Dodgy Academic Papers - the link between Austerity and MMR

 

Both sagas have their roots in dodgy academic papers, the agenda-pushing press and politicians – and willing believers

• 
• • Aditya Chakrabortty
  • The Guardian, Monday 29 April 2013 19.11 BST

A measles outbreak in Swansea has affected 900 people. Photograph: Alamy

Dodgy research pushed by publicity-happy academics. False claims burnished into golden truths by irresponsible newspapers, apparently trying their hardest to manufacture a panic. Finally, the repercussions: bad decisions and, years later, huge worries about the harm posed to the public.

I'm describing the MMR scandal, the story of how one paper published in a top medical journal prompted a mass scare about a possible link between the triple jab and autism, and led to around one million children being deprived of full vaccinations against measles, mumps and rubella. It's been in the news again this week, following a measles outbreak in Swansea affecting 900 people, and worries that London may be next.

Yet listening to the radio discussions, a feeling nagged at me. Didn't this saga, with its origins going back more than a decade, sound similar to a more recent episode in a different field – the economics of austerity? Over the past fortnight, an academic paper regularly used by George Osborne to justify his cuts, public-sector redundancies and tax hikes has also been exposed as riddled with errors and dubious statistics.

At first, I'll admit, the comparison felt like too much of a stretch. On the one hand, there was Andrew Wakefield, the MMR heretic whose image would regularly flicker up on the 10 O'Clock News; on the other, there was Carmen Reinhart and Ken Rogoff, two Harvard economists of great renown – but hardly box-office. Wakefield was struck off for malpractice; Reinhart and Rogoff are guilty of no such breaches and their book on banking crises, This Time Is Different, will be considered a classic. MMR was a scare foisted on New Labour (remember those stories about whether baby Leo Blair had been injected?), which it had to defuse; this coalition has pushed austerity. The MMR debate boiled down to a question raised by every parent: should I vaccinate my child? The arguments about austerity can't be rendered in personal terms.

So much for the obvious caveats (there's one more, which I'll come to later). Yet whenever I raised the comparison with colleagues or others who had watched the cuts debate, nearly all saw the parallels. At the root of both sagas lies research, heavily contested then and now discredited, but given excessive credibility by outsiders in politics or the press – and used to push distinct agendas. That public-health scare from the turn of the noughties, and this public-finance panic from the start of this decade share common themes. Combined, we could call these lessons: how to flog a terrible idea.

Lesson 1: Have a suspicious public

For a terrible idea to take flight, the public must be in a receptive mood. The MMR scare was preceded by the mad-cow scandal, in which the government had kept insisting that British beef was safe. The arguments over austerity followed on the great bust of 2007-8 – and hadn't then-prime minister Gordon Brown promised to abolish boom and bust? In both cases, the press had been gulled by the official expertise. Do you remember those spreads in the Daily Mail about the coming chaos at RBS? No, I don't either.

Lesson 2: Bad ideas sound like common sense

The press had trusted establishment scientists and the economic technocrats; by the time MMR and the banking bust came along there was a market for policies that sounded easy to understand. So David Cameron really could get away likening the British economy to a household that had maxed out its credit card. It was nonsense, of course, but it was easy to understand nonsense. Unlike Bloomsbury-style Keynesianism, which was much more sensible amid a slump but was treated as far-out science to do with money supplies and fiscal multipliers.

Lesson 3: Bad ideas need strong supporters

My memories of the MMR story were to do with Wakefield. But when academics Tammy Speers and Justin Lewis looked at the news stories, they found that Wakefield got fewer mentions than baby Leo. The scare about MMR was never centred around a paper in the Lancet; rather, the research was recruited into the service of a general scare. That goes much more so for austerity, where the government here and the European troika used available research to push the cause of cuts and lay-offs. The Reinhart-Rogoff paper was published two years after Osborne had adopted austerity as his policy; academia provided justification, but they didn't change minds. And austerity has been fully cloaked in the language of morality: of debt being a bad thing, of southern Europeans being feckless.

