In this post I want to give some more publicity to a story that has, so far, only been run in specialised economic news columns. It is a dramatic one that suggests much of the world has taken a wrong financial turn partly because of one influential academic paper, around which there are now some serious questions.
Two economists, Carmen Reinhart and Kenneth Rogoff at Harvard University, released a paper in 2008, “Growth in a Time of Debt.” whose main conclusion was that countries whose public debt was over 90% of their Gross Domestic Product have below average growth rates, slightly negative in fact. Their paper has been widely cited (454 Google Scholar citations as of 21 April, 2013). In addition it has been used by government exchequers to justify severe austerity measures. The most significant such example is when Paul Ryan, the Republican chair of the US House of Representatives budget committee, a notable economic hawk who has pushed for rapid fiscal tightening, cited the Reinhart-Rogoff paper as “conclusive empirical evidence that total debt exceeding 90 per cent of the economy has a significant negative effect on economic growth”. In addition, as reported in the Guardian, British Chancellor George Osborne has repeatedly said that his monetary policy was highly influenced by the paper.
Last week there was a bombshell. Three researchers from the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin, published a paper "Does high public debt consistently stifle economic growth" which seriously undermined (some have said "tore to shreds") the Reinhart-Rogoff conclusions. The new paper challenges the Reinhart-Rogoff methodology in two ways: by criticising the ways in R&R excluded some data that did not accord with their conclusion, and by criticising how they weighted their summations. You can read the actual details in the source articles. More sensationally, Herndon et al found an error in the spreadsheet that R&R had used to construct their main summative table.
In their response R&R who were obviously deeply embarrassed by the spreadsheet error nevertheless argued that their main conclusions were still sound and a debate is now beginning between the two sides. So far Herndon et al robustly maintain that the R&R study is not only flawed in the way that they originally claimed but that the results are almost the opposite of those claimed by R&R.
I hope that the debate does not simply recede into exchanges between academics guarding their reputations. This issue is of fundamental importance to the way in which we regulate our economies. I am so far dismayed by the entrenched attitudes of those who originally espoused the R&R conclusions. In particular the response from George Osborne's office has been abysmal - just a claim that their economic policy does not rest on one academic paper and that "the majority of economists" back Osborne's strategy.
It seems to me that economists, and the entire discipline of Economics, faces a challenge. They need to sort out for policy-makers just what the situation is vis a vis debt versus growth. I know this might be a big ask but they must do their level best. If we see two camps emerging divided by political affiliations we would be tempted to kiss goodbye to any pretence that Economics is a science.