The Past Speaks

In the General Theory, Keynes wrote: Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Personally, I think that Keynes was exaggerating the impact of intellectuals on public policy here. However, he was right to suggest that ideas have consequences. Politicians certainly try to defend whatever policy they have already decided to implement by citing academic studies and cherry picking data points from the historical record. In some cases, they may actually be influenced by the teachings of academic economists and even economic historians.

For the last three years, austerity policies on both sides of the Atlantic have been justified by citing a 2010 economic history paper by Carmen Reinhart and Kenneth Rogoff that allegedly  demonstrated that debt loads over 90% of GDP were economically toxic. Now we find out the conclusions in the paper were due, in part, to an innocent but clumsy rounding error in Excel. See here.  Apparently, in doing their calculations, they made Excel cell L51 equal to AVERAGE(L30:L44) rather than AVERAGE(L30:L49), which accidentally meant that the strong post-1945 economic performance of such debt-laden countries as Canada, and Australia was not included in the average.

A new paper “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” by Thomas Herndon, Michael Ash, and Robert Pollin has exposed some of the problems with the 2010 paper. See here.

Here is the abstract:

“Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower. The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.”

It remains to be see whether any of the policymakers who cited the 2010 paper will acknowledge that they were citing flawed research.