The big talk in the world of economics continues to be the famous study by Carmen Reinhart and Ken Rogoff, which claimed that as countries see debt/GDP going above 90%, growth slows dramatically.
Economists have always been sceptical of the correlation/causality on this.
But yesterday, a new study emerged which claimed that Reinhart and Rogoff used a faulty dataset to make that claim and (most stunningly) had an excel error that exacerbated the growth dropoff for countries with debt/GDP higher than 90%.
After the report dropped (and proceeded to blow up the internet), Reinhart and Rogoff rushed out a quick statement claiming that the new study (which was done by some UMass professors) supported their thesis that growth slowed as debt to GDP got higher. And Reinhart and Rogoff were quick to reiterate that even they weren’t necessarily implying causation on this (which may be true, but the fact that they say this is not well known to the politicians who are always citing the dreaded 90% level).
But in a new response — which is posted at FT — Reinhart and Rogoff admit they did make an Excel blunder, and that it mattered!
Here’s the key part:
The authors point out that there are three problems with our 1945-2009 averages and the paper itself: (i) 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, (ii) “selective exclusion” of 1946-1950 for New Zealand, and (iii) “unconventional weighting of summary statistics”—the implication being that these omissions are intentionally used to bias the results. They argue that the interaction of three problems magnifies their effects and leads to completely different conclusions, especially when they choose a different weighting scheme.
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.
The statement isn’t a full cave.
They still say that growth is slower as debt gets higher, and as stated in the statement above, they claim that median, rather than mean, growth rates are consistent with their original projections, even with the Excel change.
STILL. This is dramatic stuff. The 90% threshold has taken on a huge role in the public economic/political/pop-culture discourse. And they admit that that an Excel error lead to a “notable” change in what you’d get for the average growth rate above this level.