, if one claims some famous person makes an error, the likelihood that the famous person and his or her friends will come down on you like a ton of bricks is high. No wonder the professors let the student pursue the issue alone and only later collaborated on the final article...


Nonetheless, the U. Mass. economists took Thomas Herndon's findings seriously and let him follow them out to his first and morally significant publication.


In many departments or with many advisors, a student who had found such an error would be counseled by "wise professionals" not to pursue it. In some departments, students have the confidence that they can seek the truth and stick to it and find something interesting beaten out of them in the process of professionalization. That, combined with the money which publicizes errors helping the rich and privileged, is why pseudoscience survives and sometimes flourishes in behavioral psychology and economics...


Paul Krugman has for a long time criticized the Rogoff-Reinhart thesis. Their claim is that high debt leads to low growth. But at most, there is sometimes a correlation between the two which is not the same as a cause.

For a collapse in growth (gross domestic product) may also lead to debt becoming a higher percentage of national output.

And stimulating growth will often lead to higher revenues and thus, reduce the ratio of debt to gross domestic product, as well as enable a paying down of debt.


That is, growth leads to diminished deficits. Austerity lowers growth, often making remaining debt a high percentage of output, and renders large numbers of people unemployed, homeless (foreclosures), and hungry...

Rogoff, in particular, plays with fire when he "doubts" this Keynsian thesis.


Now the Rogoff-Reinhart claim, were it to have been backed up by data, would not - in the absence of the rich pushing "Austerity" and publicizing their "findings" - have led to the dire policy conclusion in the US and Europe that cutbacks - as opposed to more stimulus - were necessary.


But as Thomas Herndon pointed out, even their statistical results cannot be reproduced. Their data is phony.

There is no "90%" ratio that is linked to economic collapse.


The child points out that the Emperor is not, despite the proclamations of the courtier/rich folks, wearing a stitch of clothes...


That the error is deep and serious has now even been revealed by the BBC and been the subject of an excellent column by Paul Krugman in the New York Times last Friday (see below).


Morally speaking, in our country, this thesis in the mouths of politicians has cost millions of people jobs and forced other millions to work part-time when they would work full time if they could (the real unemployment rate, as David Leonhardt showed in the New York Times, is perhaps 13 or 14%. The official government figure omits those who have given up looking for work (do not report each month to the federal employment offices) as well as those who have part-time jobs in announcing falsely that the unemployment rate hovers near 8%.


And in Europe, the Rogoff- Reinhart thesis has "scientifically' contributed to the Tories producing a greater downturn in England than the Great Depression - Tories who are in certain ways better not only than the Republicans but even than Obama on tolerance of gays, the climate, and occasionally the rule of law - as well as great hardship across the Continent (Greece and Spain are two telling examples).


The IMF, always urging austerity for social programs for the poor (once again, violating a common good), is nonetheless, under Christine Lagarde, trying to urge some Keynsian stimulus in Europe against the proponents of austerity like Angela Merkel. Perhaps Herndon's exposing of the Rogoff-Reinhart error will strengthen the cause of sanity (with Krugman, however, one shouldn't hold one's breath). Perhaps it will reach even into America as the sequester lays off teachers and air controllers, diminishes demand, stalls the recovery...


Under criticism, Professors Rogoff and Reinhart acknowledge some serious statistical errors and say they will be more careful in future. But they affirm their false conclusion - one based on an elementary confusion of correlation with cause...

That this nonsense has flourished since 2010 in economics and in policy circles, and will, in new forms, flourish again, parallel to the hydra heads surrounding putative racial differences in "intelligence" in psychology, is, as Krugman underlines, sad.


Krugman sums up the scientific and moral truth of this matter:

"So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, 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.

What the Reinhart-Rogoff affair shows is 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 G.D.P. But 'economic research' showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to."


Professors Rogoff and Reinhart, one might agree, should exert greater care. In fact, they might look in the mirror and see what hardships they have contributed to for so many people who did them no injustice...

Ideas have consequences. Being a "scientist" means being aware of and taking responsibility for the moral consequences of what one does.

And the world is watching...


Bad economics, Austerity and Joblessness

19 April 2013 Last updated at 19:53 ET
Reinhart, Rogoff... and Herndon: The student who caught out the profs
By Ruth Alexander
BBC News

This week, economists have been astonished to find that a famous academic paper often used to make the case for austerity cuts contains major errors. Another surprise is that the mistakes, by two eminent Harvard professors, were spotted by a student doing his homework.

It's 4 January 2010, the Marriott Hotel in Atlanta. At the annual meeting of the American Economic Association, Professor Carmen Reinhart and the former chief economist of the International Monetary Fund, Ken Rogoff, are presenting a research paper called Growth in a Time of Debt.

At a time of economic crisis, their finding resonates - economic growth slows dramatically when the size of a country's debt rises above 90% of Gross Domestic Product, the overall size of the economy.

Word about this paper spread. Policymakers wanted to know more.

And so did student Thomas Herndon. His professors at the University of Massachusetts Amherst had set his graduate class an assignment - pick an economics paper and see if you can replicate the results. It's a good exercise for aspiring researchers.

Thomas chose Growth in a Time of Debt. It was getting a lot of attention, but intuitively, he says, he was dubious about its findings.

Some key figures tackling the global recession found this paper a useful addition to the debate at the heart of which is this key question: is it best to let debt increase in the hope of stimulating economic growth to get out of the slump, or is it better to cut spending and raise taxes aggressively to get public debt under control?

EU commissioner Olli Rehn and influential US Republican politician Paul Ryan have both quoted a 90% debt-to-GDP limit to support their austerity strategies.

But while US politicians were arguing over whether to inject more stimulus into the economy, the euro was creaking under the strain of forced austerity, and a new coalition government in the UK was promising to raise taxes and cut spending to get the economy under control - Thomas Herndon's homework assignment wasn't going well.

No matter how he tried, he just couldn't replicate Reinhart and Rogoff's results.


a box in the BBC article

Reinhart and Rogoff reply...

We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.


"My heart sank," [Herndon] says. "I thought I had likely made a gross error. Because I'm a student the odds were I'd made the mistake, not the well-known Harvard professors."

His professors were also sure he must be doing something wrong.

"I remember I had a meeting with my professor, Michael Ash, where he basically said, 'Come on, Tom, this isn't too hard - you just gotta go sort this out.'"

So Herndon checked his work, and checked again.

By the end of the semester, when he still hadn't cracked the puzzle, his supervisors realised something was up.

"We had this puzzle that we were unable to replicate the results that Reinhart-Rogoff published," Prof Ash, says. "And that really got under our skin. That was really a mystery for us."

So Ash and his colleague Prof Robert Pollin encouraged Herndon to continue the project and to write to the Harvard professors. After some correspondence, Reinhart and Rogoff provided Thomas with the actual working spreadsheet they'd used to obtain their results.

"Everyone says seeing is believing, but I almost didn't believe my eyes," he says.

Thomas called his girlfriend over to check his eyes weren't deceiving him.

“New Zealand's single year, 1951, at -8% growth is held up with the same weight as Britain's nearly 20 years in the high public debt category at 2.5% growth”

[reports] Prof Michael Ash

"But no, [Herndon] was correct - he'd spotted a basic error in the spreadsheet. The Harvard professors had accidentally only included 15 of the 20 countries under analysis in their key calculation (of average GDP growth in countries with high public debt).

Australia, Austria, Belgium, Canada and Denmark were missing."


Herndon and his professors found other issues with Growth in a Time of Debt, which had an even bigger impact on the famous result. The first was the fact that for some countries, some data was missing altogether.

Reinhart and Rogoff say that they were assembling the data series bit by bit, and at the time they presented the paper for the American Economic Association conference, good quality data on post-war Canada, Australia and New Zealand simply weren't available. Nevertheless, the omission made a substantial difference.

Thomas and his supervisors also didn't like the way that Reinhart and Rogoff averaged their data. They say one bad year for a small country like New Zealand, was blown out of proportion because it was given the same weight as, for example, the UK's nearly 20 years with high public debt.

More or Less: Behind the stats

Prof Michael Ash told the story to Tim Harford on this week's More or Less - you can listen to the programme on BBC Radio 4 and the World Service, or download the free podcast


A box in the article

"New Zealand's single year, 1951, at -8% growth is held up with the same weight as Britain's nearly 20 years in the high public debt category at 2.5% growth," Michael Ash says.

"I think that's a mistaken way to examine these data."

There's no black and white here, because there are also downsides to the obvious alternatives. But still, it's controversial and it, too, made a big difference.

All these results were published by Thomas Herndon and his professors on 15 April, as a draft working paper. They find that high levels of debt are still correlated with lower growth - but the most spectacular results from the Reinhart and Rogoff paper disappear. High debt is correlated with somewhat lower growth, but the relationship is much gentler and there are lots of exceptions to the rule.

Greece is an example of a country with high debt that has suffered a slump

Reinhart and Rogoff weren't available to be interviewed, but they did provide the BBC with a statement.

In it, they said: "We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

Accidents do happen, and science progresses through the identification of previous mistakes. But was this a particularly expensive mistake?

"I don't think jobs were destroyed because of this [sic - that is a fool's conclusion] but it provides an intellectual rationalisation for things that affect how people think about the world," says Daniel Hamermesh, professor of economics at Royal Holloway, University of London.

"And how people think about the world, especially politicians, eventually affects how the world works."

Discovering a spreadsheet error was never going to end the debate over austerity - and nor should it, according to Megan McArdle, special correspondent [she is often a bizarrely reactionary correspondant] for Newsweek and The Daily Beast.

