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EXTRACT: Last week, quite wonderfully, also saw the debunking of a central myth promulgated by fiscal conservatives and hawks everywhere - not just the hapless Osborne. First published in American Economic Review - a supposedly peer-reviewed and prestigious academic journal dating back to 1911 - the seminal 2010 paper, ‘Growth in a time of debt’ by Carmen Reinhart and Kenneth Rogoff, looked at 20 advanced economies since 1945. Both former IMF employees, they argued that, when “gross external debt” reaches 90% or more of GDP, then a country’s average growth rate collapses to -0.1%. Conversely, when debt was below 90% of GDP, you had growth rates between 3% and 4%. Inevitably, this conclusion has been cited by everyone from the IMF, World Bank, European Central Bank and the Euro group to Angela Merkel and, of course, George Osborne to justify programmes of ‘fiscal consolidation’ and vicious austerity, creating human misery on an enormous scale.
There was only one problem with Reinhart’s and Rogoff’s paper - it was total bunk. Researchers from the University of Massachusetts at Amherst found a simple coding error that omitted several countries from a Microsoft Excel spreadsheet of historical data - a few rows left out of an equation to average the values in a column. Almost a schoolboy error. As a result of this statistical mistake in the original calculations, it is now abundantly clear that the 90% ‘debt cliff’ does not exist. Simply put, Reinhart and Rogoff confused cause and effect: countries have high debt levels because they have slow growth rather than having slow growth because they are heavily indebted. You surely do not have to be a genius to realise that.
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