“A great many people think they are thinking when they are merely rearranging their prejudices.”

-William James


Reinhart and Rogoff are being blamed for the damaging, widespread adaption of post-crisis austerity programs in Europe and in the United States. This reflects a fundamental misunderstanding of how political decision get made.

Regardless of what you think of either R&R, austerity or its opposite, stimulus spending, this blame on two academics is not based on how most Humans make decisions. After years of studying investor behavior, I believe this newly discovered conclusion is actually inverted — it is opposite to how people make their decisions — especially ideological driven politicians.

Academia presents a buffet of theoretical options. Amongst the intellectual cognoscenti — those academics who toil in the world of abstract thought — this is a normal part of their process. We have an academic equivalent of millions of typing monkeys trying to produce Shakespeare — only most of the output is peer reviewed and challenged by other experts. This should inexorably lead us towards a basic form of Truth regarding specific aspects of society. Indeed, this is how soft sciences like Sociology, Political Science and Economics eventually develop and refine their understanding of how human society functions.

When policy makers and politicians get involved, we run into trouble. They have no interest in pursuing the “Truth” — rather, they look for rationales for what they have decided they want to do regardless. It is confirmation bias writ large. They seek out that which agrees with their preconceived notions, and adapt it as a rationale for what they already believe in.

Did Reinhart and Rogoff persuade many politicians to forgo stimulus and embrace austerity? I am unsure that their error-laden, cherry-picked data really convinced any one who wasn’t already leaning in that direction. Indeed, the fact that their magnum opus was never peer reviewed tells you much about how serious it was as an academic work. That is much more revealing about the people who championed the paper than it is about the paper itself. We now know it was little more than junk science, but it fit the pre-existing narrative of those who favor smaller government. They adopted it not despite of its flaws, but rather because of them. It said exactly what it was they wanted to hear, so why bother having it peer-reviewed?

If the thinking process of investors is flawed, filled with cognitive errors and biases, imagine what the process is like for ideologues and political types. The bottom line is that, just as investors seek out those articles, research reports and commentary that support their existing portfolios, so too do politicians look for similar writings that confirm their pre-existing notions.

We know that human thinking all too often is a flawed process which quite often resembles little more than James’ “rearranging of their prejudices.” We might as well blame farmers for obesity; they grow lots of different foods, but they do not force anyone eat french fries.

We as a society run into a problem when we confuse confirmation bias with thought — especially in the political arena.




Confusing Cause & Effect: Elections and Markets  (January 9th, 2008)

Are You an Investor or a Story Teller? (April 25th, 2013)

Category: Economy, Philosophy, Politics, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Blame Politicos, Not Reinhart & Rogoff”

  1. To clarify:

    R&R omitted Denmark, Canada, Belgium, Austria, and Australia out of the average returns – all of which contradicted their thesis. That Excel glitch turns a negative growth rate of -0.1 percent into 0.2 percent growth.

    Further, they cherry picked their timeline — Reinhart-Rogoff used 1946-2009 – instead of using the full 110 years of data available for countries that have a debt/GDP over 90 percent, They only less than the full run of those years – which changed the result towards their thesis as well (Cherry pick #2).

    Perhaps most damning, they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This is significant given these countries high-debt AND solid growth. Canada’s debt-to-GDP was over 90 percent during this period = 3% growth. New Zealand’s debt/GDP was also over 90% from 1946-1951. Average growth rate across those years = 2.58%. Cherry picking only the last year, as R&R did gives you a negative growth rate = -7.6%. Oops.

    All told, the paper does not prove what they claimed. The errors are overwhelming, and while I cannot tell if they were mischievous or merely sloppy in origin, the paper is now defunct.

    • bear_in_mind says:

      Not that there’s anything wrong with politeness, but having spent a reasonable amount of time in academic research, an undergraduate freshman or sophomore might reasonably claim this kind of error slipped past them, but no way a junior or senior gets away with it. Nope, nada, fuggetaboutit.

