A few somewhat unrelated notes on the Reinhart-Rogoff fiasco:
1. I thought I remembered another recent Excel disaster — and sure enough, spreadsheet coding played a role in the London Whale disaster at JP Morgan:
After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR . . .
2. There’s going to be some back and forth about modeling strategies, data choice, and so on, and I’m pretty sure some people will try to say that R-R were basically right. At this point, however, it’s reasonably clear what the data will say, because others have created data sets that more or less match what R-R claimed to have looked at; e.g., this working paper from the OECD. Here, for example, is growth for developed countries starting in 1790:
There is a negative correlation between debt and growth in the data; we can argue about how much of this represents reverse correlation. There is not, however, any red line at 90 percent. And that red line has been crucial to R-R’s influence — without the “OMG, we’re going to cross 90 percent unless we go for austerity now now now” factor, the paper would never have had the influence it’s had.
3. It’s important to make a distinction between the R-R book “This time is different” and the paper. The paper got undeserved credibility from the book; now the book may be devalued by the paper. But they’re quite different.
The book had a sound empirical strategy: it focused only on extreme events, then described what happened around those events. Because of the severity of the shock, it was reasonable to infer that whatever happened around crises was in fact crisis-related, so problems of causation were sidestepped.
The paper didn’t do any of that — it just looked at simple correlations, without making any effort to untangle causation. It wasn’t worthy of the authors. And they behaved badly by digging in when critiques surfaced, rather than responding with a good-faith effort to sort out what was really happening.
Again, however, the larger story is the evident urge of Very Serious People to find excuses for inflicting pain.