Growth in a time of Debt


This was the title of a massively influential study by economists Carmen Reinhart and Kenneth Rogoff. Using very precise statistical calculations, they claimed to have proved that debt levels above 90% led to a dramatic collapse in a country’s economy. The study was a key-note in influential austerity-fans across the world – up to and including George Osborne, our very own Chancellor of the Exchequer.

Here’s the catch: they were wrong.

From what I’ve been able to understand, their fundamental flaw was in the very basics. It wasn’t that they were looking at the wrong economic indicators; it wasn’t that economic policy needed to be readjusted; no, what they had wrong was this: they made a boo-boo with Excel. Thomas Herndon, a student at the University of Massachusetts, happened to be checking the data as part of his course (!) when he spotted the error, and he called his girlfriend over for a look. Within 24 hours, this particular Excel error was going around the world.

What do we take from all this? Well, first of all, we take a healthy lesson in handling statistics. Ray Panko, a professor at the University of Hawai’i, put it best: “This type of stuff probably happens all the time. What’s unusual here is that someone checked it.” Nowadays, calculations and correlations can be seriously complicated (how many ‘C’s can I get into that sentence?), and underneath all the data there can lie human error. We need to be very, very careful when we trust a statistical tool as evidence.

Secondly, we learn that the politicians who loved to cite this research aren’t for turning. They’ve already made their commitments, rightly or wrongly, and they just have to take this unexpected and embarrassing blow on the nose. To quote Osborne, this “is being used as an excuse by those who are always opposed to make any attempts to control public spending or deal with public debt.” Ignoring the bad grammar, that’s basically a more long-winded way of shrugging your shoulders and soldiering on.

Third, we can take from this that economists are human. They screw up just like the rest of us, and they don’t really have a clue – just like the rest of us. This shouldn’t be a secret, really, when you look at the history of the financial crash…

Fourth: be careful with Excel formulas!



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