Friday, April 19, 2013

SimCity vs Reinhart&Rogoff

Electronic Arts released SimCity 5 about a month ago in, what has to be called, one of the most botched software releases of all time. By releasing the product before it was ready, EA did irreparable damage to the game and their brand. EA is sitting on a pile of money and therefore has the opportunity to make things right...

Reinhart and Rogoff do not have such a luxury after their equally colossal mistake.

These Harvard academics made the statistical case for nations to practice austerity during the crisis or else do permanent harm to their economies (as opposed to the temporary harm of current high unemployment). They became the focal point of pro-austerity politicians around the globe.

They showed that debt-to-GDP ratios of above 90 percent slowed economic growth by approximately 1 percentage point a year. Historic trends indicate that developed economies grow at an annual three percentage points. Their findings indicated that: by growing debt more than 90 percent of GDP, developed economies could permanently lower their GDP growth by a third. Ouch.

It is a theory that sounds like it would be true. Too much debt means too much money is spent paying interest rather than investing in the real economy. It's true for households, why wouldn't it be true for national economies as well? The only problem was that no other academics could replicate their findings.

After public pressure built for them to release their data in their defense, they did. Lo and behold, their whole findings were dependent on coding errors in Excel. The biggest being that they accidentally dis-included five countries from their sample. When these cases are added back in, the conclusion drastically changes. Debt-to-GDP has zero correlation to the growth rate of the real economy. Oops.

This excel mistake not only has undone their study, as well as permanently tarnishing their reputations  but it also has undone the entire academic case for practicing austerity. The IMF has ditched austerity in favor of pro-growth policies.

Morale of the story: Make sure your product is bug-free before you release it to the public. If it is released with errors, it is going to do much more damage than you realize.

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