House Budget Committee Chairman Paul Ryan (R-Wis.), at the height of the Republicans’ debt-ceiling crisis in 2011, said he and his party were justified in prioritizing immediate debt reduction. Economists, he said at the time, “tell us that letting total debt rise above 90% of GDP creates a drag on economic growth.”
Ryan didn’t say which economists, but it didn’t much matter since everyone knew exactly what he was referring to. Carmen Reinhart and Kenneth Rogoff published a report a few years ago that conflicted with the findings of many economists, but told Republicans exactly what they wanted to hear — when a nation’s debt climbs above 90% of the nation’s total economy, it necessarily serves as a drag on economic growth.
Ryan, conservative activists, deficit hawks, the Washington Post editorial board, and the DC establishment waved around the Reinhardt/Rogoff study as definitive proof that debt reduction can’t wait — failing to reduce the deficit, or making it worse on purpose as nutty liberals like me prefer, makes an economic recovery practically impossible. Austerity measures, intended to reduce the budget shortfall, would in turn correct the problem help the economy grow.
The problem, of course, is that the Reinhardt/Rogoff study was wrong. In fact, it’s wrong in a variety of important ways, which Mike Konczal summarized very well. Several scholars at the University of Massachusetts, Amherst replicated the results of the Reinhardt/Rogoff research and uncovered some serious problems.
Among the most glaring: Reinhardt and Rogoff made a coding error in an Excel spreadsheet. Kevin Drum called it the “Excel Error Heard Round the World.” (I think Kevin means that literally, since the Reinhardt/Rogoff study has helped bolster the austerity agenda in a wide variety of countries.)
How bad is it? Take a look at the chart I put together: according the Reinhardt/Rogoff research, once a nation’s debt-to-GDP ratio tops 90%, the result is economic contraction. The revised research based on the same data points to 2.2% growth. It is, in other words, an enormously consequential error.
Paul Krugman added that plenty of sensible people “never bought” the argument in the first place, because “the observed correlation between debt and growth probably reflected reverse causation.” He added, “But even I never dreamed that a large part of the alleged result might reflect nothing more profound than bad arithmetic.”
The next question, of course, is whether Paul Ryan and every other conservative who has relied on the Reinhardt/Rogoff study will reevaluate their assumptions, given the revised reality. I think we know the answer to that. As Dave Roberts noted, “Austerity boosters care about being debunked about as much as climate skeptics do. You cannot overcome motivated reasoning with more numbers.” I’m afraid that’s correct, but for those who care about reason and evidence, this nevertheless seems like a fairly big deal. Update: It looks like Jared Bernstein and I were thinking along similar lines when it came to chart-making.
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