The final caveat is: pure science lays much more emphasis on reproducing tests to see if the results bear up; macroeconomists can't run big experiments on entire countries to see which policies work, meaning that fights in the dismal science are necessarily more ideological (however disguised) than methodological. Yet so many economists hanker after hard science status there's even a term for it: "physics envy". Indeed, that key finding from Reinhart-Rogoff – that countries with debt of more than 90% of their GDP experience sharply slower growth – sounds like something you'd hear at the back of a school lab. But it isn't a rule at all: high debt can mean slow growth, but obviously so too can slow growth produce high debt. Still, whether MMR or austerity, the bottom line in both is that plausible science can make bad decisions seem sensible. When the science no longer seems implausible, the game is up. Wakefield was rumbled; slowly but surely the same is happening to the austerity-mongers.

Beware the nostrums of economists

 

T. T. RAM MOHAN

 

TOPICS

economy, business and finance

Politicians should not fall for the economic fad of the day. Policies should be subjected to democratic processes and be responsive to people’s aspirations

“The ideas of economists,” John Maynard Keynes famously wrote, “… are more powerful than is commonly understood. Indeed the world is ruled by little else.” He might have added that the ideas of economists can often be dangerous. Policies framed on the basis of the prevailing or dominant economic wisdom have often gone awry and the wisdom was later found to rest on shaky foundations.

A striking case in point is the debate on austerity in the Eurozone as an answer to rising public debt and faltering economic growth. One school has long argued that the way to reduce debt and raise the growth rate is through austerity, that is, steep cuts in public spending (and, in some cases, higher taxes). This school received a mighty boost from a paper published in 2010 by two economists, Carmen Reinhart and Kenneth Rogoff (RR). The paper is now at the centre of a roaring controversy amongst economists.

The RR paper showed that there is a correlation between an economy’s debt to GDP ratio. As the ratio rises from one range to another, growth falls. Once the debt to GDP ratio rises beyond 90 per cent, growth falls sharply to -0.1 per cent. For some economists and also for policymakers in the Eurozone, this last finding provided an ‘aha’ moment.

CUTS IN SPENDING

Since public debt was clearly identified as the culprit, it needed to be brought down through cuts in spending. The IMF pushed this line in the bail-out packages it worked out for Greece and Portugal among others. The U.K. chose to become an exemplar of austerity of its own accord.

It now turns out that there was a computational error in the RR paper. Three economists at the University of Massachusetts at Amherst have produced a paper that shows that the effect of rising public debt is nowhere as drastic as RR made it out to be. At a debt to GDP ratio of 90 per cent, growth declines from an average of 3.2 per cent to 2.2 per cent, not from 2.8 per cent to -0.1 per cent, as RR had contended.

You could say that even the revised estimates show that growth does fall with rising GDP. However, as many commentators have pointed out, correlation is not causation. We cannot conclude from the data that high debt to GDP ratios are the cause of low growth. It could well be the other way round, namely, that low growth results in a high debt to GDP ratio.

There is a broad range of experience that suggests that high debt to GDP ratios are often self-correcting. Both the U.S. and the U.K. emerged from the Second World War with high debt to GDP ratios. These ratios fell as growth accelerated in the post-war years. India’s own debt to GDP ratio kept rising through the second half of the 1990s and the early noughties. As growth accelerated on the back of a global boom, the ratio fell sharply. The decline in the ratio did not happen because of expenditure compression, which the international agencies and some of our own economists had long urged.

NEEDED, RETHINK

The controversy over the RR paper should prompt serious rethinking on austerity in the Eurozone. Many economists have long argued that the sort of austerity that has been imposed on some of the Eurozone economies or that the U.K. has chosen to practise cannot deliver higher growth in the near future. It only condemns the people of those economies to a long period of pain.

