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The Excel mistake heard round the world

A screenshot of part of the Excel spreadsheet by economists Kenneth Rogoff and Carmen Reinhart, with the column error highlighted. See the full screenshot below.

In the last three years, there has been a concerted effort by those in Washington to reduce government spending and reign in the national debt. One reason for the budget cuts? Research by two Harvard economists, Ken Rogoff and Carmen Reinhart. The pair found that when a country owes more than 90 percent of their GDP, it slides into recession.

Except Reinhart and Rogoff made a glaring mistake in the Microsoft Excel spreadsheet they used to calculate their averages. "They left off five countries. And that changed things pretty significantly," says Tim Fernholz, a business reporter with Quartz. Instead of a mild recession, carrying that much debt means a country is probably going to have mild growth -- slow, but growth all the same.

The Reinhart-Rogoff spreadsheet, via qz.com

But why did this one paper have such huge implications on budget policy? When a country is faced with recession, it has two choices -- stimulus, or austerity. Pump more money into your government, grow your debt, and hope that you're creating enough jobs along the way to work your way out of the slump. Or you can start making cuts to slow the amount of money your country will need to borrow. "In the long term, economists think that having less debt is going to be better for the economy. But if you're coming out of a crisis, you have to make a decision then and there."

And this was especially true with Reinhart and Rogoff's paper. The pair met with 40 senators in 2011 and "they told them, you need to act now and that we can't afford to spend more money to stimulate the economy." Also reading research by the two Harvard economists were budget chairs from both parties, then Treasury Secretary Timothy Geithner, the Simpson-Bowles Commission and financial leaders in countries overseas. "When we were talking about the budget deficit and the debt in 2010, 2011 and 2012, everybody had this 90 percent threshold on their minds," says Fernholz.

In their defense, Reinhart and Rogoff point to other studies that show high debt leads to slow growth. But Fernholz says "it's not clear if countries that are growing slowly have high debt or if high debt causes countries to grow slowly." The Reinhart-Rogoff research suggested causation instead of correlation.

"When politicians around the country and in fact around the world were deciding what to do to save the economy after the recession, they were reading this paper and it was scaring them," says Fernholz. "And it was making them think, we need to cut the debt now if we want to save the economy."

This was true, for example in the United Kingdom which quickly implemented austerity measures. The country's economy is in bad shape today. Meanwhile, in the U.S., there was a stimulus and Congress moved slower to make budget cuts. And while the economy here isn't exactly sparkling, both debt and unemployment are going down.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.
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What dirkvelten said. How could you let Tim Fernholz say, without any contradiction whatever, "When we were talking about the budget deficit and the debt in 2010, 2011 and 2012, everybody had this 90 percent threshold on their minds."?

Look, when it comes to economics, I'm just a layperson, but even I've read enough economist blogs (see, e.g., Paul Krugman, Jared Bernstein, Brad DeLong, etc.), to know that Reinhart-Rogoff has been under fire for a very long time.

Even before the latest paper exposing R-R's Excel typos (to be charitable) came out, Reinhart and Rogoff were subject to criticisms for drawing causality conclusions that their data did not mandate. Surely Marketplace is familiar with John Irons' and Josh Bivens "Government Debt and Economic Growth" paper for EPI from three years ago? No? That's funny, because it was pretty widely discussed at the time in places like the Economist. Actually, there were quite a few economists who thought that R-R were drawing questionable conclusions from limited data of dubious relevance to large economies like the United States'.

In light of the well-publicized and authoritative challenges to R-R basically ever since it came out, Fernholz' comment that "everybody had this 90 percent threshold on their minds" brings to mind a paraphrase of the old joke about the Lone Ranger and Tonto, ending with the punch line "What do you mean 'everybody'"?

I'm dumbfounded that the tone of your report on the Reinhart & Rogoff research was "Gee, what a surprise... who knew!?" What? How in the world could you not mention that Paul Krugman—you know, the Nobel Laureate economist—has been saying exactly this over and over and over ad infinitum in his NY Times columns. I mean, really: WTF...?

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