Economic Modelling - The Emperor has no clothes!

Economics lost it's credibility this week as a science.

Kenneth Rogoff and Carmen Reinhart wrote a paper in 2010 called "Growth in a Time of Debt" that has been widely adopted by global policy makers.

This paper has been the justification needed for the global economic movers and shakers to pound out a  simple message to governments with high debt:

"That if government debt becomes too high, 
then economic growth will always suffer."

This has been the basis of the "Austerity Measures" that have been washing around the world since 2010.

But the intellectual rigor behind the intellectual basis of the global austerity movement was severely weakened this week with another paper written by Thomas Herndon, a student in the University of Massachusetts Amherst's doctoral program in economics.  He published a paper exposing the basic errors that these two experts had made.  He was helped by his two teachers, Michael Ash and Robert Pollin.

The paper shows that Reinhart and Rogoff had ommited data, made a simple mistake in their Excel spreadsheet and used a bizarre statistical methodology, all of which skewed their results.

What has emerged is that Rogoff and Reinhart's theories have never been tested or checked in the three years since, even though economists like L. Randall Wray of the Levy Institute, say they have asked for the data in the past, but they have been rebuffed.

"They ignored our request. I have heard from several other researchers that Reinhart and Rogoff also ignored their repeated requests for the data." Wray wrote this week.

This is not how the scientific method is supposed to work.

But this has been used as a justification to bring several countries to their knees - perhaps there was another way?

My wife always demands to see the evidence for any theory.

You simply can't take things for granted.

Nobel Laureate Paul Krugman wrote in response to this situation:

"In this age of information, maths errors can lead to disaster.  NASA's Mars Orbiter crashed because engineers forgot to convert to metric measurements.  JP Morgan Chase's "London Whale" venture went bad because modellers divided a sum instead of an average. So, did an Excel coding error destroy the economies of the Western World?"

We have to question everything.

The Austerity method is not the only way for governments to work their way through this.  But big Banks and other vested interests think it is and found data to support their argument.

Just like any problem a business owner has, there are many way to work your way to success.

This story shows how theories can be based on unconfirmed data, so if you are basing your strategies on a theory, do your due diligence.

If my theories doesn't work in application, I'm not scared to try something else.

I'm not in the business of proving theories.  I'm in the business of making things work.

This is only the beginning. Get to know clarity. Email me, Mike Kennedy...

No comments: