Monday 20 May 2019

Harvard economists admit errors in austerity blueprint paper

Harvard Professor and Economist Kenneth Rogoff
Harvard Professor and Economist Kenneth Rogoff

Jason Lange

TWO Harvard economists have acknowledged errors in a study that has been cited by policymakers around the world as justification for government austerity campaigns.

However, they claimed that the "central message" of their research was still valid.

The 2010 study by Carmen Reinhart and Kenneth Rogoff found economic growth throughout modern history has slowed dramatically when a government's debt exceeds 90 percent of a country's annual economic output.

But in a study made public this week, researchers from the University of Massachusetts at Amherst found spreadsheet coding errors in Reinhart and Rogoff's work. The two Harvard economists said the mistake was an accident.

"It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," Reinhart and Rogoff said in a statement.

It was unclear whether the academic expose would have an impact on how governments deal with budget deficits that ballooned during the Great Recession, or on the climate of austerity that has taken hold in many rich countries since 2010.

The new study appeared to undermine Reinhart and Rogoff's gravest findings which have been frequently cited by pro-austerity politicians in the United States, Great Britain and the European Union.

In their 2010 study entitled "Growth in a time of Debt," Reinhart and Rogoff found economic output on average contracted 0.1 percent per year in countries where government debts were above 90 percent of gross domestic product.

Yet even correcting for the spreadsheet errors and other alleged methodological errors, the new study appeared to confirm the Harvard economists' findings that heavily indebted countries do indeed grow more slowly. The average annual growth rate for countries when debt levels were exceptionally high was 2.2 percent, well below growth rates for counties when debt levels were lower.

Many economists and policymakers are not about to discard Reinhart and Rogoff's message that very heavy debt loads could be a problem for economic growth.

"Ninety percent strikes me a good rule of thumb," Olivier Blanchard, chief economist at the International Monetary Fund, said in a brief interview.

Indeed, financial leaders of the world's 20 largest economies plan to consider a proposal this week to cut their public debt over the longer term to well below 90 percent of economic output, according to a document prepared for a meeting between the leaders.

Blanchard said Reinhart and Rogoff's work has been "tremendously useful" although he said questions remained over whether high debt was really the cause of lower growth. It might be the case that low growth leads to higher debt.

"There are all kinds of causality issues," he said.

Blanchard did not elaborate, but other economists have pointed out that in the recent history of United States, debt has skyrocketed because of weak economic growth, not the other way around. More specifically, the 2007-09 recession fueled higher borrowing because tax receipts fell and claims for unemployment benefits increased.

While the two Harvard economists said the spreadsheet errors were regrettable, they did not change the message of their research.

They pointed out that the errors were not present in their calculations of countries' median rates of growth, which also were slower when debt loads were extremely high.

"We do not ... believe this regrettable slip affects in any significant way the central message of the paper," Reinhart and Rogoff said.

The University of Massachusetts researchers also criticized Reinhart and Rogoff for omitting data from several countries. The Harvard researchers responded by saying the data for those countries was unavailable when they first published their research, but that they subsequently added it to their public database.

Reinhart and Rogoff have compiled centuries of economic and financial data and their body of work on debt and the history of financial crises has been hugely influential.

The "Growth in a time of Debt" paper results in more than 500 citations in Google scholar, an online database of research papers. The citations include papers by economists from the Bank of England, the World Bank and the European Central Bank, as well as myriad universities.


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