Following the IMF's underestimation of the fiscal multiplier and its sensational mea culpa of last year, the recent discovery of data presentation errors, statistical and analytical errors in influential economic policy papers seriously call into question either the competence or the political neutrality of the studies' authors.
Austerity
The most striking examples of statistical and analytical bias are the widely publicized papers by Reinhardt & Rogoff ("Growth in a Time of Debt") that established a 90% of GDP threshold for the negative effects of debt on growth, and by Alesina and Ardagna which "supposedly showed that spending cuts were....expansionary". Alesina & Ardagna's paper on expansionary austerity was closely examined by IMF economists who found that A&A used a statistical technique that was supposed to identify episodes of large fiscal contraction but picked up extraneous effects that correlated with positive economic developments such as a stock market boom. A&A incorrectly interpreted these findings as support for their argument that fiscal austerity has expansionary economic effects.
In an attempt to replicate Reinhardt & Rogoss's findings, Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts Political Economy Research Institute (PERI) found "that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period." For example, growth data for Australia, Belgium, and Canada had been myteriously excluded from the statistical analysis, data that significantly alter the results, against austerity policies.
With the debunking of these two papers, the intellectual edifice of austerity economics has crumbled, causing quite a sensation and media-frenzy in the US because - and I had not realized this until I saw the Colbert Report of April 23 (see link below) - the R&R paper had been actively cited by US congressmen and political pundits (the VSPs in Washington) as scientific proof for the alleged 90% debt cliff: take a listen to Paul Ryan, US Congressman and the US mainstream media (hilarious, esp. the pics of Olli Rehn and Jens Weidman and Colbert's pronunciation of Jean-Claude Trichet and Lord Lamont of Whatchamacallit !). Also, meet Thomas Herndon, the graduate student who discovered the excel coding error in the R&R paper and the 'mistakenly' omitted data.
Competitiveness
Competitiveness
Another example of biased statistical analysis is the 'evidence' for the alleged labor cost competitiveness problem of France, Spain, Italy, and Portugal, presented to eurozone heads of state by non other than ECB president Mario Draghi (see slide #10). The problem is, Mr. Draghi apparently compares apples and oranges in slide 10, namely real GDP per employee as indicator of labor productivity with nominal wages ! Had he correctly compared real GDP per employee with real wages, the results would have been starkly different (see here), with far-reaching implications for economic policy adjustments in the eurozone: France shows a near perfect match between productivity and real wages, Germany and Italy are the countries with the biggest competitiveness problem. In the case of Germany, real wages trail far behind German productivity due to the wage-depressing Agenda 2010 policies. So, instead of remaining silent in shock, the president of France Francois Hollande should have demanded that Germany adjust its real wage levels upward so as to adhere to the stability norm for balanced growth in a monetary union. But France is waking up ...
Considering the brilliant and highly competent management of ECB monetary affairs by Mario Draghi, Andrew Watt is justified in questioning Mario Draghi's ideology. But to introduce such an obvious, plump data bias into a presentation, and expect to get away with it, one would have to be either naive or extremely impertinent. Mario Draghi does not give me the impression of fitting either one of these descriptions. Another possibility: some other interested party introduced the wrong data into the presentation without his knowledge..... That would be outrageous, yet this post by Yanis Varoufakis suggests that Mario Draghi has made some enemies among German policy hawks.
Household wealth distribution in Europe
The ECB's survey of household wealth in the eurozone represents an even more egregious misuse of data for political purposes:
The data on median net household wealth by country show - lo and behold ! - that the median German household is the poorest in the eurozone, while the median household in Greece is twice as rich and the median household in Cyprus has five times the net wealth of a median German household. The median households in Spain and Italy are three times wealthier (see table 4.1, page 76). Which observation, then, comes immediately to mind ? Of course: it is unacceptable that the poor Germans pay for the bail-out of rich Greeks, Cypriots, and other Southern European debtors (see, for example, articles in the Wall Street Journal, Financial Times, and Frankfurter Allgemeine).
Paul de Grauwe, professor of political economy at the London School of Economics and a former member of the Belgian parliament, analyzed the ECB's household wealth survey and reported some other surprising observations in his article "Are Germans really poorer than Spaniards, Italians and Greeks ?". He found, for example, that when looking at mean household net wealth, Germany is suddenly four times richer than Greece, and, computing the mean/median ratios which illustrates the distribution of household wealth within countries, he finds that Germany has the most unequal distribution of household wealth in the eurozone.
He also questions whether household wealth is a good indicator of the wealth of a nation as a significant part of a nation's wealth can be held by the corporate sector and not by the household sector. He then used Eurostat and OECD data to compute the total capital stock per capita, defined as domestic capital stock and net international investment position, and found that, based on this measure, Germany is the second most wealthy nation in the eurozone.
He concludes: "The facts are that Germany is one of the wealthiest countries of the Eurozone. The problem is that this wealth is very unequally distributed in Germany, creating a perception among less wealthy Germans that these transfers [to the Southern European periphery] are unfair."
Exactly, except that the unfairness of transfers from Germany to Southern Europe is a fairy tale consciously disseminated by the Merkel government and the mainstream German media. In fact, the money transfers flow into a completely different direction, namely from German and EU taxpayers to German and French banks !
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