by Andrew White | April 30, 2013 | Comments Off on The role of National Debt on Growth; and errors in the data?
You have probably seen a few headlines in the last couple of weeks concerning the “error” made by Reinhart and Rogoff in their spreadsheet calculation that had suggested countries with national debt approaching 90% of GDP would tend to experience lower growth (than those with lower debt). Apparently their research was fodder for some countries to argue for austerity – i.e. the slowing of government spending and in fact the contraction of same, in order to lower debt.
Well, Gartner analysts also pondered this “error”. True to form, those analysts focused on “information” nuggets spotted the reported error first. For three days a group of analyst pondered the implications for errors of information and processing and analyses on policy decisions. There was a predictable policy bias – but that was fine.
A week after the email storm died down, those analysts focused on “analytics” spotted the re run of the story in the press – and so they had a go at dissecting what happened. Perhaps predictably the first bunch assumed the primary error was to be found in the information in the spreadsheet – a physical or perhaps semantic error. The second group determined that this was an error in analysis and even the analytic used by the researchers.
For good measure, I posted an email to the then merging joint groups: was this an error in the data, in the process, in the application, in the people? True to form, our BPM’ers came out of the woodwork for quick fire response – of course, it was more to do with peer review, follow up and practice. There were data issues; processes for peer review might need to be validated/tightened up; the actual analytic seemed to have been untested. There are several bottom lines from these email strings:
- An observation of an error or condition can have many, even valid, causes.
- Without first hand and detailed knowledge of the facts of the case, it is very hard to come up with a concrete understanding of the real root cause.
- In any number of similar errors, there are always going to be contention between data, analysis, and process – and the resulting outcome.
In this case the outcome was a policy decision made by politicians – based on guidance by economists.
The actual story – that the two researchers had made an error and understated the impact of national debt on growth – is not that alarming. There are some politicians who are using the opportunity to argue for less austerity and more government spending.
And in today’s print edition of the Wall Street Journal, there is an article highlighting how, for the first time in six years, the federal government will be paying off some of the national debt. In turns out they will be paying off approximately $35 billion of the $16.7 trillion. This is paltry, but a good sign, right?
The argument that just because interest rates are extremely low the (US) government should take out more loans to fund growth is interesting. Think about your own household? How do you invest for future growth? How do your debts and interest payments influence how you spend on consumables today? How does your expectation of the interest rate tomorrow, and how much debt everyone has around you, impact your behavior?
The US is lucky – since its peers are equally saddled (if not more) with debt, and low interest rates mean interest payments are low. But the idea of taking on more debt seems to fly in the face of reality. The UK’s experience in the 1980s was equally intriguing. It cut taxes, and held spending back, and it returned to growth. And this was in the face of Keynesian conventional wisdom. I think the relationship between the UK and its peer competitors was important. Because its main competitors were remaining saddled with Keynesian policies, the UK stood out. Investors saw something different, that (despite short term pain) would lead to favorable conditions. This is the same with the US vis a vis Europe, and Japan. If we can take the “high road” we will stoke investor zeal and confidence (of private industry) to invest in infrastructure and base R&D would be unfettered. A return to more government spend just means higher taxes later; this holding back private investment – and so the cycle of malaise would continue.
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