Tuesday, April 16, 2013

90% Debt, GDP growth and MS Excel errors.

I hadn't been paying that much attention to this, but it turns out that a well cited statistic is that countries that have debt that is 90% of GDP grow slower than lower debt countries.  Hence a strong reason for reducing federal debt...or so it would seem...

The original idea was put forward in a paper by two Harvard economists, Carmen Reinhart and Ken Rogoff, and since then it has been very popular with the Tea Party crowd as a reason why federal debt is a "bad thing".

Unfortunately, it turns out that the analysis was wrong.  The researchers apparently missed some observations, used a somewhat dubious weighting system and worst of all made a fundamental excel error.

I am not sure what is more shocking, that Harvard economists would make such analysis errors, or that they are actually using Excel as their primary analysis tool.

Full details in the LA Times here, and a more detailed analysis of the errors are here.  Both articles are well worth reading.

(Thanks to my colleague Srini for sending me the link)