The Ticker Quick Views on Politics, Economics and Finance

Yesterday, a group of authors at the University of Massachussetts-Amherst released a paper calling into question one of the intellectual cornerstones of post-financial-crisis economic thought. The authors, Thomas Herndon, Michael Ash and Robert Pollin, said they had found three errors in research done by the economists Kenneth Rogoff and Carmen Reinhart, who had demonstrated that there seemed to be a tipping point where a country with public debt greater than 90 percent of its gross domestic product would face sharply slower growth.

The most glaring error: In an Excel data set of countries' annual GDP growth and their public debt, Rogoff and Reinhart apparently forgot to select an entire row when it came to averaging growth figures, leaving out Australia, Austria, Belgium, Canada and Denmark. Rogoff and Reinhart acknowledged the error, writing that "it leads to a notable change in the average growth rate for the over-90-per-cent debt group." This means that one of the most influential claims in public discussions and government policies related to austerity, debt and stimulus -- "that there is a sharp fall-off in growth when debt reaches 90 percent of GDP -- was partially due to a simple Excel error.

Until yesterday, politicians who wanted to raise taxes and cut government spending frequently cited a 2010 paper by Carmen Reinhart and Kenneth Rogoff called "Growth in a Time of Debt." The paper implied that high public indebtedness leads to slower economic growth.

Yesterday, it was revealed that the authors' methodology, choice of data and competence with the Microsoft Excel spreadsheet were all found wanting. When it comes to policymaking, this news changes very little: the Reinhart-Rogoff paper was always a flimsy justification for fiscal austerity.

Mark Sanford will be the first to tell you he has flaws. The former South Carolina governor talks about his personal failings ad nauseam on the campaign trail, almost turning his rallies into awkward therapy sessions.

But the baring of Mark Sanford’s soul isn’t true humility. It's actually a form of arrogance: Sanford is confident that he is so awesome, everyone from the voters to his ex-wife to God will forgive him for any bad behavior.

While driving last weekend, I flipped on my local National Public Radio station to hear Bill Moyers yammering away on income inequality. While the subject is important, even if the cure remains elusive, Moyers's selective use of data was appalling.

The Commerce Department reports that personal income fell 3.6 percent in January -- that’s the sharpest one-month dive in twenty years. It sure seems like the Roaring 20s all over again -- people at the top living it up while those down below lose their livelihood.

Moyers conveniently omitted personal income increases of 1.1 percent in November, 2.6 percent in December and 1.1 percent in February. The last two months of 2012 witnessed a huge shift of income forward to avoid any additional liability arising from the expected expiration of the Bush tax cuts at year-end. January's enormous decline was payback.

Ken Rogoff and Carmen Reinhart have become known for warning that debt-to-GDP ratios over 90 percent are linked to poor economic growth. But a new working paper from economists at the University of Massachusetts says Reinhart and Rogoff’s findings are created by bad methodology. They seem to have a point.

Thomas Herndon, Michael Ash and Robert Pollin say that the Reinhart-Rogoff finding of sharply lower average growth in high-debt countries rests on three errors: a bad weighting method, inexplicable exclusion of data from certain countries and years, and an Excel coding error. After fixing those problems, they find that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

Yesterday’s defenses from Reinhart and Rogoff are most notable for what they do not contain: a defense of the methodology that Herndon and his colleagues criticize. Instead, they make two main arguments. One is that a 2012 paper, which Reinhart and Rogoff wrote with Vincent Reinhart, supports their finding that high debt is associated with low growth, as do several papers from other researchers. Their other response is that the really important matter is median performance, not the mean performance statistic that the UMass researchers are critiquing.

“We have generally emphasized the 1% differential median result in all our discussions and subsequent writing,” Rogoff told me in an e-mail. That is, in the graphic of means and medians below, from their 2010 American Economic Review paper (similar free version available here), the really important statistic is the median growth figure. That number is about 1 percentage point lower for the high-debt countries, not the average figure that falls off a cliff.

In the same e-mail, Rogoff points out that 1 percent less GDP growth per year is a big deal. “Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.”

(Corrects spelling of George Shultz in fifth paragraph.)

The Obama administration's decision not to send any serving official to Margaret Thatcher's funeral today was a mistake.

And then there was one.

The European Central Bank is the last major central bank without an aggressive monetary easing program. The last few years of stuttering economic recovery have forced its counterparts -- the Bank of Japan, the Federal Reserve and the Bank of England -- one by one into action.

One problem that confounds economists and policymakers has been what to do about job polarization: the phenomenon, over the last three decades, of a declining number of "middle-skill" jobs and their replacement with growth in high- and low-skill occupations. While 59 percent of those employed had middle-skill jobs in 1983, only 45 percent did by 2012. This trend increases income inequality and leaves workers without the education or ability to perform high-skill work with fewer, and grimmer, job opportunities.

Many observers (including me) have tended to assume this phenomenon was driven mainly by sectoral changes in the economy: Manufacturing and related industries tend to require a lot of middle-skill workers, while service industries are more dependent on high- and low-skill workers. That assumption also shows up in the political discussion of job polarization. President Barack Obama's administration has focused specifically on expanding manufacturing employment as part of an effort to create more middle-class jobs.

