WARNING: Individual Research Findings and Economic Models May Not Be Fully Grounded

Reposted from Legal Planet. A couple of weeks ago, a major paper on the economics of government deficits turned out to have huge flaws. Matt Kahn and Jonathan Zasloff have already had something to say about this, but I'd like to add some thoughts about the implications for environmental issues."Interesting," you say, "But what does that have to do with the environment?" I see two big lessons. The first lesson is about the danger of overreacting to a dramatic research finding, especially when you really want to believe it because it confirms what you thought all along. The second lesson is about how little economists know about the functioning of the economic system as a whole, as compared with their understanding of how individual pieces of the economy work. This is really important for large-scale issues like climate change. I'd suggest use of the warning on the left by journals in the future. More about all of this after the jump. The paper in question purported to show that there's a kind of deficit cliff - when government debt hits 90% of GDP, the bottom drops out of economic growth. As a new paper showed, that finding had fatal flaws. Due to a spreadsheet error, five countries were left out of the analysis. Also, the results were pretty much driven by a single bad year in New Zealand, when government debt was very high and the economy was doing very badly. (This was partly because the researchers only included that one year out of New Zealand's history, maybe due to data availability, and also weighted each country equally no matter how many episodes of high debt they had or how they lasted). An additional problem is that the paper appeared in the American Economic Review, a very distinguished, peer-reviewed journal - but it turns out that the specific issue containing conference papers isn't peer-reviewed, unknown to many of us.