Austerity: a spreadsheet error?
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What is the main topic discussed in this episode?
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Hello and welcome to More or Less on the BBC World Service. I'm Tim Harford. Two respected economics professors, Carmen Reinhart and the former chief economist of the International Monetary Fund, Ken Rogoff, are presenting a research paper called Growth in a Time of Debt.
What was Reinhart and Rogoff's 'Growth in a Time of Debt' claim about a 90% debt-to-GDP threshold?
As with all conference papers, it's brief and won't be published in a peer-reviewed journal. But it will pack a real punch. Reinhart and Rogoff had been gathering together a large set of historical data about economic growth and government debt, specifically the debt-to-GDP ratio, comparing government debt to the overall size of a country's economy. And they concluded that for countries with a high debt-to-GDP ratio, growth was dramatically lower.
The paper was of interest from the very start.
Michael Ash, a professor of economics and public policy at the University of Massachusetts Amherst.
It set this image of a threshold or cliff at 90% public debt to GDP, and beyond that, woe unto the country that passes.
And Michael Ash had an assignment for his graduate students.
We asked the students to replicate what they feel is an important paper in the economics literature. and our student Thomas Herndon chose growth in a time of debt as his student project.
While Thomas Herndon was getting stuck into his homework, the world was going through an economic crisis and an intense political argument. Most developed countries were in recession, and not coincidentally, debt was growing rapidly, sometimes because of deliberate attempts to stimulate the economy, sometimes just because tax revenues were falling and more people were claiming unemployment benefits. which led to a now familiar question. Let debt increase in the hope of stimulating economic growth and getting out of recession?
Why did Michael Ash assign students to replicate the Reinhart and Rogoff study?
Or cut spending and raise taxes aggressively to get public debt under control? And not surprisingly, Carmen Reinhart and Ken Rogoff's statistical discovery was in the spotlight. Mike Conchal, a fellow of the Roosevelt Institute, a left-of-centre think tank, says that the policymakers were listening.
Reinhart and Rogoff met with 40 senators where they displayed these results. many senators were quite impressed with them and it really It made, you know, perhaps a minor deficit hawk into a raging deficit hawk. It amplified their worries and their concerns.
But while US politicians were arguing over whether to inject more stimulus into the economy, the euro was creaking under the strain of forced austerity and a new coalition government in the UK was promising to raise taxes, cut spending and get the deficit under control. All this with the Reinhart and Rogoff result hanging in the air. Thomas Herndon's homework assignment wasn't going well.
He kept coming back to us saying, I've tried A, I've tried B, I've tried C. I can't get their results. Here are the results that I get.
But his professors couldn't see where he was going wrong either.
We had this puzzle that we were unable to replicate the results as Reinhardt and Rogoff published them, and that really got under our skin.
And so what was the next step to approach Reinhardt and Rogoff?
Yes, after attempting but being unable to replicate the original results... The course ended and we encouraged Thomas to continue his research. He contacted Reinhardt and Rogoff and they kindly provided the actual working spreadsheet that they had used to produce the results in the paper.
And you can see where this is going. With the author's numbers and methodology in hand, Thomas Herndon and his professors found some problems with the paper. The first was a basic spreadsheet error.
In an attempt to take an average across 20 countries...
How did Thomas Herndon discover he couldn't replicate the original results?
Reinhardt and Rogoff only included the cells for 15 countries. So five countries were excluded. Australia, Austria, Belgium, Canada, and Denmark were simply excluded through this spreadsheet oversight.
Oops. But Thomas and his professors found other issues which had more of an impact on the famous result.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:44
2
What was Reinhart and Rogoff's 'Growth in a Time of Debt' claim about a 90% debt-to-GDP threshold?
0:44–2:14
3
Why did Michael Ash assign students to replicate the Reinhart and Rogoff study?
2:14–4:02
4
How did Thomas Herndon discover he couldn't replicate the original results?
4:02–5:18
5
What happened when Herndon obtained Reinhart and Rogoff's original spreadsheet?
5:18–6:22
6
What specific spreadsheet error and data omissions did Herndon and professors find?
6:22–8:14
7
How did correcting the errors change the paper's findings about debt and growth?
8:14–9:27