By Dean Baker
Did an Excel error cost you your job? This is what people around the world should be asking after researchers at the University of Massachusetts uncovered a serious calculation mistake. The mistake was in an enormously influential paper by Carmen Reinhart and Ken Rogoff, two prominent economists, which purports to show that high levels of government debt lead to slow economic growth.
This paper has been widely cited by political figures around the world who have been pushing the case for cutting back government spending and raising taxes. House Budget Committee Chairman Paul Ryan famously cited Reinhart and Rogoff when he laid out his budget earlier this year. So have many of the politicians now pushing for cuts in Social Security and Medicare.
Reinhart and Rogoff’s work has had an extraordinary impact for an academic paper. This is why the calculation error is so important. When the error is corrected, the relationship between debt levels and economic growth is far less clear.
They are several examples of countries that have enjoyed healthy growth with debt levels far higher than the United States has now or will plausibly experience in the foreseeable future. Furthermore, the biggest falloff in growth rates in the corrected data occurs with debt levels that are way below what the United States has seen for the last three decades.
This means that if anyone wanted to use the corrected Reinhart and Rogoff paper for an argument about reducing debt levels, they should be pushing for much larger spending cuts and tax increases than anyone has put on the table. The corrected Reinhart and Rogoff paper would be telling us to kiss Social Security and Medicare goodbye completely and tighten our belts with some real tax increases.
Of course we are not hearing such calls, because the paper itself was not actually the basis for policy. Rather its finding were being used to provide cover by those who wanted to cut Social Security, Medicare and other programs that enjoy high levels of public support. It would be impossible to garner the political support needed for cuts to these programs on the merits, so the politicians pushing these cuts were happy to use the erroneous findings from Reinhart and Rogoff to advance their agenda.
The Reinhart and Rogoff paper was not used only to argue for cuts to popular social insurance programs, it was also used to argue against government efforts to boost the economy and create jobs. The opponents of these policies argued that efforts to spur the economy would prove to be counterproductive because Reinhart and Rogoff showed us that higher debt levels would mean slower growth.