25 April 2013

Excel Lent Depression: Part 1

Krugman, while writing in his blog in The New York Times, titled his recent post 'Excel Depression' . I have gone ahead and tweaked the title and have named my blog 'Excel Lent Depression'. The reason is that Microsoft Excel, which is one of the apps in the Microsoft Office suite, has lent itself to be used and cause a huge depression in Europe. That 'Excel Lent Depression' sounds like 'Excellent Depression' is only incidental. 

The genesis of the story as recounted by Krugman is:

At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, “Growth in a Time of Debt,” that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

The problem with this theory, continues Krugman:

First, the learned Professors omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”

To explain why all this led to Excel Depression, Krugman points out:

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper instantly became famous; it was, and is, surely the most influential economic analysis of recent years.

I know there is something called self fulfilling prophecy. Is there also something called self fulfilling data?

Ah, but the learned Professors while acknowledging the Excel coding error, 'defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth.' This defence is much like the way that I have asserted in this blog that while 'Excel Lent Depression' sounds like 'Excellent Depression', they are totally different. We need to recognise the two as homophonic expressions and nothing more.

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