The FT's Piketty Criticism is Nothing Like the Reinhart-Rogoff Affair

May 27, 2014Mike Konczal

Several people are comparing Chris Giles’s piece in the Financial Times, which criticizes the data Thomas Piketty used in his book Capital in the 21st Century, to the Reinhart-Rogoff (R-R) incident from last year. That was when Carmen Reinhart and Kenneth Rogoff’s paper ”Growth in a Time of Debt, which found that growth went negative above a 90 percent debt-to-GDP threshold, was criticized by Thomas Herndon, Michael Ash, and Robert Pollin (HAP). HAP found data and methodology errors in R-R, and now Giles finds data and methodology errors in Piketty. (I wrote about Giles’s article here.)

So the critiques must be similar, right? No. They are quite different, and in fact there are at least four ways in which they are practically the opposite of each other: in their transparency; in the object of their criticism; in the severity of their critiques; and in their democratic implications.

Transparency and Accessibility of the Data

Piketty’s data is public. That is why we are debating it, because that’s how Giles went about critiquing it. R-R kept their data hidden for years as their policies shaped the international debate over austerity.

R-R based their argument on post-war debt and growth, but their site had no spreadsheet saying “here are the countries and growth rates we used for the post-war period.” Instead they offered links to various other sites for growth data, without clarifying which ones they used. If you tried to replicate the data yourself, as many did, you’d find 110 high-debt data points, but R-R only used 96. Again, it wasn’t clear which were being used.

It’s a minor point, but one worth emphasizing. I can think of at least three sets of economists who stated publicly that R-R had not released their data between 2010 and 2012 [1]. This was before Carmen Reinhart sent their raw data to an innocuous graduate student named Thomas Herndon, which formed the basis for HAP.

Attacking the Data Versus Attacking the Argument

Giles is questioning Piketty’s underlying, original data. HAP took the data that R-R provided for granted, even though it likely would have similar questions, and instead criticized what they did with said data.

A lot of people are pointing out that creating brand new data sets, especially using data that spans countries and centuries, will necessarily involve a lot of difficult calls around merging and splicing various sources. To put that a different way, it would be odd if someone went back into the raw, underlying data and didn’t find some difficult calls that could be questioned.

Critics took R-R’s underlying data for granted in the debate. Perhaps they shouldn’t have. As Bivens and Irons of EPI pointed out in their 2010 discussion, R-R use gross debt, which seems inappropriate compared to debt held by the public if the story they’re telling is about debt and economic outcomes. Yeva Nersisyan and Randy Wray argued that R-R also did a poor job of noting whether a debt was denominated in its own currency.

Those are good points, but they’re not what HAP focused on. They looked at the methodology and construction of results and took the R-R data as given instead of nitpicking the underlying data calls -- calls which are always fraught with ambiguity. Critics generally didn’t try to undermine the data R-R presented in This Time is Different; they took on a supplemental argument tacked onto that data, and the problems they found were less subjective and much more devastating.

The Actual Problems Identified Were Far Different in Scale

Giles focused his analysis on the most speculative data chapter in the book. According to Piketty, inequality in the ownership of wealth is one of the two channels that can lead to greater income inequality, but it’s the less important and far more speculative one, developed at the end of the book and added with many, many caveats by the author himself. This chapter is also at the farthest edge of the research frontier, as evidenced by the fact that new research on this topic is still breaking. Even if the whole chapter collapses, there are still very open questions about the growth of capital stock, how much of the economic pie capital will take home, the rise in labor inequality, and many other topics that comprise a much bigger part of the book.

In contrast, within 72 hours of HAP, support for the idea that there was a debt “threshold” collapsed. John Taylor said that the G20, a far cry from a group of liberal bloggers, omitted specific deficit or debt-to-GDP targets as a result of HAP’s critique. What happened?

