By Eamon Murphy
Filed under: GDP, European Union, Economy
Carmen Reinhart and Kenneth Rogoff are at the top of the economics profession, with influence inside and outside the academy. Both have worked in senior positions at the International Monetary Fund; both have chairs at Harvard. Rogoff was a chess grandmaster in his mid-twenties, before giving up the royal game to focus on economics. “I’m not a great mathematician,” he told the Financial Times, explaining the relation between his interests, “but game theory really clicked for me.” This method of analysis offers insight into government behavior during a debt crisis, Rogoff suggested: “One of the reasons that Carmine Reinhart and I hit it off, is that we are both incredibly cynical about governments.”
Now the most influential product of their collaboration – an argument widely considered to have laid the basis for the West’s recent shift toward austerity economics – has been shown to rest in large part on a simple error, a spreadsheet coding mistake discovered by a 28 year-old graduate student at the University of Massachusetts Amherst named Thomas Herndon.
“I almost didn’t believe my eyes when I saw the basic spreadsheet error,” Herndon told Reuters. “I was like, am I just looking at this wrong? There has to be some other explanation.” Herndon asked his girlfriend for confirmation that he wasn’t missing something. He was right, she said.
The story begins with a large-scale research project carried out by Reinhart and Rogoff, investigating hundreds of years of financial crises around the world. The result was a well-received 2009 book, This Time Is Different: Eight Centuries of Financial Folly. They also published a paper based on a selection of their data, titled “Growth in a Time of Debt” (2010), which claimed to show that economic growth slows appreciably once a country’s public debt to GDP ratio gets above 90 percent.
It was an argument bound to receive attention from the press and policymakers, because, according to some projections, the U.S. was set to pass that purported 90 percent red line in the coming decade. And the Reinhart-Rogoff result achieved notoriety on both sides of the Atlantic: Reinhart testified before the National Commission on Fiscal Responsibility and Reform; Paul Ryan cited the study in his 2013 budget, “The Path to Prosperity: A Blueprint for American Renewal”; and European Union Economic and Monetary Affairs Commissioner Olli Rehn spoke in February of “serious academic research” that indicated an economic danger zone above 90 percent debt-to-GDP. (The G20 countries have said they will soon consider a proposal “to cut public debt over the longer term to well below 90 percent of gross domestic product,” The Fiscal Times reports.)
The Washington Post editorial board even presented the “Growth in a
From: http://www.dailyfinance.com/on/reinhart-rogoff-debt-GDP-spreadsheet-error/