The big scandal in economics this week (and yes, there are big scandals in economics) is the news that the most widely cited academic study driving austerity programs worldwide came to an erroneous conclusion due to... wait for it... an error in a Microsoft Excel spreadsheet! (Apparently a simple mistake that "all spreadsheet jockeys fear." Not Microsoft's error, a user error.)
The highly influential paper authored by economists Carmen Reinhart and Ken Rogoff warned that countries with debt-to-GDP ratios above 90 percent experience dramatically lower economic growth than countries with lower debt-to-GDP ratios. It is this alarming (but, now we know, nonexistent) 90-percent cutoff that has largely been cited as grounds for budget-slashing economic austerity in the US and abroad.
But... well... oops:
It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation.
Since R&R country weight their data (each country's growth rate has the same weight), and there are only seven countries that cross into the high debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)
This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.
... If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere.
But of course, facts don't matter.
This post has been updated since it was first published.