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In the Washington Post , Lawrence Summers weighs in on the now infamous Rogoff-Reinhart coding error . Summers seems a bit annoyed at both those people who don't see the error as a big deal, and those who are "taking joy" in Rogoff and Reinhart's mistake. Summers: Where should these debates settle? As someone who has done a fair amount of econometric research, consumed such research as a policymaker and participated (as an advocate) in debates about fiscal stimulus and austerity, these would be my takeaways: First, this experience should accelerate the evolution of mores with respect to economic research. Rogoff and Reinhart are rightly regarded as careful, honest scholars. Anyone close to the process of economic research will recognize that data errors like the ones they made are distressingly common. Indeed, the JP Morgan risk models in use when the London “whale” trade was placed appear to have had errors similar to those made by Reinhart and Rogoff. Going forward, authors, journals and commentators need to devote more effort to replicating significant results before broadcasting them widely. More generally, no important policy conclusion should ever be based on a single statistical result. Policy judgments should be based on evidence accumulated from multiple studies done with differing methodological approaches. Even then, there should be a reluctance to accept conclusions from “models” without an intuitive understanding of what drives them. It is understandable that scholars want their findings to inform policy debates. But they have an obligation to discourage and on occasion contradict those who would oversimplify and exaggerate their conclusions. Second, all participants in policy debates should retain a healthy skepticism about retrospective statistical analysis. Trillions of dollars have been lost and millions of people have become unemployed because the lesson learned from 60 years of experience between 1945 and 2005 was that “American house prices in aggregate always go up.” This was no data problem or misanalysis. It was a data regularity until it wasn’t. The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care. In retrospect, it was folly to believe that with data on about 30 countries it was possible to estimate a threshold beyond which debt became dangerous. Even if such a threshold existed, why should it be the same in countries with different currencies, financial systems, cultures, degrees of openness and growth experiences? And there is the chestnut that correlation does not establish causation and so any tendency for high debt and low growth to go together might well reflect the debt accumulation that follows from slow growth. Read Lessons can be learned from Reinhart-Rogoff error here .

Carmen Reinhart and Kenneth Rogoff 's paper, Growth in a Time of Debt , has been required reading for policy makers in developed economies, and it is seen as highly influential in the debate over austerity. After the authors' methods were called into question, Rogoff and Reinhart looked over their work, and found an error. But they still stand by their conclusions (FT, sign-in required). Thomas Herndon , Michael Ash , and Robert Pollin are the economists who highlighted some key issues with Reinhart and Rogoff's work. In Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff , the authors write that they "find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics." Here is a sample of their critique: To build the case for a stylized fact, RR stresses the relevance of the relationship to a range of times and places and the robustness of the rounding to modest adjustments of the econometric methods and categorizations. The RR methods are non-parametric and appealingly straightforward. RR organizes country-years in four groups by public debt/GDP ratios, 0{30 percent, 30{60 percent, 60{90 percent, and greater than 90 percent. They then compare average real GDP growth rates across the debt/GDP groupings. The straightforward non-parametric method highlights a nonlinear relationship, with effects appearing at levels of public debt around 90 percent of GDP. We present RR's key results on mean real GDP growth from Figure 2 of RR 2010a (below) and Appendix Table 1 of RR 2010b in Table 1 (here). Figure 2 in RR 2010a and the first line of Appendix Table 1 in RR 2010b in fact do not match perfectly, but they do deliver a consistent message about growth in time of debt: real GDP growth is relatively stable around 3 to 4 percent until the ratio of public debt to GDP reaches 90 percent. At that point and beyond, average GDP growth drops sharply to zero or slightly negative. A necessary condition for a stylized fact is accuracy. We replicate RR and that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and growth among these 20 advanced economies in the post-war period. Our most basic finding is that when properly calculated, the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0:1 percent as RR claims. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when public debt/GDP ratios are lower. Download the paper here .

Things are looking up in Japan, as businesses in the world's third largest economy gain confidence in the economic policies of the Abe government . At The Guardian , Joseph Stiglitz gives Abe credit for tackling big structural challenges that have been holding back growth. And, Stiglitz writes that Japan could become a "ray of light" for advanced economies: Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive programme entailing monetary, fiscal, and structural policies. Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can. The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as president of the Asian Development Bank. During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US treasury and the International Monetary Fund. Not wedded to central bankers' obsolete doctrines, he has made a commitment to reverse Japan's chronic deflation, setting an inflation target of 2%. Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant. Kuroda's stance has already weakened the yen's exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary policy interdependence: if the US Federal Reserve's policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Some day, we might achieve closer global monetary-policy co-ordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere. Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners' refinancing problems, even at lower interest rates, or small and medium-size enterprises' lack of access to financing. Japan's monetary policy, one hopes, will focus on such critical issues. But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: how would Japan's economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. Second, anyone visiting Japan recognises the benefits of its infrastructure investments (America could learn a valuable lesson here). The real challenge will be in designing the third arrow, what Abe refers to as "growth". This includes policies aimed at restructuring the economy, improving productivity, and increasing labour-force participation, especially by women. Read Japan banks on success of Abenomics here .

