Economic Austerity's Lynch Pin Paper Used Bad Data

This falls into the category that the magazine The Week would call "Boring But Important".  Paul Krugman has been saying this for a long time, but a 28-year old economics graduate student just showed that the classic paper upon which economic austerity as a solution to debt crisis is the way to go made a fundamental error in calculculation, leaving it's conclusion equally flawed.  The paper is Reinhart and Rogoff's 2010 paper, "Growth in a Time of Debt,".  Grad student Thomas Herndon picked the papaer to analyze for a class on econometrics in part because it has been one of the most politically influential economic papers of the last decade. It claims, among other things, that countries whose debt exceeds 90 percent of their annual GDP experience slower growth than countries with lower debt loads — a figure that has been cited by people like Paul Ryan and Tim Geithner to justify slashing government spending and implementing other austerity measures on struggling economies.

 

Herndon was able to get the data used for the paper from Reinhart, and when he pulled up an Excel spreadsheet containing it, he quickly spotted something that looked odd.

"I clicked on cell L51, and saw that they had only averaged rows 30 through 44, instead of rows 30 through 49."  Oops.
 

What Herndon had discovered was that by making this error error, Reinhart and Rogoff had forgotten to include a critical piece of data about countries with high debt-to-GDP ratios that would have affected their overall calculations. They had also excluded data from Canada, New Zealand, and Australia — all countries that experienced solid growth during periods of high debt and would thus undercut their thesis that high debt forestalls growth.  Double oops.  So maybe we should try to fix some of the things that are broken about our current system, but worry less about the debt and more about what we need to do to be competative in the future.