First, the actual methodological problem was more important in R-R. It became clear that the choices made in weighting and averaging radically overstated the effects of one year from New Zealand in which R-R recorded a negative 7.6 percent change in GDP. But more generally, HAP showed that the final results were very sensitive to minor data adjustments.

This gets confused in the subsequent narrative, but R-R largely accepted the numbers of HAP. In fact, they said that the smaller numbers HAP found were in line with their new research, which found a smaller decline and correlation between debt and GDP, implicitly abandoning their 2010 paper that had become the focus of world policy. But they still argued that a negative relationship was present.

Since the data was made available by HAP, it took only 24 hours before other researchers found major problems that R-R’s response did not address. Specifically, the economist Arin Dube showed that “simple exercises suggest that the raw correlation between debt-to-GDP ratio and GDP growth probably reflects a fair amount of reverse causality. We can’t simply use correlations like those used by R-R (or ones presented here) to identify causal estimates.” In other words, low growth led to a higher debt-to-GDP ratio, not the other way around.

There was no convincing answer forthcoming from R-R about this issue. A month later, the economist Miles Kimball and Yichuan Wang found that they “could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.”

That no other researchers have used Giles’s findings to immediately disprove, or at least cast doubt on, Piketty’s central arguments is telling. This could still happen, so it’s important to be critical. But the general work in Capital, leaving aside the question of inequality of the ownership of capital in Chapter 10, has evolved over decades and has had its tires kicked many, many times. The debt threshold of R-R never passed peer review, and it is unlikely it could have given the obvious reverse causality issues.

The Difference in Democratic Accountability

It seems like everyone who brings up Capital in the 21st Century has to immediately remark about how impossible it would be to do anything about Piketty’s findings given our current reality. Did you hear that Piketty’s solutions in Capital are impractical? They’re impractical, you know. A global wealth tax? Impractical!

But some people, when they act, create their own reality. Even though it had never been replicated, R-R’s paper was immediately moved to the center of elite discussion. It was one of the most cited pieces of evidence during the Great Recession. It became a justification for austerity, and it was one of the central economic arguments for the Ryan Plan, the budget that Mitt Romney would have tried to put into place had he won the 2012 election.

Some people want to argue that the R-R Excel error was no big deal. And in an econometric sense, they might have a point. But in a political sense, it mattered. It showed that hundreds of millions of people’s lives were being guided by a piece of research with an error that literally anyone would have found if R-R had let another set of human eyeballs look at it.

This is why democratic accountability is so important with economics. It’s good to see Piketty checked here, even if the concerns are overplayed; as Piketty says, the distribution of wealth “is too important an issue to be left to economists, sociologists, historians, and philosophers. It is of interest to everyone, and that is a good thing.” Indeed it is, just as austerity and government budgets are.

[1] First, “Government Debt and Economic Growth.” Bivens and Irons of EPI, July 2010, footnote 5: “The actual data used in the [R-R] study have not been made available to the public by the authors.”

Second, “Not Following Professional Ethics Matters Also.” Dean Baker, July 2010: “Mr. Rogoff and Ms. Reinhart have declined to adhere to standard ethics within the economics profession and have refused to share the data on which they base their conclusion with other researchers.”

Third, “Is High Public Debt Always Harmful to Economic Growth?” Minea and Parent, Feburary 2012, footnote 4: “Our efforts for obtaining the database used by RR were...unfortunately unsuccessful.”

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Several people are comparing Chris Giles’s piece in the Financial Times, which criticizes the data Thomas Piketty used in his book Capital in the 21st Century, to the Reinhart-Rogoff (R-R) incident from last year. That was when Carmen Reinhart and Kenneth Rogoff’s paper ”Growth in a Time of Debt, which found that growth went negative above a 90 percent debt-to-GDP threshold, was criticized by Thomas Herndon, Michael Ash, and Robert Pollin (HAP). HAP found data and methodology errors in R-R, and now Giles finds data and methodology errors in Piketty. (I wrote about Giles’s article here.)

