FacebookTwitterGoogle+RedditEmail

The Great Spreadsheet Blunder

by

It has been a bit more than a year since the Excel Spreadsheet error that shook the world. For those who may have missed it, in April of 2013, Thomas Herndon, a University of Massachusetts graduate student in economics, found an error in the calculations of Harvard Professors Carmen Reinhart and Ken Rogoff on the relationship between government debt and economic growth.

Reinhart and Rogoff had done analysis showing that countries experienced sharply slower growth once their debt to GDP ratio exceeded 90 percent. With the United States and many European countries reaching debt to GDP ratios in this 90 percent range, Reinhart-Rogoff’s work was seen as a warning alarm. It was taken as providing evidence that they would have to reduce spending and/or raise taxes to get or stay below the 90 percent cutoff.

Political leaders and central bankers around the world were happy to trumpet the Reinhart-Rogoff findings. The story was that cutting deficits may slow growth in the short-term, and seriously hurt those directly affected by the cuts such as laid off government workers, but it was essential medicine for sustaining a healthy economy.

The spreadsheet error uncovered by Herndon, and analyzed in a paper co-authored with two University of Massachusetts professors, Michael Ash and Robert Pollin, showed that the Reinhart and Rogoff story was not true. Working off the spreadsheet that Reinhart and Rogoff had created, they showed there was no 90 percent cliff. Reinhart and Rogoff’s cliff depended both on the spreadsheet error and also a peculiar way of aggregating growth rates across countries.

If the numbers were entered correctly and added up across countries with more typical methods, growth did not fall off steeply for debt levels above 90 percent. The data still showed a negative relationship with higher debt levels associated with lower growth rates, but the sharpest reduction in growth rates occurred with debt levels of less than 30 percent. That was a very different story than what Reinhart and Rogoff were telling publicly and presumably also in private meetings with central bankers, finance ministers, and members of Congress.

Perhaps even more importantly, a number of analyses looked at the direction of causation between growth and debt. While Reinhart and Rogoff never directly tested for causation, they certainly implied that the causation went from high debt to low growth rates.

Following the discovery of the spreadsheet error several papers analyzed the Reinhart-Rogoff data and found that the causation went almost entirely from slow growth to high debt. In other words the story was not that countries ran up big debts and then their economies stopped growing. The story was that countries that had serious growth problems tended to run larger deficits to boost growth. Also, if an economy is growing rapidly, its debt to GDP ratio would decline (other things equal) as its GDP rose. When a country’s GDP is not rising much, it’s much harder to bring down the debt to GDP ratio.

With the academic basis for deficit reduction undermined by this new research, it might have been reasonable to expect there would be a renewed push for measures to stimulate the economy and reduce the high unemployment rates that plague most wealthy countries. However nothing like this happened. The push for deficit reduction in the United States and Europe went on just as it had before.

The one exception was Japan, where the government of Shinzo Abe embarked on an aggressive stimulus program. Abe took this path in spite of the fact that Japan has by far the highest debt to GDP ratio of any wealthy country. And Abe’s policies appear to have worked to date, as growth jumped and employment surged.

But Abe embarked on this path even before the spreadsheet error had come to light. The economics profession can’t claim that this new evidence was responsible for the change of policies in Japan.

There isn’t much that the economics profession can claim in this debate that makes it look very good. While there is now a large and growing body of evidence that larger budget deficits would boost growth and employment in the current economic environment, those in the political establishment in both Europe and the United States seem impervious to evidence at this point. They got all the evidence they needed when they had the Reinhart-Rogoff study they could cite. Now that it turns out that Reinhart and Rogoff were mistaken, they see no reason to re-examine their policies.

It is also instructive that Reinhart and Rogoff don’t seem to have suffered much in their professional standing. While both of them have produced a large body of research over their careers, so that their reputations did not rely on the 90 percent debt-to-GDP cliff, this was a rather egregious error. They justified their mistake by pointing out that it only appeared in a working paper that they had rushed to finish. A revised version of the paper included the correct numbers.

However they surely knew that the dramatic 90 percent cliff story from the original working paper was being used in policy debates around the world. Knowing that they had been rushed when they wrote that version of the paper, surely they had time in the subsequent 3 years until the error was discovered to go back and examine their work, or more likely have a research assistant re-examine their work. Obviously they never chose to do so. If either of them has suffered any professional consequence from this failure, it is difficult to see what it is.

Economics is a profession that fixates on the idea of getting incentives right. When two prominent economists can make a major error on work that had a huge impact on economic policy across the world, and face no real consequences, it says a great deal about the incentives in the economic profession.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This essay originally appeared in Al Jazeera.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

December 07, 2016
Clancy Sigal
Caution: Conspiracy Theory Ahead!
December 06, 2016
Anthony DiMaggio
Post-Fact Politics: Reviewing the History of Fake News and Propaganda
Richard Moser
Standing Rock: Challenge to the Establishment, School for the Social Movements
Behrooz Ghamari Tabrizi
Warmongering 99 – Common Sense 0: the Senate’s Unanimous Renewable of Iran Sanctions Act
Norman Solomon
Media Complicity is Key to Blacklisting Websites
Michael J. Sainato
Elizabeth Warren’s Shameful Exploitation of Standing Rock Victory
David Rosen
State Power and Terror: From Wounded Knee to Standing Rock
Kim Ives
Deconstructing Another Right-Wing Victory in Haiti
Nile Bowie
South Korea’s Presidency On A Knife-Edge
Mateo Pimentel
Some Notes and a Song for Standing Rock
CJ Hopkins
Manufacturing Normality
Bill Fletcher Jr – Bob Wing
Fighting Back Against the White Revolt of 2016
Peter Lee
Is America Ready for a War on White Privilege?
Pepe Escobar
The Rules of the (Trump) Game
W. T. Whitney
No Peace Yet in Colombia Despite War’s End
Mark Weisbrot
Castro Was Right About US Policy in Latin America
David Swanson
New Rogue Anti-Russia Committee Created in “Intelligence” Act
George Ochenski
Forests of the Future: Local or National Control?
December 05, 2016
Bill Martin
Stalingrad at Standing Rock?
Mark A. Lause
Recounting a Presidential Election: the Backstory
Mel Goodman
Mad Dog Mattis and Trump’s “Seven Days in May”
Matthew Hannah
Standing Rock and the Ideology of Oppressors: Conversations with a Morton County Commissioner
Kevin Zeese - Margaret Flowers
#NoDAPL Scores Major Victory: No Final Permit For Pipeline
Fran Shor
The End of the Indispensable Nation
Michael Yates
Vietnam: the War That Won’t Go Away
Michael Uhl
Notes on a Trip to Cuba
Robert Hunziker
Huge Antarctica Glacier in Serious Trouble
John Steppling
Screen Life
David Macaray
Trump vs. America’s Labor Unions
Yoav Litvin
Break Free and Lead, or Resign: a Letter to Bernie Sanders
Norman Pollack
Taiwan: A Pustule on International Politics
Kevin Martin
Nuclear Weapons Modernization: a New Nuclear Arms Race? Who Voted for it? Who Will Benefit from It?
David Mattson
3% is not Enough: Towards Restoring Grizzly Bears
Howard Lisnoff
The Person Who Deciphered the Order to Shoot at Kent State
Dave Archambault II
Standing Rock Sioux Tribe Statement on Dakota Access Pipeline Decision
Nick Pemberton
Make America Late Again
Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
FacebookTwitterGoogle+RedditEmail