Austerity tripped

The evidence for austerity may be based on an Excel spreadsheet error

One of the most influential intellectual justifications for the unpopular austerity measures embraced by policymakers or imposed upon them in the wake of the financial crisis was provided by two widely cited papers. Now, one of those papers, written in 2010 by Harvard economists Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt", appears discredited for making fundamental Excel coding errors, selectively excluding certain data and using debatable methods to weight the countries analysed.

The controversial paper argued that a high debt to GDP ratio at a certain cut-off point 90 per cent would lead to slow growth. It was cited by everyone, from Paul Ryan to Olli Rehn, the European commissioner for economic and monetary affairs and the euro, as proof that "fiscal consolidation" was necessary. Ryan's proposal for a US budget said that the study "found conclusive empirical evidence that [debt] exceeding 90 per cent of the economy has a significant negative effect on economic growth".

Reinhart and Rogoff attributed causality in the reverse direction from already established theory, which showed that slow growth would lead to a high debt to GDP ratio. In their paper, Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst, found that the average real GDP growth rate for countries carrying a public debt to GDP ratio of over 90 per cent was higher than claimed by Reinhart and Rogoff, and they failed to find a cut-off point where growth fell significantly. As a core empirical argument by heavyweight economists, underpinning the global shift towards austerity, is tripped up by an elementary Excel error, millions impacted by that policy will not be amused.

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