So the critiques must be similar, right? No. They are quite different, and in fact there are at least four ways in which they are practically the opposite of each other: in their transparency; in the object of their criticism; in the severity of their critiques; and in their democratic implications.

Transparency and Accessibility of the Data

Piketty’s data is public. That is why we are debating it, because that’s how Giles went about critiquing it. R-R kept their data hidden for years as their policies shaped the international debate over austerity.

R-R based their argument on post-war debt and growth, but their site had no spreadsheet saying “here are the countries and growth rates we used for the post-war period.” Instead they offered links to various other sites for growth data, without clarifying which ones they used. If you tried to replicate the data yourself, as many did, you’d find 110 high-debt data points, but R-R only used 96. Again, it wasn’t clear which were being used.

It’s a minor point, but one worth emphasizing. I can think of at least three sets of economists who stated publicly that R-R had not released their data between 2010 and 2012 [1]. This was before Carmen Reinhart sent their raw data to an innocuous graduate student named Thomas Herndon, which formed the basis for HAP.

Attacking the Data Versus Attacking the Argument

Giles is questioning Piketty’s underlying, original data. HAP took the data that R-R provided for granted, even though it likely would have similar questions, and instead criticized what they did with said data.

A lot of people are pointing out that creating brand new data sets, especially using data that spans countries and centuries, will necessarily involve a lot of difficult calls around merging and splicing various sources. To put that a different way, it would be odd if someone went back into the raw, underlying data and didn’t find some difficult calls that could be questioned.

Critics took R-R’s underlying data for granted in the debate. Perhaps they shouldn’t have. As Bivens and Irons of EPI pointed out in their 2010 discussion, R-R use gross debt, which seems inappropriate compared to debt held by the public if the story they’re telling is about debt and economic outcomes. Yeva Nersisyan and Randy Wray argued that R-R also did a poor job of noting whether a debt was denominated in its own currency.

Those are good points, but they’re not what HAP focused on. They looked at the methodology and construction of results and took the R-R data as given instead of nitpicking the underlying data calls -- calls which are always fraught with ambiguity. Critics generally didn’t try to undermine the data R-R presented in This Time is Different; they took on a supplemental argument tacked onto that data, and the problems they found were less subjective and much more devastating.

The Actual Problems Identified Were Far Different in Scale

Giles focused his analysis on the most speculative data chapter in the book. According to Piketty, inequality in the ownership of wealth is one of the two channels that can lead to greater income inequality, but it’s the less important and far more speculative one, developed at the end of the book and added with many, many caveats by the author himself. This chapter is also at the farthest edge of the research frontier, as evidenced by the fact that new research on this topic is still breaking. Even if the whole chapter collapses, there are still very open questions about the growth of capital stock, how much of the economic pie capital will take home, the rise in labor inequality, and many other topics that comprise a much bigger part of the book.

In contrast, within 72 hours of HAP, support for the idea that there was a debt “threshold” collapsed. John Taylor said that the G20, a far cry from a group of liberal bloggers, omitted specific deficit or debt-to-GDP targets as a result of HAP’s critique. What happened?

First, the actual methodological problem was more important in R-R. It became clear that the choices made in weighting and averaging radically overstated the effects of one year from New Zealand in which R-R recorded a negative 7.6 percent change in GDP. But more generally, HAP showed that the final results were very sensitive to minor data adjustments.

This gets confused in the subsequent narrative, but R-R largely accepted the numbers of HAP. In fact, they said that the smaller numbers HAP found were in line with their new research, which found a smaller decline and correlation between debt and GDP, implicitly abandoning their 2010 paper that had become the focus of world policy. But they still argued that a negative relationship was present.