The IMF itself has undergone a major conversion on this issue and is now pressing the U.K. to change course on austerity. Its chief economist, Olivier Blanchard, went so far as to warn that the U.K. Chancellor, George Osborne, was “playing with fire.” The IMF’s conversion came about late last year when it acknowledged that its own estimates of a crucial variable, the fiscal multiplier, had been incorrect. In its World Economic Outlook report published last October, the IMF included a box on the fiscal multiplier, which is the impact on output of a cut or increase in public spending (or an increase or reduction in taxes). The smaller the multiplier, the less costly, in terms of lost output, is fiscal consolidation. The IMF had earlier assumed a multiplier for 28 advanced economies of around 0.5. This would mean that for any cut in public spending of X, the impact on output would be less than X, so the debt to GDP ratio would fall.

REVISED ESTIMATE

The IMF now disclosed that, since the sub-prime crisis, the fiscal multipliers had been higher — in the range of 0.9 to 1.7. The revised estimate for the multiplier meant that fiscal consolidation would cause the debt to GDP ratio to rise — exactly the opposite of what policymakers in the Eurozone had blithely assumed. The people of Eurozone economies that have seen GDP shrink and unemployment soar are unlikely to be amused by the belated dawning of wisdom at the IMF.

This is not the first time the IMF has made a volte face on an important matter of economic policy. Before the East Asian crisis and for several years thereafter, the IMF was a strong votary of free flows of capital. During the East Asian crisis, many economists had pointed out that the case for free flows of capital position lacked a strong economic foundation, unlike the case for free trade. This did not prevent the IMF from peddling its prescription to the developing world. India and China refused to go along.

In 2010, the IMF discarded its hostility to capital controls. It said that countries would be justified in responding to temporary surges in capital flows. A year later, it took the position that countries would be justified in responding to capital surges of a permanent nature as well. Last December, it came out with a paper that declared that there was “no presumption that full liberalisation is an appropriate goal for all countries at all times.” The IMF’s realisation was a little late in the day for the East Asian economies and others whose banking systems have been disrupted by volatile capital flows.

Capital account convertibility is one instance of a fad in policy catching on even when it lacked a strong economic foundation. Another is privatisation, for which Margaret Thatcher has been eulogised in recent weeks. Thatcher’s leap into privatisation in the U.K. was driven by her conviction that the state needed to be pushed back. After privatisation became something of a wave, economists sought to find theoretical and empirical grounds for it and initially came out overwhelmingly in favour.

GRADUATED APPROACH

It took major mishaps in privatisation in places such as Russia and Eastern Europe for the conclusions to become rather more nuanced. Privatisation works in some countries, in some industries, and under conditions in which law and order, financial markets and corporate governance are sound. Moreover, partial privatisation — or what is called disinvestment — can be as effective as full privatisation. As in the case of capital account convertibility, India’s graduated approach to liberalisation has been vindicated. It is, perhaps, no coincidence that the fastest growing economies in the world until recently, China and India, did not embrace the conventional wisdom on privatisation.

Other fads have fallen by the wayside or are seen as less than infallible since the sub-prime crisis, and these relate to the financial sector. ‘Principles-based’ regulation is superior to ‘rule-based’ regulation. The central bank must confine itself to monetary policy and regulatory powers must be vested in a separate authority. Monetary policy must focus on inflation alone and must not worry about asset bubbles and financial stability. One can add to this list.

What lessons for policymaking can we derive from the changes in fashion amongst economists? Certainly, one is that politicians and policymakers must beware the nostrums of economists, and they must not fall for the economic fad of the day. Economic policies must always be subject to democratic processes and be responsive to the aspirations of people. Broad acceptability in the electorate must be the touchstone of economic policies. Another important lesson is that gradualism is preferable to ‘big bang’ reforms.

India’s attempts at liberalisation, one would venture to suggest, have conformed to these principles better than many attempted elsewhere. Such an approach can mean frustrating delays in decision-making and the results may be slow in coming. However, social turbulence is avoided, as are nasty surprises, in economic outcomes. At the end of the day, economic performance turns out to be more enduring.

(The author is a professor at IIM Ahmedabad; ttr@iimahd.ernet.in)