Economists' Spreadsheet Error Upends the Debt Debate

A major study bolstering the case for austerity is called into doubt
Photographs by Andrew Harrer/Bloomberg; Jerome Favre/Bloomberg

“Growth in a Time of Debt” (PDF), a 2010 study by Harvard University economists Carmen Reinhart and Kenneth Rogoff, was the rare academic work that had a huge influence on Washington policymakers. It argued that high government debt is associated with slow economic growth and that growth is particularly weak when gross government debt exceeds 90 percent of gross domestic product, a threshold the U.S. had already crossed. With its illustrious authors, wide-ranging analysis, and portentous title echoing Gabriel García Márquez, the paper was praised by everyone from House Budget Chairman Paul Ryan to former Treasury Secretary Timothy Geithner. Alan Simpson and Erskine Bowles called on Reinhart to testify before their deficit reduction commission. Journalists cited the paper as the definitive word on growth and debt, while conservative lawmakers used it to justify cutting spending. Ryan, who ran for vice president last year, cited the work to say the U.S. risked not only slow growth but “a debt-fueled economic crisis.”

Republicans’ reliance on Reinhart-Rogoff to support their budget-cutting agenda was always risky, in part because the authors themselves argued it was important to let the U.S. economy regain speed before embarking on a major deficit reduction program. Now the notion that fighting debt is an urgent priority is further weakened by the authors’ acknowledgment that they made an error in a spreadsheet. Three economists at the University of Massachusetts at Amherst revealed the mistake on April 15.

The Excel mistake is more of a public-relations disaster than a significant slip. Reinhart and Rogoff wrote that average growth in high-debt countries was -0.1 percent. The UMass researchers said it was really 2.2 percent. But the spreadsheet error accounted for only about 0.3 percentage point of that difference. Most of the rest is caused by differences in the way the economists weighted the data. Even the UMass researchers found that higher debt is associated with slower growth.

Deficit hawks seemed unperturbed. “We can debate an exact dollar amount,” Douglas Holtz-Eakin, a former director of the Congressional Budget Office, says in an e-mail, “but the simple fact that debt ultimately hinders growth is unchanged.” Still, liberal skeptics are seizing on this dustup to justify a slower-going approach to deficit-cutting. It’s too soon to judge the political fallout, but this can’t possibly be good for Team Austerity.


    The bottom line: The authors of an influential paper on the link between high government debt and low growth admit they made a calculation error.

    Before it's here, it's on the Bloomberg Terminal.