How a Slip of the Finger Changed the Economic Policy Debate

Did a couple of economists' slip of the finger cause wrongheaded policy decisions?

FE_DA_130426EconomicGrowth.jpg

An error in an economic policy paper may invalidate some pro-austerity arguments.

By SHARE

Black is white, up is down, and high debt-to-GDP ratios may not, in fact, be correlated to negative economic growth.

That's a taste of what many economic policy wonks are feeling today. A new paper is blasting holes in what has been one of the most oft-cited findings of the post-recession period. And while it seems like a high-minded debate between eggheads, it's a discussion about the basic assumptions that underlie how—and even why—our politicians are tackling the nation's high deficits and debt.

[PHOTOS: Protests Against Austerity in Europe Escalate]

In a 2010 paper, economists Carmen Reinhart and Ken Rogoff, both of them highly respected academics currently at Harvard University, came to the conclusion that when debt-to-gdp ratios rise above 90 percent, "median growth rates fall by one percent, and average growth falls considerably more."

But now, a team of economists from the University of Massachusetts in Amherst have analyzed Reinhart and Rogoff's spreadsheets and found that a Microsoft Excel coding error, in addition to an odd weighting system and the exclusions of certain years of data for certain countries, invalidate Rogoff and Reinhart's findings. In fact, they find, economic growth tends to be positive for countries with debt-to-GDP ratios above 90 percent.

Why does it matter? As one economist put it in the title of a Tuesday blog post, "How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?"

"This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment," writes Dean Baker, codirector the left-leaning Center for Economic and Policy Research, in his blog post. "In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure."

[OPINION: How an Excel Error Helped Lead to Austerity]

Neither Reinhart nor Rogoff has yet responded to U.S. News requests for comment, but they did provide a response to the Wall Street Journal late Tuesday afternoon. The two economists point to a 2012 paper they wrote with Vincent Reinhart, former director of the Federal Reserve Board's Division of Monetary Affairs, in which they found high debt to be correlated with lower growth.

To say the economists' 2010 work was widely cited may be an understatement. It became a go-to source for some in the debate over deficits and a key point in Washington budget debates. Rep. Paul Ryan (R-Wis.) cited the paper in is Path to Prosperity budget proposal that would have drastically cut spending. Reinhart told the Senate Budget Committee in 2010 that debt-to-GDP levels are associated with lower growth. The paper was also often cited in debates over European austerity.

In addition, the paper was a favorite in the news media. On their website, Reinhart and Rogoff list nearly 80 news articles that cited the work over the course of just over a year. As recently as last week, Bloomberg cited the study in an article about debt and growth dynamics.

[BROWSE: Political Cartoons on the Economy]

Of course, the fact that a few economists found a flaw in a couple of other economists' research is not going to decisively sway the austerity debate one way or the other. Plenty of other papers and economists make the case for reducing deficits and debt over the long term.

But even for those who believe strongly in reining in spending, there are lessons to be found in the flawed research. One may be that single academic works should not be taken as gospel truth, because when those papers are found to be faulty, it turns established thinking on its head.

In addition, it's further encouragement for experts to vigorously question and scrutinize each other's research. Even without the Excel data, the Amherst economists point out, there were other reasons to question Reinhart and Rogoff's work. This may be seen as more reason for those who question seemingly bedrock conclusions to question more loudly.