Subscribe free to our newsletters via your
. Earth Science News .

Walker's World: The bad math that lost jobs
by Martin Walker
Paris (UPI) Apr 22, 2013

disclaimer: image is for illustration purposes only

Back in the 1920s, an Austrian newspaper won the honor for headline of the decade with a front-page story that read, "Archduke Franz Ferdinand Found Alive; Great War Fought By Mistake."

We now have something similar in the field of economics. The headline should read: "Harvard Professors Get Sums Wrong; Millions Lose Jobs By Mistake."

The 1920s headline was a spoof. The case of Professors Carmen Reinhart and Kenneth Rogoff is too true for comfort. The paper they co-authored in 2010, which suggested that countries whose debt levels reach 90 percent of gross national product will start to see their economies shrink, turns out to have been marred by a mistake in a spread sheet.

Instead of such countries seeing a contraction rate of 0.1 percent, as they suggested, the economies can still grow around 2 percent. That is less than less indebted countries but not a disaster.

Given the eminence of the two economists, who both worked at the International Monetary Fund, and Reinhart was chief economist at Bear Stearns and Rogoff was chief economist at the Fed, their paper was hugely influential.

British Chancellor of the Exchequer George Osborne met Rogoff on several occasions and cited their work to justify his own policy of austerity, slashing public spending to cut debt. The IMF and the European Central Bank and the leaders of the European Union were all able to point to the Reinhart-Rogoff doctrine to justify the draconian cuts they imposed on Greece, Cyprus, Spain, Ireland and Portugal as conditions for bailing them out.

It is not easy to put any precise price on the policies of austerity but something like 5 million jobs may have been lost in Europe as a result of the spread sheet error. It was exposed by Thomas Herndon, a doctoral student at the University of Massachusetts, who questioned the figures.

"It is sobering that such an error slipped into one of our papers," Rogoff and Reinhart said in a statement acknowledging Herndon's correction.

The mistake by no means destroys the economic case for restraint in public spending and the need to reduce debt. But it tears a giant hole in the political credibility of the political leaders who put their trust in the Reinhart-Rogoff argument and imposed draconian budget cuts.

Shortly before he took office, Osborne in a major policy address cited Reinhart and Rogoff by name and declared, "The latest research suggests that once debt reaches more than about 90 percent of GDP, the risks of a large negative impact on long-term growth become highly significant."

The discovery of the spread sheet error has given the political rivals to Osborne and others a potent new weapon.

"We warned that rapid fiscal tightening when the global economy is weak risked backfiring and that's what happened," charged Ed Balls, top economic spokesman for Britain's Labor Party.

This is the second such rethink to undermine the case for financial austerity. Last Oct. 15, this column reported that Olivier Blanchard, chief economist at the IMF found that budget cuts could do more harm than good.

That column read: "Blanchard's team addressed the effect of cuts in government spending on gross domestic product growth. We know that cuts will reduce output, since there will be less money in the hands of the public to buy products and thus less incentive for manufacturers to make more. But it is hard to calculate how much the knock-on effects of the cuts bite into growth.

"This is called the fiscal multiplier. Usually, we try to calculate this another way, by asking how much extra growth will a certain amount of extra government spending produce. For the past decade and more, the IMF (and almost all government economists around the world) have assumed that the multiplier effect of spending cuts is 0.5; that is to say, cut public spending $100 billion and you cut growth $50 billion.

"The new IMF research says this was wrong, and the multiplier effect is much greater -- somewhere between 0.9 and 1.7. That means that cuts of $100 billion means growth reduced $90 billion-$170 billion. Wow! If that is right, the IMF is saying that the more you cut government spending the more your overall output will shrink -- and you will never get out of the hole. Your economic output just continues to decline, which is precisely what we have seen happening in Greece."

Combine these stories, of the fiscal multiplier and the debt effect, and the conventional economic thinking that has been in power for the past three years looks to be seriously and damagingly mistaken, as they were in the Great Depression of the 1930s. John Maynard Keynes, who argued then that governments should invest to create jobs rather than slash spending and cut them, looks as if he is being vindicated all over again.


Related Links
The Economy

Comment on this article via your Facebook, Yahoo, AOL, Hotmail login.

Share this article via these popular social media networks DiggDigg RedditReddit GoogleGoogle

Memory Foam Mattress Review
Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily
XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News

Eurozone faces new risks amid $13 billion Cyprus bailout
Brussels (UPI) Apr 19, 2013
The European Union faces new risks to its 17-member eurozone as a $13 billion bailout of Cyprus failed to calm fears, exacerbated by a Fitch downgrade of Britain. Investors warned Europe in and outside the eurozone faced dangers similar to Latin America's sovereign defaults, state confiscation of deposits and other multiple crises of the last century which carried into 2002 in parts of ... read more

Pakistan quake victims burn tyres at angry protests

Hong Kong searches for 6 missing crew after boat crash

Texas fertilizer plant blast 'kills up to 15'

Fukushima leaking radioactive water

Softening steel problem expands computer model applications

New material gets itself into shape

For the very first time, two spacecraft will fly in formation with millimeter precision

High pressure gold nanocrystal structure revealed

Iraq makes contingency plans for Syria dam collapse

New technique measures evaporation globally

Study reveals seasonal patterns of tropical rainfall changes from global warming

Liverpool Bay sediment discovery could save millions

Age matters to Antarctic clams

An SwRI-led remote-sensing study quantifies permafrost degradation in Arctic Alaskan wetlands

Prince Harry to trek to South Pole with wounded troops

Pleas for US to name first ambassador to Arctic

Europe cheese firms hope time is ripe for China

Fertility needs in high-yielding corn production

UBC researchers weed out ineffective biocontrol agents

Life is sweet for beekepers in Greece, but for how long?

China quake rescuers battle landslides, debris

Rescuers in China scrabble to find quake survivors

Helping to forecast earthquakes in Salt Lake Valley

China quake takes an only son, and all hope

Guinea-Bissau army ready to aid US drug probe: spokesman

Regional bloc to send 2,000 troops to stabilise C.Africa

Radical Nigeria cleric rejects place on amnesty panel

Zimbabwe deputy PM tells Africa to be tough on China

From mice to humans, comfort is being carried by mom

DNA study suggests human immunity to disease has ethnicity basis

Fascinating rhythm: The brain's 'slow waves'

New Research Reveals How Human Ancestor Walked, Chewed, and Moved

The content herein, unless otherwise known to be public domain, are Copyright 1995-2014 - Space Media Network. AFP, UPI and IANS news wire stories are copyright Agence France-Presse, United Press International and Indo-Asia News Service. ESA Portal Reports are copyright European Space Agency. All NASA sourced material is public domain. Additional copyrights may apply in whole or part to other bona fide parties. Advertising does not imply endorsement,agreement or approval of any opinions, statements or information provided by Space Media Network on any Web page published or hosted by Space Media Network. Privacy Statement