Tags: Reinhart | Rogoff | debt | growth

Harvard Professors’ Error Shows How Bad Government Debt Really Is

Friday, 19 Apr 2013 08:32 AM

By Michael Carr

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Economics is regarded as a science, and many policy decisions are based on the research of economists. However, recent news shows that even the best research in the field could be wrong.

In a widely cited study, Harvard professors Carmen Reinhart and Kenneth Rogoff suggested that when government debt tops 90 percent of a nation’s gross domestic product (GDP), the economy slows. There were a few problems with the paper, and one of them was a simple error using Excel, the spreadsheet software used to analyze the data.

A new study has found that without the error, the conclusion of the paper would probably be different. The authors of that study found that without the error, the GDP growth rate for countries with high levels of debt is actually 2.2 percent rather than the contraction of 0.1 percent that Reinhart and Rogoff reported.

While errors like this in a paper are problems, the more thorough review done to find the problems highlights that debt is even worse than the original study showed.
 
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The original research failed to include the experience of Australia, New Zealand and Canada after World War II. All three countries had high debt, but as they helped to rebuild the global economy after the war, they enjoyed strong economic growth and reduced their debt.

There will be a great deal of analysis about this error. It has troubling implications for the academic community. The original paper was peer-reviewed, which presumably provides a high level of scrutiny to research. If the peer-review process is unreliable, the academic community could be failing in its mission to advance learning.

Deeper analysis may also reveal that rapid economic growth and reduced government spending are the best way to address debt. In fact, that might be the only way to make debt manageable since the alternative of raising taxes slows growth.

Excluding post-war data allowed Reinhart and Rogoff to show that debt was bad. Including those years when growth was high and government spending was falling rapidly dramatically changes the analysis and points to a solution for the debt crisis roiling Europe.

When the economy was booming as spending fell, debt declined and set the stage for an extended economic boom.

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