"There is other research showing that you can have these slowdowns when you get to high levels of debt,"[no, that is exactly the evidence and analysis which is missing...] she says. "We have a very vivid [example] in Greece." [This is typical "he said, she said." "Bush says the moon is made of green cheese, scientists say it isn't" style of reporting in a context and even an article in which the Rogoff-Reinhard side of this has been shown to be false; assertions of McCardle's sort are, by themselves, worth nothing, i.e. they offer no specific evidence and argument. If there is relevant evidence or counterargument to Herndon and Keynes - the vague allusion to Greece is a feeble attempt - the interviewee and the author need to specify it].

Thomas Herndon's view is that austerity policies are counter-productive. But right now he's delighted that the first academic paper he's ever published has made such a splash.

"I feel really honoured to have made a contribution to the policy discussion," he says.


Thomas Herndon is the hero of this story and made, even against his professors' initial skepticism, a great contribution to seeking the truth and preventing further harm to millions of people.


New York Times
The Excel Depression
Published: April 18, 2013

In this age of information, math errors can lead to disaster. NASA’s Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase’s “London Whale” venture went bad in part because modelers divided by a sum instead of an average. So, did an Excel coding error destroy the economies of the Western world?

See the photo here.
Fred R. Conrad/The New York Times

The story so far: At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, “Growth in a Time of Debt,” that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper instantly became famous; it was, and is, surely the most influential economic analysis of recent years.

In fact, Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.

For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”

In response, Ms. Reinhart and Mr. 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, it’s 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 policy makers, 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.

What the Reinhart-Rogoff affair shows is 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 G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers 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.


Paul Krugman: 'So Much At Stake' In Reinhart-Rogoff Research Controversy
Posted: 04/17/2013

What may seem like a petty debate among wonks could have major consequences for major economies around the world, and Paul Krugman wants all of you to know it.

The Nobel Prize-winning economist wrote a series of blog posts Tuesday dissecting the fallout over a new study that claims that a widely-cited paper by famed economists Carmen Reinhart and Ken Rogoff is full of errors. The highly influential Reinhart-Rogoff paper in question -- which found that economic growth slowed for countries whose public debt was more than 90 percent of their GDP -- has been a favorite of austerity lovers the world around in the aftermath of the financial crisis.

To Krugman, the economists' initial response to the criticism was "disappointing." "They’re basically evading the critique," he wrote in a Tuesday blog post. "And that’s a terrible thing when so much is at stake."

In a second response at 2 a.m. on Wednesday morning after Krugman wrote his post, Rogoff and Reinhart stood by their overall finding that higher debt is connected to slower growth. They did, however, admit to a now infamous Microsoft Excel mistake.

The controversy over the paper comes as debates continue to rage in Europe and Washington over the merits of cutting spending -- which has lead to high unemployment and slowed immediate economic growth in many cases -- in an attempt to boost growth and better deficit outlooks.

Indeed, just this week the International Monetary Fund's chief economist, Olivier Blanchard, asserted that while U.S. spending cuts improved the country's deficit outlook, it hurt its overall economic growth in the process.

For his part, Krugman says he never really believed the paper's findings anyway. He wrote in another post that the paper "wasn't worthy of the authors" and that austerity defenders seized on it "to find excuses for inflicting pain."


The Jobless Trap
Published: April 21, 2013

F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.
Enlarge This Image

Fred R. Conrad/The New York Times
Paul Krugman

For the overriding fear driving economic policy has been debt hysteria, fear that unless we slash spending we’ll turn into Greece any day now. After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.

But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.

Now, some unemployment is inevitable in an ever-changing economy. Modern America tends to have an unemployment rate of 5 percent or more even in good times. In these good times, however, spells of unemployment are typically brief. Back in 2007 there were about seven million unemployed Americans — but only a small fraction of this total, around 1.2 million, had been out of work more than six months.

Then financial crisis struck, leading to a terrifying economic plunge followed by a weak recovery. Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found.

It goes without saying that the explosion of long-term unemployment is a tragedy for the unemployed themselves. But it may also be a broader economic disaster.

The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. This could happen because their work skills atrophy, but a more likely reason is that potential employers assume that something must be wrong with people who can’t find a job, even if the real reason is simply the terrible economy. And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak.

One piece of evidence comes from the relationship between job openings and unemployment. Normally these two numbers move inversely: the more job openings, the fewer Americans out of work. And this traditional relationship remains true if we look at short-term unemployment. But as William Dickens and Rand Ghayad of Northeastern University recently showed, the relationship has broken down for the long-term unemployed: a rising number of job openings doesn’t seem to do much to reduce their numbers. It’s as if employers don’t even bother looking at anyone who has been out of work for a long time.

To test this hypothesis, Mr. Ghayad then did an experiment, sending out résumés describing the qualifications and employment history of 4,800 fictitious workers. Who got called back? The answer was that workers who reported having been unemployed for six months or more got very few callbacks, even when all their other qualifications were better than those of workers who did attract employer interest.

So we are indeed creating a permanent class of jobless Americans.

And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

No comments:

Post a Comment