Austerity has become almost like a four-letter word in some circles. It’s used to describe policies meant to reduce government spending and debt that may be painful in the here and now -- measures such as cuts to social services, or that lead to job losses in the short-term. A key piece of empirical research policymakers have used to justify “austerity measures” has been a 2010 study by two Harvard economists, Carmen M. Reinhart and Kenneth Rogoff, about the downside of high debt.
Well now another set of academics at University of Massachusetts at Amherst have replicated the study. They discovered that thee Harvard professors made an Excel coding error in their research – one that mattered for the results, along with a few other issues.
But before you say 'bring on the government spending gravy train,' let’s back up. What was the original study to begin with?
Reinhart and Rogoff found countries with government debt loads equivalent to or greater than 90 percent of economic output saw their median growth rates fall by 1%. Their average growth rates fell considerably more. In other words, high government debt was bad for economies.
Mike Konczal, fellow at the Roosevelt Institute, writes, “This has been one of the most cited stats in the public debate during the Great Recession.” He cites Paul Ryan’s Path to Prosperity budget as relying on this “empirical evidence,” as well as the editorial board of the Washington Post.
Konczal was the first to report on the UMass paper - by Thomas Herndon, Michael Ash and Robert Pollin - which triggered a pretty explosive response on Twitter and in the blogosphere. Konczal sat down with The Daily Ticker to discuss his takeaways in the accompanying video.
In addition to the Excel error, the researchers argue that Reinhart and Rogoff used a debatable method to weight the countries in their research and selectively excluded years of high debt and average growth.
Konczal writes, "All three bias in favor their result, and without them you don’t get their controversial result.”
One of the study's authors, Michael Ash, agreed with that conclusion in a phone interview with The Daily Ticker.
Reinhart and Rogoff in a written statement today admitted that the UMass researchers accurately point out a coding error that omits several countries from the averages they looked at (in other words, there really was an Excel error), however, they “do not believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.” (The Daily Ticker also reached out to them for an interview.)
Reinart and Rogoff point out the UMass researchers also find lower growth associated with periods when debt is over 90%.
While Ash concedes that fact, he asserts that the UMass study's finding of average growth of countries with high debt loads at 2.2% is significantly different from the -0.1% Reinhart and Rogoff identified. And Ash argues it's this average that has become the central focus of policy. The researcher's takeaway is that there's "no threshold or cliff at 90%" debt-to-GDP, saying this shows it is "important to operate on a case by case basis" when it comes to countries and their debts.
It’s an academic debate that’s likely to continue and readers can draw their own conclusions.
As for the idea that an Excel error or any other possible problems with the Reinhart/Rogoff paper was wrongly responsible for justifying modern austerity as we know it, Annie Lowrey in the New York Times points out that other studies have found similar results showing higher debt economies suffered slower growth. The studies are from organizations like the International Monetary Fund, the Organization for Economic Cooperation and Development, and the Bank of International Settlements.
The Economist’s Ryan Avent discouraged overstating the influence of the Harvard economists’ work and put it well. He took to Twitter writing, "If academic papers had that much heft the world would be a very different place.”
And Jeff Cox at CNBC points out for the globe's austerity poster children, "Governments throughout southern Europe have been forced into cost-cutting far more by their need to comply with mandates from their creditors and the euro zone than by any ideas raised in a book by two Harvard professors."