Debt / Economy

4 Reasons Why the Reinhart-Rogoff Fiasco Doesn’t Change Anything

Two weeks ago, a grad student at UMass Amherst discovered a spreadsheet error in the Reinhart-Rogoff (R-R) paper, a paper that many austerity advocates cited as proof that too much debt cripples economic growth. In the days and weeks after the spreadsheet error fiasco, many were quick to draw significant implications from this event, calling it the end of austerity and declaring that the debate is over (and that Krugman won).

Not so fast.

Here are four reasons why the “spreadsheet error heard ‘round the world” is not likely to have the impact that people think it will:

1) The overall argument of the Herndon paper is still consistent with R-R’s findings. High levels of debt are still linked to low levels of growth. Sure, the Herndon paper debunked the 90 percent debt-to-GDP threshold. But the austerity argument is not just about the threshold; it’s about the overall trend. And this trend – high levels of debt and slower growth – has not been completely debunked. Two days ago, University of Chicago professors Justin Wolfers and Betsey Stevenson published this chart, showing that the trend of high debt and slow growth still exists. They wrote, “It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture.”

2) The new Herndon paper doesn’t change the overarching debate on causality. This is the more important fight: austerity is a good policy to follow if we think high levels of debt cause slower growth, but it’s not if we don’t. Even when those in the anti-austerity camp didn’t dispute R-R’s methodology and results, they fought against the implication that high debt caused slow growth. The new Herndon paper does nothing to push the argument in either direction.

3) It hasn’t really changed any minds on either side of the debate. It’s not as if the anti-austerity side needed more proof that R-R was wrong. They already had a long list of papers that questioned R-R’s findings. Similarly, the pro-austerity camp isn’t admitting defeat because they, too, have a laundry list of studies that support their positions as well. This recent spreadsheet error fiasco is not likely to change any minds on either side. The fact that people pounced on this spreadsheet error and announced the end of austerity is indicative of a larger problem with the current political discourse: people will jump on any paper to validate their positions.

4) Whatever popular support there is for austerity doesn’t come from citing R-R, or any other paper for that matter.  It comes from the intuition that spending and racking up debt is irresponsible. When you ask people why they support deficit reduction, you get metaphors like, “the government should balance its checkbook,” not arguments about high levels of government spending crowding out investment. Therefore, having someone point out that R-R messed up a calculation is not going to sway the American public. The implications of the Herdon paper should not be confused with the timing of its release: if popular support for austerity is waning, this coding error is not the primary driver behind that trend.