Correlation doesn’t imply Causation: A Real World Example
On the first day of our
GCPP Workshop in Delhi, Pranay had asked us blog on a real world example of
correlation which doesn’t imply causation also known as the Oldest Mistake in
Public Policy (OMPP). The easiest and the most widely debated topic in this
context is the whole argument on economic growth versus government debt.
Economic growth and
government debt are correlated as the increase in rate of growth would generate
higher revenues for the government which in turn could be used to reduce the
debt burden. It can also be argued the other way round as well i.e. increase in
government debt leads to lower economic growth but this is not entirely true.
In 2010, American
Economists Carmen Reinhart and Kenneth
Rogoff published a paper titled
“Growth in a Time of Debt” in an issue of the American Economic Review.
[1] The paper contends that when gross debt of a country is 60% of its
GDP its growth rates falls by 2% and in those countries where gross debt is 90%
of its GDP the economic growth is roughly cut by half. This paper was being
cited as a justification for austerity programs in European countries with high
levels of government debt.
In 2013, a paper in the
Cambridge Journal of Economics criticized the assertion of Reinhert and Rogoff
citing flawed methodology as there were coding errors in the statistical
analysis and selective omission of data. [2]
This critique was
endorsed by Nobel Prize winning Princeton Economists Paul Krugman who wrote in
his New York Times Op-ed:
“Economic research, austerity advocates
insisted, showed that terrible things happen once debt exceeds 90 percent of
G.D.P. But “economic research” showed no such thing; a couple of economists
made that assertion, while many others disagreed. Policy makers abandoned the
unemployed and turned to austerity because they wanted to, not because they had
to.” [3]
Paul Krugman
further blogged providing data of G7 countries from 1950 to 2007, asserting
that Britain didn’t suffer much from the high debt levels in the 1950s whereas
Italy and Japan did. For Italy and more so with Japan it was slowing down of
the economy that increased government debt and not the other way around. [4]
References
[1] Carmen M Reinhart, Kenneth S Rogoff (2010).
"Growth in a Time of Debt". American
Economic Review. 100 (2): 573–78. Link: https://www.aeaweb.org/articles?id=10.1257/aer.100.2.573
[2] Thomas Herndon, Michael Ash, Robert Pollin. (2014). "Does
High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart
and Rogoff". Cambridge Journal of Economics. 38 (2): 257–279. Link:
https://academic.oup.com/cje/article-abstract/38/2/257/1714018/Does-high-public-debt-consistently-stifle-economic?redirectedFrom=fulltext
Comments
Post a Comment