17 April 2013

But Liars Figure [update]

If you're a policy wonk, or a regular reader of comprehensive newspapers, you're likely aware of the Reinhart & Rogoff controversy. Fact is, I hadn't been paying attention until today's reporting. The deja vu experience is charming; when I was at UMass, there was only Amherst and the economics department was busy purging anybody who wasn't Right Wing micro zealot. Boy howdy!

The report is here.

Of the critiques of the critique, this one appeals. And here's Krugman.

Anyway, was it intentional academic malfeasance? None of the reporting I've read says so. I'm not so nice.

The money quote, from Next New Deal:
They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result.

If you read through the various reports, the weighting scheme used by R&R comes up as a major source of criticism. In a nutshell, each country is reduced to one number for each of four categories, regardless of how long its data series is.
(HAP note that just adding an additional category, rather than 90+ makes a difference.
... we add an additional public debt/GDP category, extending by an additional 30 percentage points of public debt/GDP ratio--that is, we add 90-120 percent and greater-than-120 percent categories.

What isn't mentioned (in the reports I've viewed), is weights reflecting economy size. Both R&R and HAP treat all economies as equivalent. They certainly aren't.

HAP (page 8):
But equal weighting by country gives a one-year episode as much weight as nearly two decades in the above 90 percent public debt/GDP range.

It's hard to warrant that categorizing the data, particularly in the way they did, is justified. Well, unless one needs to make a case, much as lawyers will selectively pick facts to satisfy a client. This abject disdain for objectivity is the reason I abandoned economics after grad school.

Excel is for cowards. (Props to Bill Simmons; I think I've got it right this time.)

I've spent some time with the R&R paper, and here's the justification they give:
The four "buckets" encompassing low, medium-low, medium-high, and high debt levels are based on our interpretation of much of the literature and policy discussion on what is considered low, high etc debt levels. It parallels the World Bank country groupings according to four income groups. Sensitivity analysis involving a different set of debt cutoffs merits exploration as do country-specific debt thresholds along the broad lines discussed in Reinhart, Rogoff, and Savastano (2003).

And to further note: weighting by base GDP (for some agreed upon time point) by country has the felicitous effect of de-emphazing small economies with small absolute (in the global realm) GDP growths. A $1 gain for $10 looks a lot better than a $2 gain for $50. Or, "it's easier to grow fast when you start out small!" Just ask Apple, subject of another post today.

The thing is, what they've done (with, or without, the Blessing of the World Bank) is binned continuous data. It is incorrect to label this as "weighting", because it isn't. Binning, for these data, do not improve the explanatory power of the data. Furthermore, they all (R&R, and the critiques I've seen) all allow the outlier question to pass unasked. At 30% and 120% (see the HAP paper, figure 3) there are significant outliers, which (just happen to) push the model in the direction R&R's politics demand. It is well known that linear regression is sensitive to outliers. Further proof. Bad dog!

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