Since the data was made available by HAP, it took only 24 hours before other researchers found major problems that R-R’s response did not address. Specifically, the economist Arin Dube showed that “simple exercises suggest that the raw correlation between debt-to-GDP ratio and GDP growth probably reflects a fair amount of reverse causality. We can’t simply use correlations like those used by R-R (or ones presented here) to identify causal estimates.” In other words, low growth led to a higher debt-to-GDP ratio, not the other way around.

There was no convincing answer forthcoming from R-R about this issue. A month later, the economist Miles Kimball and Yichuan Wang found that they “could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.”

That no other researchers have used Giles’s findings to immediately disprove, or at least cast doubt on, Piketty’s central arguments is telling. This could still happen, so it’s important to be critical. But the general work in Capital, leaving aside the question of inequality of the ownership of capital in Chapter 10, has evolved over decades and has had its tires kicked many, many times. The debt threshold of R-R never passed peer review, and it is unlikely it could have given the obvious reverse causality issues.

The Difference in Democratic Accountability

It seems like everyone who brings up Capital in the 21st Century has to immediately remark about how impossible it would be to do anything about Piketty’s findings given our current reality. Did you hear that Piketty’s solutions in Capital are impractical? They’re impractical, you know. A global wealth tax? Impractical!

But some people, when they act, create their own reality. Even though it had never been replicated, R-R’s paper was immediately moved to the center of elite discussion. It was one of the most cited pieces of evidence during the Great Recession. It became a justification for austerity, and it was one of the central economic arguments for the Ryan Plan, the budget that Mitt Romney would have tried to put into place had he won the 2012 election.

Some people want to argue that the R-R Excel error was no big deal. And in an econometric sense, they might have a point. But in a political sense, it mattered. It showed that hundreds of millions of people’s lives were being guided by a piece of research with an error that literally anyone would have found if R-R had let another set of human eyeballs look at it.

This is why democratic accountability is so important with economics. It’s good to see Piketty checked here, even if the concerns are overplayed; as Piketty says, the distribution of wealth “is too important an issue to be left to economists, sociologists, historians, and philosophers. It is of interest to everyone, and that is a good thing.” Indeed it is, just as austerity and government budgets are.

[1] First, “Government Debt and Economic Growth.” Bivens and Irons of EPI, July 2010, footnote 5: “The actual data used in the [R-R] study have not been made available to the public by the authors.”

Second, “Not Following Professional Ethics Matters Also.” Dean Baker, July 2010: “Mr. Rogoff and Ms. Reinhart have declined to adhere to standard ethics within the economics profession and have refused to share the data on which they base their conclusion with other researchers.”

Third, “Is High Public Debt Always Harmful to Economic Growth?” Minea and Parent, Feburary 2012, footnote 4: “Our efforts for obtaining the database used by RR were...unfortunately unsuccessful.”

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - May 27: Taking Stock of Piketty's Capital

May 27, 2014Rachel Goldfarb

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Why Geithner Drives Liberals Nuts (Politico)

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Roosevelt Institute Fellow Susan Crawford says that instead of overseeing mergers that will hurt consumers, regulators should be pushing cable companies to invest in infrastructure.

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Roosevelt Institute Fellow Susan Crawford says that instead of overseeing mergers that will hurt consumers, regulators should be pushing cable companies to invest in infrastructure.

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Blake Zeff argues that the best way to fight poverty is to take a page from the right's handbook and form a super PAC powerful enough to threaten lawmakers who don't support the cause.

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Daily Digest - May 19: Workers Around the World Order Up Higher Pay

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Daily Digest - May 14: A Victory for Workers in Vermont

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For U.S. Mothers, Conservative Policies Can Be Deadly

May 12, 2014Andrea Flynn

This post is the first in the Roosevelt Institute's National Women's Health Week series, which will address pressing issues affecting the health and economic security of women and families in the United States. Today, a look at why conservative policies at the state level are leading to increased maternal mortality rates.

