Did This Excel Error Cause Panic Over Federal Debt?

The debate over federal debt and the urgency with which to cut the United States’ dependency on borrowings has paralyzed policymaking in Washington. Now, it turns out, a mistake in a Microsoft (NASDAQ:MSFT) Excel worksheet may be partly responsible for the gridlock in the nation’s capital.

Harvard University economists Ken Rogoff and Carmen Reinhart had written in a 2010 paper that the ratio of the country’s debt to gross domestic product reaching 90 percent could spell a period of lower economic growth, and presents the biggest reason to cut the deficit. The research quickly gained popularity and became the rallying cry in some policy circles for lowering government spending.

A new study by three researchers at the University of Massachusetts — Thomas Herndon, Michael Ash, and Robert Pollin —  finds that the widely cited 2010 paper by Rogoff and Reinhart, which painted an ominous picture of the rising debt to GDP ratio, was based on questionable data exclusion, and worse still, erroneous coding in the Excel sheet they used. Among those who cited the research by the Harvard economists wasRepublican leader Paul Ryan, who highlighted the report as a reason to force big spending cuts in the government’s budget.

After being unable to replicate the data from the 2010 report, the University of Massachusetts researchers obtained the working spreadsheet from Rogoff and Reinhart. “While using RR’s working spreadsheet, we identified coding errors, selective exclusion of available data, and unconventional weighting of summary statistics,” they wrote in their paper…

Rogoff and Reinhart made significant errors in reaching the conclusion that countries facing public debt to GDP ratios above 90 percent will experience a major decline in GDP growth, the researchers wrote. Additionally, they point out how the 2010 report is the only evidence cited in the “Paul Ryan Budget” on the consequences of high public debt for economic growth, and was part of 76 high-profile features in several media outlets, including The Economist, The Wall Street Journal, The New York Times, and Washington Post, among others.

Rogoff and Reinhart haven’t yet responded to the UMass paper, according to The Los Angeles Times, which added that if the new analysis holds up, it knocks a key leg out from under the argument that the country’s economic growth depends on cutting the deficit and reducing the national debt without delay.

Herndon, Ash, and Pollin are scathing in their criticism. They say that the full extent of errors made by the Harvard economists transforms the reality of modestly diminished average GDP growth rates for countries with high levels of public debt into a false image that high public debt ratios inevitably result in sharp declines in GDP growth.