      Simply put, R&R had a thesis and sought the “evidence” to support the thesis… especially since they were looking to publish a book around their findings. Just imagine what a boring read they would have produced if their data didn’t support their thesis? Might have even been unpublishable… hmmmmmmmmmm.

  2. Mr.Tuxedo says:

    History is replete with examples of where the cart has been put before the horse, i.e., a solution seeking out a problem.
    I’m reading The Drunkards Walk…How Randomness Rules Our Lives.
    The chapter about false positives and positive fallacies, conditional probability and Bayesian examples such as A will occur if B occurs will generally differ from the probability that B will occur if A occurs.
    Those who make decisions that alter people’s lives such as breast cancer diagnosis, and Olympic drug testing in the past have drawn poor conclusions. The book is filled with examples of how data is misinterpreted, often because of using the small sampling numbers instead of the large sampling numbers, and as in the R & R example just omitted numbers.

  3. MayorQuimby says:

    Reinhardt junk science? Oh come on now. And as for any debt accrual, the ability to service it is entirely dependent upon the future economic growth of a given entity so the whole debate is largely meaningless since the future is unknown – is a 90% debt to gdp ratio some sort of breaking point? Well not if the future holds a massive growth spurt and serviced inflation. But if not, then 75% ratios can break the backs of nations.

    Clearly anyone who depends upon the capital markets for a living wants growth since a disproportionate amount of that growth will end up in *their* pocket. But the inflationary side-effects and eventually mounting interest payments land on the backs of the working class which is the price to be paid for employment rates being as low as they are. There is no black and white here Barry (ie austerity = bad, spending Trillions = good) just many shades of gray. Reinhardt and Rogoff deserve a heck of a lot more respect than you are giving them.

    • Their underlying thesis was supported in their own paper with cherry picked data, key omissions that contradicted their thesis, and math errors. Back those out and the “proof” goes away

      If thats not junk science, what is?

    • capitalistic says:

      Here we go again. Debt service capacity has nothing to do with growth. As long as you have assets, you can service debt. Also, the government is not a for-profit enterprise. The market clearly doesn’t care what you think because the US is borrowing at cartoon-like rates.
      Inflationary? When will this magical inflation- era occur? If you actually understand applied economics, you would notice that we’ve been in a deflationary environment for 5 years. Do you know what inflation actually means? Do you know the different kinds of inflation? Do you know that inflation > deflation?

      BR, you’re right.

    • James Shannon says:

      “For those pushing austerity as the solution to America’s economic ills, here’s a reality check: According to a new study, austerity policies have cost the U.S. roughly 2.2 million jobs.”
      Austerity is flat out corporate sponsored corruption! Corporations have inflated ALL core consumer needs and the middle class and poor are suffering!
      Government has clearly make things worse for the little people as the Wealthy Elite made huge profits while avoiding taxes.
      Sorry Mayor – Barry is right and you are one of these people!
      “A great many people think they are thinking when they are merely rearranging their prejudices.”

  4. Laocoon says:

    Elected officials may be more visible, but policymakers in the executive branch are just as insidious. Justification drives selling a policy. Justification comes from any study that fits the desired outcome. Justification is strongest when it comes from a big name institution of any type, name brand academic preferred. When I was a financial advisor to government agencies, I was often asked if we had “studies” or “data” we could “share” with senior policymakers in support of their fad of the week. As a going concern we usually didn’t do studies (revenue generation being the goal instead) nor did we keep the kind of data they were looking for. I never saw policymakers consider a rigorous study. What they wanted was the equivalent of a pitch book with a big name on it. Likewise policy implementation worked off a cookbook operations manual, relabeled. Justification, cookbook, performance reviewed against cookbook. Is it any wonder why there is so little innovation and so much waste in government?

  5. theexpertisin says:

    I enjoy the intellectual exercise proffered via cherry picking critiques. More interesting to me are the self-righteous who cherry pick with glaring selectivity.