At the Liberty Street Economics blog, New York Fed vice president Kenneth Garbade takes us into the Wayback machine so we can look at the nation's "first debt ceiling crisis." In 1951, debt began moving up closer and closer to the debt ceiling: Come 1953, the federal government had a problem to solve. Corporate tax receipts in the spring of 1953 saw the Treasury comfortably through the first six months of the year, but officials knew that receipts would drop off in the fall. On June 3, Secretary of the Treasury George Humphrey testified before the House Ways and Means Committee that he expected to have to borrow between $9 billion and $12 billion of new money before the end of the year. Treasury debt at the time amounted to $266 billion and officials speculated that Congress might have to raise the debt ceiling. Reaction to the prospect of an increase in the debt ceiling was swift and sharp. Senator Harry Byrd of Virginia, a prominent conservative, declared that, in order to pressure the new Eisenhower Administration to cut spending and restore a balanced budget, he would do “everything in [his] power” to block an increase. The Wall Street Journal opined on its editorial page that “to impose a limit on the government’s debt and then to change it the moment it begins to squeeze makes of the whole thing a trick for fooling people.” On July 1, the Treasury announced a record peacetime deficit of $9.4 billion for the fiscal year just ended —$3.5 billion more than had been projected six months earlier. Secretary Humphrey noted that “difficulties of this size cannot be cured overnight,” and that “many months” of effort would be required “to get the situation under control.” To cope with the looming autumnal decline in tax receipts, on July 6 the Treasury offered for sale at par about $5½ billion of eight-month tax anticipation certificates. It received subscriptions for more than $8½ billion of the certificates and ultimately sold $5.9 billion. More would surely be needed, but by the end of July there was only $2.9 billion of headroom remaining below the debt ceiling. On July 30, one day before Congress planned to adjourn, President Eisenhower asked Congress to approve a $15 billion expansion in the debt limit, to $290 billion. The House of Representatives quickly approved the request (on a vote of 239 to 158) but, despite the testimony of Secretary Humphrey that failure to raise the debt ceiling could lead to “near panic,” the Senate Finance Committee pigeon-holed the initiative. Congress adjourned without taking action, leaving Administration officials to manage as best they could. Read the full history lesson here .

How would you like to save a trillion dollars a year? One thing, you have to spend a bunch of money on a bunch of projects you have been putting off. That's the opportunity and challenge global policy leaders are facing when it comes to infrastructure, according to a report from the McKinsey Global Institute . In order to just keep up with global economic growth, government spending has to reach new highs at a time when politics is pushing many key economies toward cuts. From the report: The McKinsey Global Institute (MGI) estimates $57 trillion in infrastructure investment will be required between now and 2030—simply to keep up with projected global GDP growth. This figure includes the infrastructure investment required for transport (road, rail, ports, and airports), power, water, and telecommunications. It is, admittedly, a rough estimate, but its scale is significant—nearly 60 percent more than the $36 trillion spent globally on infrastructure over the past 18 years. The $57 trillion required investment is more than the estimated value of today’s worldwide infrastructure.1 Even then, this amount would not be sufficient to address major backlogs and deficiencies in infrastructure maintenance and renewal or meet the broader development goals of emerging economies. Moreover, the task of funding the world’s infrastructure needs is more difficult because of constraints on public-sector budgets and commercial debt in the wake of the financial crisis, higher and more volatile resource costs, and the additional costs of making infrastructure resilient to climate change and less harmful to the environment. The size of the infrastructure “gap” and the undoubted challenges there are in finding the financing necessary to close it dominate political and public discussion on this topic. Yet this focus diverts attention from what we believe is just as compelling and urgent an issue—how the world can get more, better-quality infrastructure for less. This report focuses on rethinking how governments, together with the private sector, select, design, deliver, and manage infrastructure projects, and make more out of the infrastructure already in place. We argue that there is an emerging opportunity to raise the productivity of infrastructure investment by a substantial margin. Based on McKinsey & Company’s work with governments and private-sector infrastructure players around the world, an extensive literature review, and drawing on insights from more than 400 case examples, we project that if infrastructure owners around the world were to adopt proven best practice, theycould increase the productivity of infrastructure investment to achieve savings of 40 percent. Put another way, scaling up best practice could save an average of $1 trillion a year in infrastructure costs over the next 18 years. While a 40 percent saving is an extrapolation that uses several simplifying assumptions, we believe a productivity boost of this magnitude is achievable in many countries if they are willing to invest in a systematic approach to infrastructure that drives improvement across agencies and private-sector owners and contractors. The measures that we discuss are not about inventing a completely new approach to infrastructure— what we propose is simply rolling out proven best practice on a global scale. Here is a breakdown of the key sectors where the report argues infrastructure is needed: Read the full report here .

The Economist opened 2013 by poking fun at Washington politics (easy target, we know). The cover of the British magazine's first issue of the year featured John Boehner wearing lederhosen and Barack Obama dressed in classic Parisian garb, following the last minute deal between the Speaker of the House and the President that avoided the so-called fiscal cliff. The point, if not clear enough, was that America's policy makers turned to European style economic solutions. Economist editors explain themselves in this short video .

The Organisation for Economic Co-operation and Development (OECD) is projecting another year of slow growth--about 1.4% across OECD member nations--for 2013. But if all goes well, meaning Europe's struggles don't get worse, growth will rise to 2.3% for 2014. Here is a look the projections for real GDP growth across regions: From the OECD release: In the United States, provided the “fiscal cliff” is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014. After softer-than-expected activity during 2012, growth has begun picking up in the emerging-market economies, with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand. China is expected to grow at 8.5% in 2013 and 8.9% in 2014, while GDP is also expected to gather steam in the coming years in Brazil, India, Indonesia, Russia and South Africa. Labour markets remain weak, with around 50 million jobless people in the OECD area, the Outlook said. Unemployment is set to remain high, or even rise further, in many countries unless structural measures are used to boost near-term employment growth. The euro area crisis remains a serious threat to the world economy, despite recent measures that have dampened near-term pressures. Adjustment of deep-rooted imbalances across the euro area has begun, but much more is needed to ensure long-term sustainability, including structural reform in both deficit and surplus countries. The OECD provides a helpful summary of the report's key findings in this video: You can read more from the Economic Outlook here .