An economic report that has been used frequently to justify austerity measures in the U.S. and Europe has one flagrant flaw: an Excel error.
The 2010 report by prominent U.S. economists Carmen Reinhart and Ken Rogoff, titled "Growth In A Time Of Debt," argues that national economies whose public debt rises above 90 percent of GDP are doomed to stagnate.
But when a team of economists at the University of Massachusetts, Amherst tried to duplicate the study using the spreadsheet that Reinhart and Rogoff used, they soon saw that the rationale for austerity relied on significant errors. For instance, five countries—Australia, Austria, Belgium, Canada, and Denmark—were mistakenly excluded from the Excel calculations.
As Mark Gongloff points out, the coding error, as well as numerous other questionable aspects of the research, changes the report's findings significantly:
The most important error appears to be 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 the years of data boosts New Zealand's average economic growth rate under high debt to 2.58 percent, from negative 7.6 percent. Given the small amount of data used in Reinhart and Rogoff's study, this has a huge impact on the overall findings.
How influential was the study? As Quartz' Tim Fernholz demonstrates, "Growth In A Time of Debt" was used liberally by U.S. and U.K. lawmakers to argue in favor for the necessity of austerity measures in a time of recession. Check out the abbreviated list below:
“It is widely acknowledged, based on serious research, that when public debt levels rise about 90% they tend to have a negative economic dynamism, which translates into low growth for many years.” — European Commissioner Olli Rehn.
“Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.” — House Budget Committee Chairman and former Republican vice-presidential candidate Paul Ryan.
“It’s an excellent study, although in some ways what you’ve summarized understates the risks.”— Former US Treasury Secretary Tim Geithner.
“We would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.” Lord Lamont of Lerwick, former UK chancellor and sometime adviser to current chancellor George Osborne.
According to Dean Baker of the Center for Economic and Policy Research, the economic policies that the report helped justify have pushed the unemployment rate over 10 percent for the Eurozone as a whole, and above 20 percent in Greece and Spain. In other words, says Baker, "This is a mistake that has had enormous consequences."
Please consider supporting our work.
I hope you found this article important. Before you leave, I want to ask you to consider supporting our work with a donation. In These Times needs readers like you to help sustain our mission. We don’t depend on—or want—corporate advertising or deep-pocketed billionaires to fund our journalism. We’re supported by you, the reader, so we can focus on covering the issues that matter most to the progressive movement without fear or compromise.
Our work isn’t hidden behind a paywall because of people like you who support our journalism. We want to keep it that way. If you value the work we do and the movements we cover, please consider donating to In These Times.