This post is the first in the Roosevelt Institute's National Women's Health Week series, which will address pressing issues affecting the health and economic security of women and families in the United States. Today, a look at why conservative policies at the state level are leading to increased maternal mortality rates.

For much of the last decade, maternal mortality rates (MMRs) have declined globally. But in the United States, they have consistently increased and are now at one of the highest points in the last 25 years. If conservatives have their way with social and economic policy, it’s unlikely the U.S. will make significant strides to improve the health of mothers in the near future.

According to a report released last week in the The Lancet, the U.S. now ranks 60th out of 180 countries for maternal deaths. China is number 57. Only seven other countries experienced an increase in MMR over the past 10 years. They include Greece, Afghanistan, and South Sudan. The report estimates that for every 100,000 births, 18.5 mothers die in the U.S. By comparison, 13.5 women die in Iran, 6.1 in the United Kingdom, and only 2.4 in Iceland.

It is no coincidence that the U.S. MMR has increased as poverty rates have steadily climbed. In 2010, Amnesty International released a report that showed women living in the lowest-income areas were twice as likely to suffer a maternal death. States with high rates of poverty were found to have MMRs 77 percent higher than states with fewer residents living below the federal poverty level. Women of color have poverty rates more than double those of white women, and black women are 3-4 times as likely to die from pregnancy-related causes.

The numerous factors that contribute to the high U.S. MMR are complex, as are the solutions required to effectively address the problem. However, one solution is already in place and is working. The Affordable Care Act (ACA) will significantly improve maternal health by mandating coverage of pre-natal, maternity, and post-partum care in all insurance plans. But some of the women in greatest need will remain uninsured and at increased risk because of the refusal of 21 states to expand Medicaid. Many of those states have among the nation’s highest rates of poverty and maternal mortality.

Expanding Medicaid would save women’s lives. A 2010 study conducted in New York City showed that the MMR for women with no insurance was approximately four times higher than for insured women, and that the rate for women insured by Medicaid was comparable to that of women with private insurance.

Many states have higher Medicaid eligibility limits that enable pregnant women with incomes above the standard Medicaid threshold to receive coverage. However, that coverage does not begin until women are already pregnant, and it is often terminated soon after their babies are born. This short coverage period leaves women uninsured for much of their lives and places them at higher risk for health problems that can lead to complications during and after pregnancy. Following implementation of the ACA, some states reduced eligibility limits for pregnant women, and loopholes in other states will leave many women without coverage during this critical time. Expanding Medicaid would provide continuous coverage for women whose incomes exclude them from the program and who do not qualify for subsidized insurance through the exchanges.

Despite the maternal health crisis unfolding in many states, conservative state lawmakers stand firm in their refusal to expand Medicaid, even though the federal government will cover 100 percent of the cost for the first three years and a minimum of 90 percent thereafter. Some states, like Georgia, are so intent on undermining the ACA that they have passed laws to prevent state employees from advocating for expansion and have made it more difficult for people who already qualify for Medicaid to enroll.

Conservatives do not have plans to solve this crisis. In fact, their plans will only make it worse. Family planning cuts and abortion restrictions in places like Texas have shuttered women’s health clinics and obliterated the health infrastructure on which poor women relied for their basic needs. And while many women and their families are still reeling from the recession, cuts to safety net programs like food stamps have led to greater insecurity in health, income, and food than ever before.

Last week’s Lancet report is a stark reminder that women suffer heavy casualties in the partisan battles raging in states across the country. But what we are witnessing today is more than a nasty game of politics: it is a violation of women’s human rights. We should be ashamed and outraged.

Andrea Flynn is a Fellow at the Roosevelt Institute. Follow her on Twitter @dreaflynn.

Image via Thinkstock

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Daily Digest - May 12: Walmart Sets the Wrong Example for a Progressive Future

May 12, 2014Rachel Goldfarb

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Did Obama Make a Mistake by Touting Solar Power at Walmart? (All In with Chris Hayes)

Roosevelt Institute Fellow Dorian Warren says this speech rewarded a company that is failing on the environment and on inequality, which makes it a confusing political choice.