(Corrects amount of South Korean exports in description of second chart.)

The U.S. Treasury on Friday issued a warning to Japanese policymakers "to refrain from competitive devaluation and targeting its exchange rate for competitive purposes." The warning was prompted by the Bank of Japan's commitment to a new inflation target and a much larger balance sheet. My colleague Caroline Baum has already noted the strangeness of the U.S. statement, given that the Japanese government is merely doing what U.S. academics have been recommending for more than 15 years.

After receiving criticism for declining to use the word "terrorism" in his first response to the Boston marathon bombing, President Barack Obama invoked the term today, saying "any time bombs are used to target innocent civilians it is an act of terror."

Actually, that's not right. The U.S. federal code and the Federal Bureau of Investigation both include in their definitions of terrorism an element of political motivation.

There's a fad at the moment for jokey versions of the famous World War II "Keep Calm and Carry On" poster, which the 1939 British government printed to reassure the public after the start of German air raids.

A little stiff upper lip is in order after the bombings in Boston because London stages its own annual marathon on April 21, with 37,000 runners expected to take part. And before that, tomorrow, the city will host a massive funeral procession for Margaret Thatcher.

The Boston Marathon bombing, juxtaposed with the mass murder at Sandy Hook Elementary School in Newtown, Connecticut, reveals an ideological component to the way Americans assess risk. In particular, Americans' tolerance of mayhem and death varies depending on the source of the violence.

The Wall Street Journal editorial page, for example, was quick to revisit old fears about foreign terrorism in the wake of the Boston attack:

Iran suffered a massive 7.8 magnitude earthquake this morning -- one more demonstration of why the country's nuclear program is an albatross it should shed.

Just last week, that a smaller 6.1 magnitude quake hit 100 miles from Iran's only nuclear plant, Bushehr on the Persian Gulf, killing 37 people and injuring 950. Fortunately, that quake was too small to damage the Bushehr reactor and today's was too far away, on the border with Pakistan.

Banks and financial companies tend to die in one of two ways: from cancer or from a heart attack.

When a firm has cancer, its assets -- loans, securities and other investments -- either aren't repaid or turn out to be worth less than expected. Losses erode capital, leading to insolvency. To help avoid this, banks should hold more capital than regulations now require.

(Corrects government reference to recount in second paragraph.)
Never mind the toxic felicitations from democratic paragons like Belarus's Aleksandr Lukashenko and Russia's Vladimir Putin. One of the most telling responses to Nicolas Maduro's victory in Venezuela's presidential election yesterday came from Diosdado Cabello, his fellow Chavista and president of the National Assembly. Speaking of Maduro's less than two percent margin of victory -- the narrowest win in a Venezuelan presidential contest since 1968 -- Cabello tweeted that "the results oblige us to make a profound self-criticism."

The comment by Cabello, an internal rival with strong ties to the military and business, points to the political challenges facing President-elect Maduro and augurs for a rough, unpredictable period ahead. Even with huge support from the military and government, Maduro barely eked out a win. (Opposition candidate Henrique Capriles Radonski has demanded a recount that Maduro, after earlier accepting in principle, is now rejecting.) To secure his legitimacy moving forward, Maduro may feel that he has to out-Chavez Chavez, cracking down on an emboldened opposition, swatting at the U.S. and cozying up closer to China and Iran, expropriating more companies and shutting down the media. Reflecting the prospect of instability, Venezuelan bonds were Latin America's worst performing securities last month, and fell on news of Maduro's election.

The European Union's antitrust authority just accomplished what the U.S. Federal Trade Commission concluded in January it could not: It partially pried Google Inc.'s hands off the Internet steering wheel.

To settle an antitrust investigation, Google is agreeing to distinguish between its own services and those of competitors in search results, Bloomberg News reports. This will slow -- though not stop -- the digital economy's gatekeeper from leveraging its dominance in search into market power in other areas.

Why did regulators need to wreck John Thomas Financial Inc.? Because it's wreckable, as Gordon Gekko said in the movie "Wall Street."

The Financial Industry Regulatory Authority filed a complaint today accusing John Thomas and its chief executive, Anastasios "Tommy" Belesis, of fraud. The Securities and Exchange Commission previously had sued Belesis and his New York-based firm; they have denied all wrongdoing.

(Corrects spelling of Mustafa Kemal Ataturk in fifth paragraph.)

If only it were a shock. A Turkish court today convicted the country's best-known classical pianist and composer, Fazil Say, for inciting hatred and insulting Islam.

For over two decades, economic policymakers in developed countries have been telling Japan to get its act together. The once-great nation that was going to eat the U.S.'s lunch pretty much fell off the global map after its real estate and stock market bubbles burst in 1989.

The problem, according to the diagnosticians, is chronic deflation, or falling prices. The cure? More money.

The most effective way to block any measure in the European Union is to say it requires a treaty change. This is the sucker punch German Finance Minister Wolfgang Schaeuble delivered at an April 13 meeting with his EU counterparts in Dublin.

According to Schaeuble, the EU can't make more progress towards setting up a banking union within the existing EU treaties. Germany says that a treaty change is needed to properly separate the banking supervision and monetary policy sides of the European Central Bank, once the ECB takes over supervisory duties for all 17 euro area countries.