    • lrh says:

      I’m struck by the many who clearly see a speck of confirmation bias in another’s eye while being oblivious to the beam of confirmation bias in their own eye.

  6. faulkner says:

    Stories are the evolutionary basis of strategies. In terms of psychological development – individual, social, and historical – stories come first. Stories are explanations and rehearsals for dealing with other people and the world. Stories are ways of mentally manipulating possible paths of action and understanding. What we don’t realize is that the structure of a well-told story is more important to our minds (System1) than the facts or even the rules of logic.

    The larger the scope of time, the more likely our imagination will turn a sequence into a story. The more abstract a story structure is, the simpler it has to be. Economic ‘schools of thought’ – which by definition seek to provide explanatory coverage of large scopes of time, space and activities – are governed by simple abstract stories (meta-narratives). Contrary to logic, but not to how we represent experience, the very simplicity and starkness of a story makes it seem more real. When there are no contradictions in a story, it is more compelling in the mind’s eye and felt to be more true.

    Now let’s go look for some supporting facts.

  7. DeDude says:

    I think you are letting them off a little to easy.

    I see it more like the gun and the gunman. Both have considerable blame and without either it would be much more likely that the dead body was still alive.

    Yes those who seek austerity would have done so without that study. But if they had not had that study to refer to, or if the authors had been scientists and strongly objected to the way their study was “abused”, then the crime of austerity would have been more difficult to commit.

    The problem in todays politics is that there literally are hundreds of operations that study things to seek justification rather than to seek the truth. It has become very easy for those who define reality by their “gut feelings” to find support for whatever they want to believe. Unfortunately the real world consequences of such flawed policy processes cannot be imagined away.

  8. Petey Wheatstraw says:

    Forget bad scholarship. What passes for scholarship, these days, is sad and pathetic.

    The even sadder point is that the population/electorate is too stupid and/or lazy to understand its pivotal role in its own disenfranchisement. It’s not all that occult to see that the system is gamed. It’s not all that complex that it can’t be understood with a modicum of honest examination (it’s fairly easy to look past the shucking and jiving and get to the meat of the matter).

    It seems that the vast middle class is being economically raped because we were asking for it. We’ll also be forced to bear and raise the resulting child.

    One big, happy, dysfunctional family.

  9. RW says:

    John Kenneth Galbraith understood this as well as anyone I think:

    From Wikiquote

    Increasingly in recent times we have come first to identify the remedy that is most agreeable, most convenient, most in accord with major pecuniary or political interest, the one that reflects our available faculty for action; then we move from the remedy so available or desired back to a cause to which that remedy is relevant. -”The Convenient Reverse of Logic in Our Time,” commencement address, American University (1984); reprinted in A View from the Stands (1986)

    When the modern corporation acquires power over markets, power in the community, power over the state and power over belief, it is a political instrument, different in degree but not in kind from the state itself. To hold otherwise — to deny the political character of the modern corporation — is not merely to avoid the reality. It is to disguise the reality. The victims of that disguise are those we instruct in error. The beneficiaries are the institutions whose power we so disguise. Let there be no question: economics, so long as it is thus taught, becomes, however unconsciously, a part of the arrangement by which the citizen or student is kept from seeing how he or she is, or will be, governed. -”Power and the Useful Economist” (1973); also in Annals of an Abiding Liberal and The Essential Galbraith

  10. beaufou says:

    Reinhart and Rogoff, I wish I had some of them at my job so every time I screw up I have some else to blame. Seriously, if the politico-bastards were held responsible for their actions, we’d live in a much better world.

  11. Glenn Hubbard’s New Book Cites Discredited Reinhart-Rogoff Study

    Would it be too embarrassing to rush out a second edition of a new book before the first edition has even hit the shelves?

    That is something Glenn Hubbard, Columbia economist and a former adviser to President George W. Bush and Mitt Romney, might want to consider. His new book Balance, due for release on May 21, approvingly cites the recently discredited research of Harvard economists Carmen Reinhart and Kenneth Rogoff in its opening argument, on page 5.

