It’s the Excel spreadsheet error that has economists and policymakers around the world in a tortured round of self-examination – and it involves some critical lost Australian data.
An influential economics paper published in 2010 titled Growth in a Time of Debt suggested there was a “tipping point” in the debt-to-GDP ratio where growth would suddenly stop.
When the debt level reached 90% of GDP, authors Reinhart and Rogoff found, growth slowed dramatically to -0.1%.
This “tipping point” has been cited widely in the US and Europe by policymakers who have trumpeted austerity measures as a way of steering countries out of recession. Pay down debt, the argument goes, and growth will return.
But a spectacular row has erupted over the usefulness of the Reinhart-Rogoff paper in informing policy decisions after its data were questioned in a response paper by Herndon, Ash, and Pollin (let’s call them HAP) who found some ugly errors in the calculations.
Among them were some mistakes in the Excel spreadsheets that led to the original findings. The authors have now admitted to the errors but the fuse was lit when Mike Konczal published this column that showed an actual screenshot of the error — the Excel blue box highlights formulas missing some data.
It might provide a chuckle, but the implications for some established arguments on managing public debt are a cause for anything but.
Explaining the influence of the original paper, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, said: “When Reinhart-Rogoff appeared a few years ago in the aftermath of the GFC, it added to the sense of gloom at the time. The fact that there was an error in the numbers would suggest that the gloom was overstated somewhat.
“I understand the principle [of not wanting to let public debt get out of hand] but the headlong rush to get it down in Europe can result in a far worse outcome compared to what has happened with the US, which has taken a more gradual approach,” Oliver told Business Insider.
Critically, the HAP paper found that when the spreadsheets are analysed correctly, there was no dramatic tipping point as Reinhart and Rogoff suggested. Growth slows all right, but just to around 2.2% by the HAP calculations – a world of difference from the -0.1% suggested by the original study.
(More detail and charts at The Economist.)
Reinhart and Rogoff have been forced to respond, writing a column for The Financial Times in which they admit the spreadsheet error but defend their overall methodology.
They openly admit to “a coding error that causes the first five countries in the alphabet to be omitted in forming averages for the 1946-2009 period in one figure”.
The first five countries in the alphabet? Eek. We all know where Australia sits in a “Select your country” drop-down menu.
There’s also what the HAP authors say is the unexplained exclusion of some data items, including numbers from Australia in the post-war period between 1946 and 1950. (We’re trying to get our hands on the exact numbers from the good folks at the Reserve Bank of Australia.)
From the HAP paper:
“A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49…This spreadsheet error…is responsible for a -0.3 percentage-point error in RR’s published average real GDP growth in the highest public debt/GDP category.”
The Reinhart-Rogoff response in the FT says:
On the first point, we reiterate that Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point. The authors show our accidental omission has a fairly marginal effect on the 0-to-90-per-cent buckets in figure 2. However, it leads to a notable change in the average growth rate for the over-90-per-cent debt group. The median growth rate we report is the right order of magnitude.
Points for honesty there. You’d never get such an admission from a politician.
As Konczal pointed out, there’s impact from those exclusions because the omitted countries including Australia have high debt and growth. (Please assume the Howard-Costello era
jokes observations are accounted for.)
The upshot of this doesn’t discount the Reinhart-Rogoff findings entirely. They make the point that the overall thrust of the paper stands.
Deliciously, two of the authors of the HAP paper, Robert Pollin and Michael Ash, have published a response to the response to the response at the FT. You can read it here. This isn’t done yet.
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