Oops: Debt and Economic Growth

Every now and then in economics, as I suspect in many other fields, some piece of supposedly settled wisdom is thrown into question by a revelation of human error. Such was the case in recent days with respect to a book and several papers by Carmen M. Reinhart and Kenneth S. Rogoff. Reinhart and Rogoff’s research, initially published just before the financial crisis but reprised over several years (and henceforth referenced in the common academic style as “RR”), has been widely cited to make the case that excesses of public debt lead to reduced economic growth. This finding, in turn, undergirds arguments in Europe and the United States for government budget retrenchment.

But earlier this month, three faculty members of the University of Massachusetts-Amherst (Thomas Herndon, Michael Ash and Robert Pollin, hereinafter stuck with the moniker of “HAP”), working in part with a data spreadsheet provided to them by Reinhart and Rogoff, discovered errors in the original calculations.

Given the prominence of Reinhart and Rogoff personally and of their findings in the budget debate, what should we conclude? How, if at all, should our thinking change?

Without burrowing deep into the weeds, but for your background: HAP found two families of what they consider to be errors. First, there were mistakes in spreadsheet formulas, which had the effect of omitting some relevant data from crucial calculations. On that count, RR plead guilty as charged. Second, there are some complex questions with respect to the relative weight in the calculations that should be assigned to different high-debt episodes in different countries. This one is a judgment call. However, given the discovery of the other errors, it looks like RR will need to mount a full defense on this count as well. And in practical terms, HAP present competing findings with this second “error” corrected; those findings have received and will continue to get attention. (In addition, there were some few errors in data entry, but those apparently are not consequential in terms of the results.)

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Minarik serves as senior vice President and director of research at the Committee for Economic Development. He served as a member of the Bipartisan Policy Center’s Domenici-Rivlin Debt Reduction Task Force.