Senator John Thune has contended that our national debt puts us at risk of an economic train wreck. He has cited the 90% debt-to-GDP ratio as a "tipping point" for... well... some kind of trouble. (Our current national debt-to-GDP ratio is at 106%.)
This 90% figure comes from Harvard economists Kenneth Rogoff and Carmen Reinhart. Their research provided justification for austerity policies far and wide.
Their research was also wrong. Worse, it was a simple Excel spreadsheet error compounding a classic conflation of correlation and causation. John Nichols explains how backwards the Rogoff-Reinhart results were:
The Harvard economists who promoted the theory that when a nation’s level of debt exceeds 90 percent of its GDP it reaches a “tipping point” acknowledged last week that their calculations included “a significant mistake.”
Specifically, a coding error left essential data out of the Harvard study. That led to what an analysis by three University of Massachusetts-Amherst professors identified as "serious errors that inaccurately represent the relationship between public debt and growth."
What of the whole 90 percent “tipping point” thing? When the Amherst professors replicated the study and included all the data, the average growth rate of nations with a 90 percent debt load did not decline by 0.1 percent, as suggested by the Harvard report. Rather, the rate was a positive 2.2 percent.
Carmen Reinhart, one of the Harvard economists, acknowledged to CBC News: "It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future" [John Nichols, "Case for Austerity Crumbling," The Cap Times, 2013.04.21].
Debt happens. More debt happens when the economy slows down and the public sector has to man the economic guns while the private sector reels. Kicking the government in the shins over arbitrary numbers now proven bogus doesn't help the economy.
If you hear Senator Thune or any other elected official citing that 90% tipping point, be sure to read them this correction and get them back to talking real economics.
As a lowly grad student, I think it's great that the error was found by a lowly grad student as well.
At some point, debt has to matter. With that caveat, Rogoff and Reinhart had problems in addition to the coding error: "Thomas Herndon, Michael Ash and Robert Pollin say that the Reinhart-Rogoff finding of sharply lower average growth in high-debt countries rests on three errors: a bad weighting method, inexplicable exclusion of data from certain countries and years, and an Excel coding error. After fixing those problems, they find that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”
http://www.washingtonmonthly.com/ten-miles-square/2013/04/reinhartrogoff_on_debt_and_gro044220.php
I'll let the stat geeks (read folks who know more about numbers than I do) take up the harms of bad weighting measures or selective data.
My wife will note that I am more averse to debt than the typical American consumer. Debt does matter, micro and macro, in that it reduces our freedom of action. We should look for ways to reduce our debt, but we should also be practical and look at the real harms of eliminating that debt too fast for an anemic economy to handle.
Three cheers for all lowly yet thorough grad students. Debate coaches and tab room aficionados can also attest to the importance of selecting all the data in the spreadsheet before hitting Sort.
There is a huge difference in economic growth of R&R fallacy of -0.1% from the correct Herndon figure of 2.2%. Doubt it? Run your family budget either way for a year and tell us how it turns out. Mr. Thune and the republican apologists failed to figure it out because they apparently don't do math, it wasn't peer-reviewed, and they are more interested in ideology than fact.
Here's explanations of the work:
http://www.ritholtz.com/blog/2013/04/colbert-demolishes-reinhart-rogoff/
And with the co-author: http://jessescrossroadscafe.blogspot.com/2013/04/realnews-debunking-rogoff-reinhart.html
Meanwhile as Forbes magazine wrote, Obama is the stingiest government spender since Eisenhower.
Krugman won the argument. The republicans in congress are an international embarrassment. http://finance.yahoo.com/blogs/daily-ticker/economic-argument-over-paul-krugman-won-150247189.html?vp=1
But watch. They won't change with new data, with new information. Rather watch them reinforce and double-down on their ideological failure. Gosh I miss Eisenhower, flaws and all.