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Did Obama Make a Mistake by Touting Solar Power at Walmart? (All In with Chris Hayes)

Roosevelt Institute Fellow Dorian Warren says this speech rewarded a company that is failing on the environment and on inequality, which makes it a confusing political choice.

Thousands in Pierce County Trapped in Underwater Mortgages (Tacoma News Tribune)

Kathleen Cooper speaks to Roosevelt Institute Fellow Mike Konczal, who says these mortgages slow economic growth because homeowners spend so much on debt payments.

Making Ends Meet at Walmart (NYT)

When Walmart reviewed its financials to determine performance pay for executives, it made adjustments to ensure larger bonuses despite a rough year, reports Gretchen Morgenson.

Undocumented NYC Domestic Workers Clean Up with Collective (AJAM)

Forming an environmentally friendly cleaning co-op has ensured fair wages, steady income, and safety for some undocumented workers, writes Kaelyn Forde.

Heller May Try to Attach Unemployment Extension to Tax Cut Bill (Roll Call)

Humberto Sanchez reports that an upcoming set of corporate tax breaks with bipartisan support could be key to a deal that would renew unemployment benefits.

FCC Head to Revise Broadband-Rules Plan (WSJ)

Gautham Nagesh says FCC Chairman Tom Wheeler is trying to address public backlash with this latest revision of rules, which could be a good thing for net neutrality.

New on Next New Deal

For U.S. Mothers, Conservative Policies Can Be Deadly

Maternal mortality rates have increased in the U.S., and Roosevelt Institute Fellow Andrea Flynn argues that conservative policies like refusing Medicaid expansion make things worse.

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Daily Digest - May 9: Higher Taxes on the Rich Are Nothing to Fear

May 9, 2014Rachel Goldfarb

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Now That’s Rich (NYT)

With so much wealth now concentrated among a small financial elite, writes Paul Krugman, we should set aside fears that higher taxes would punish workers and job creators.

Click here to receive the Daily Digest via email.

Now That’s Rich (NYT)

With so much wealth now concentrated among a small financial elite, writes Paul Krugman, we should set aside fears that higher taxes would punish workers and job creators.

  • Roosevelt Take: Roosevelt Institute Chief Economist Joseph Stiglitz spoke to the Senate Budget Committee about how policy, like higher taxes, could address inequality. His testimony was based on a forthcoming Roosevelt Institute paper.

People Don’t Vote With Their Feet When it Comes to Taxes, Report Finds (WaPo)

Niraj Chokshi reports on a Center on Budget and Policy Priorities study, which found that interstate moves, which are rare to begin with, have almost nothing to do with income taxes.

Warren and Allies Said to Reject Fannie Mae Overhaul Bill (Bloomberg Businessweek)

Six Democratic senators have decided this plan to replace government-owned mortgage firms is unworkable, reports Cheyenne Hopkins, and without them it's unlikely to pass.

Unions Warn Obama on Walmart Visit (WSJ)

Jeffrey Sparshott reports that labor groups are unhappy with the president's planned talk about energy efficiency at a Walmart. They suggest another topic: income inequality.

Janet Yellen's Favorite Phrase, Explained (Vox)

Danielle Kurtzleben notes that Yellen often refers to labor market "slack," which means people want work but can't find jobs. Yellen's concern is how the Fed can address that problem.

Rand Paul Clearly Doesn't Understand Why the Economy's Still Struggling (TNR)

Danny Vinik writes that the real problem in the economy is low demand for goods and services. Cutting spending won't solve that problem, but full employment would.

New on Next New Deal

Collaborative Democracy in Action: The Summer of Rethinking Communities

Alan Smith, Roosevelt Institute Associate Director of Networked Initiatives, writes that students across the country are asking how their schools can better support local communities.

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