Economists’ case for austerity attacked

The intellectual case for fiscal austerity came under attack on Tuesday as two of the world’s best-known economists were accused of sloppy statistics.

Kenneth Rogoff and Carmen Reinhart of Harvard University found that economic growth falls to a mean average of minus 0.1 per cent when public debt is greater than 90 per cent of output.

But researchers at the University of Massachusetts, Amherst, said that when they repeated the analysis with the same data they got a figure of plus 2.2 per cent.

“Coding errors, selective exclusion of available data, and unconventional weighting of summary statistics led to serious errors that inaccurately represent the relationship between public debt and GDP growth,” they said.

The academic spat is important because the Rogoff-Reinhart result, published in 2010, is one of the strongest arguments for quickly raising taxes or cutting public spending to keep debt below the 90 per cent limit.

Paul Ryan, the Republican chair of the House Budget committee who has pushed for rapid fiscal tightening in the US, cited the Reinhart-Rogoff study as “conclusive empirical evidence that total debt exceeding 90 per cent of the economy has a significant negative effect on economic growth”.

Mr Rogoff and Ms Reinhart said they would review the criticisms but argued that there was consensus on the basic conclusion of higher debt leading to slower growth. The Harvard economists said they have always pointed to their median growth result – 1.6 per cent when debt is higher than 90 per cent of GDP – rather than the negative mean figure.

The Amherst researchers said that Ms Reinhart and Mr Rogoff had made an error in their spreadsheet, missed several years of data and then averaged their results in a way that put unusual weight on short episodes in particular countries.

For example, New Zealand in 1951, when debt was above 90 per cent of GDP and growth was minus 7.6 per cent, weighs heavily on the overall result. “People make errors but when you combine the errors with the weighting that’s where you get this result,” said Robert Pollin, one of the Amherst group.

“We literally just received this draft comment and will review it in due course,” said Mr Rogoff and Ms Reinhart. They declined to comment beyond a prepared statement but said that the Amherst results also showed that growth was slower when debt was higher. “The weight of the evidence to date – including this latest comment – seems entirely consistent with our original interpretation of the data,” they said.

“Because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large,” they said. “It is utterly misleading to speak of a 1 per cent growth differential that lasts 10-25 years as small.”