|"I was VP of my college Economics club!"|
"This is a mistake that has had enormous consequences," wrote Dean Baker of the Center for Economic and Policy Research. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."
The new paper, by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst, set out to reconstruct the findings of an influential 2010 paper by Reinhart and Rogoff, called "Growth In A Time Of Debt." Reinhart and Rogoff, of the University of Maryland and Harvard, respectively, claimed that economic growth slowed fairly dramatically for countries whose public debt crossed a threshold of 90 percent of gross domestic product.
The problem is that other economists have been unable to recreate Reinhart and Rogoff's findings. Herndon, Ash and Pollin now say they were able to do so -- but only by leaving out big, important pieces of data. Using the same spreadsheet that Reinhart and Rogoff used for their research, Herndon, Ash and Pollin found that "Growth In A Time Of Debt" was built around a handful of significant errors. Correcting for those errors changed the findings dramatically-- average GDP growth for high-debt countries jumps from negative 0.1 percent to a positive 2.2 percent.
The most important error was a failure to include years of data that showed Australia, Canada and New Zealand enjoying high economic growth and high debt at the same time. Including all years of economic data boosts New Zealand's average economic growth rate under high debt to positive 2.58 percent (from negative 7.6 percent). Given the small amount of data used in Reinhart and Rogoff's original (flawed) study, this correction had a huge impact on the overall findings.
Shockingly, another error seems to be a simple failure to use an Excel spreadsheet correctly, as highlighted by economist Mike Konczal at the Roosevelt Institute's Next New Deal blog. In building a formula to calculate average economic growth rates, Reinhart and Rogoff appeared to leave off several lines of data in their original spreadsheet (oops!).
"We literally just received this draft comment, and will review it in due course," Reinhart and Rogoff lamely responded this week.
Even before the errors cited in the new study came to light, many economists doubted Reinhart and Rogoff's conclusion that high debt causes low growth, given the glaring chicken-and-egg problem at the heart of the research. Did these countries have slow growth because they had high debt, or did they have high debt because they had slow growth?
Beyond that, Baker notes, there were lots of other reasons to question Reinhart and Rogoff, including the fact that their gloomy conclusions about debt relied heavily on slow U.S. economic growth immediately after World War II. At the time, the U.S. was deep in war debt and dismantling its war machine. That relatively brief state of affairs was quickly followed by arguably the greatest economic boom in history.
Despite these questions, Reinhart and Rogoff's findings have been used frequently to justify austerity measures in the U.S. and Europe. Unsurprisingly, the 2012 version of the pro-austerity budget plan of Rep. Paul Ryan cites Reinhart and Rogoff by name. The GOP's myopic focus on government debt and budget deficits has contributed to severe cutbacks in government spending that have slowed economic growth and helped keep unemployment high. In Greece, austerity measures forced into place as condition of a bailout, has only resulted in slower growth and higher debt burdens.