    Hubbard and co-author Tim Kane of the Hudson Institute, a conservative think tank, don’t just repeat Reinhart and Rogoff’s assertion that economic growth suffers when government debt crosses 90 percent of gross domestic product. They take that claim a step further, fitting it into their broad thesis that America is DOOMED if it can’t get government spending under control. A 90 percent debt ratio is associated not only with slightly slower growth, they suggest, but also with just maybe the very collapse of America:

  12. lrh says:

    Keynes expressed a thought about the discipline he followed to avoid bad thinking. He wrote, “It is astonishing what foolish things one can temporarily believe if one thinks too long alone… If one is to avoid an undue proportion of mistakes, [he] is extremely dependent on criticism and conversation.”

  13. Pantmaker says:

    This debate is similar to how some Christians feel their faith is threatened somehow by evolution. R&R’s research paper can be a total disaster and austerity can still be the right path.

    • Right path? Lacking empirical evidence, I can only presume you are referring to a political choice.

      But in terms of demonstrating with data that this is the proper and correct option for generating economic growth, there is no evidence whatsoever for that. This i why so many politicos gravitated to R&R.

      • James Shannon says:

        Austerity is clearly making ALL the world’s economies worse. A Total Global economic melt down is a very real potential.
        Austerity ignores Modern Money Theory. Politicos ignore MMT because governments only represent the wealthy Elite, a subject that is clearly Taboo to main stream thinkers!

  14. VennData says:

    I COMPLETELY disagree with the premise that people decide what to do and then look for the data.

    Will forward evidence upon its arrival later today after I’ve looked a while.

    • bear_in_mind says:

      Really? Have you not read about Alan Greenspan’s deep-seated affinity for Ayn Rand’s ideology and how that drove his economic perspectives? Or maybe Paul Ryan? Or should these be considered ‘outliers’?

      As for Reinhart-Rogoff, it’s impossible to precisely know their state-of-mind when they assembled this research. What observers CAN discern is the manner in which they engaged in public discussion of their findings, which left little question on which side of the policy debate (i.e. austerity vs. stimulus) they advocated based upon their “conclusions.”

      Betsey Stevenson & Justin Wolfers have an article over at Bloomberg attempting to mitigate the flogging Reinhart-Rogoff are suffering. Here’s the money quote:

      “In the end, all the corrections advocated by the critics shift the average GDP growth for very-high-debt nations to 2.2 percent, from a negative 0.1 percent in Reinhart and Rogoff’s original work.”

      Refereeing Reinhart-Rogoff Debate

  15. molten_tofu says:

    Fixed it for you:

    When people get involved, we run into trouble.

    Academics have some of the worst partisan bickering, confirmation bias and prejudice, and there’s plenty of information to suggest peer-review doesn’t work all that well: http://en.wikipedia.org/wiki/Peer_review#Criticism_of_peer_review

    R+R are just humans, and awkwardly enough as social scientists don’t seem to be all that self-conscious about it.

  16. biotrekker says:

    We will soon have a real time, real life test of whether infinite borrowing to create “stimulus” without reform and restructuring can lead to prosperity. Japan. When Japan’s debt detonates, what will the Keynesians say then, I wonder?

    • I CALL FOUL: You cannot criticize a policy by claiming it will blow up in the future. (Thats called a prediction, not an anlysis)

      You guys have been warning about hyper-inflation, collapse of the dollar, interest spikes, etc. So far, you have been dead wrong.

      Come back when you have some empirical proof about being right about something for a change

  17. Many pundits do not realize the bond vigilantes have moved on since RR. The latter’s first effort was based on their intrigue over a single metric whereas the international investment community is now tasked with weighing all matters surrounding a jurisdiction’s debt service ability. In short we are today in search of tipping points.

    In the case of the USA, my modeling suggests the critical surge in bond rates past 7% occurs in 2024 … promptly followed by an austerity crisis and severe recession.

    Debt Wall & GDP outlook charts: http://trendlines.ca/free/economics