Mary F. Calvert for The New York Times Kenneth Rogoff and Carmen Reinhart at Ms. Reinhart’s Washington home in 2010, the year their study “Growth in a Time of Debt” was published.

An influential 2010 economics paper by Carmen Reinhart and Kenneth Rogoff showed that countries with high levels of debt experienced significantly slower rates of growth – and became a justification for many countries to adopt austerity budgets to hold down their debt loads. Now a provocative new paper is arguing that the paper was seriously flawed, in part because of basic calculation errors in a spreadsheet.

Because policy makers, economists and journalists have repeatedly cited the Reinhart-Rogoff paper in recent years, the new paper is causing a significant stir, with commentary from across the economics blogosphere.

We have reached out to the authors of the original paper to comment, and will update as soon as we hear from them. But in the meantime, here is a sense of the controversy.

In their path-breaking paper, “Growth in a Time of Debt,” based on 3,700 economic observations, Ms. Reinhart and Mr. Rogoff, now both at Harvard, found little relationship between growth and debt for countries with debt-to-economic output ratios of 90 percent or less. But for countries with debt loads equivalent to or above 90 percent of annual economic output, “median growth rates fall by one percent, and average growth falls considerably more.”

Since that paper came out, dozens of policy makers around the world have cited it as a reason for cutting budgets despite a down economy. Keep your debt below 90 percent of output, the logic went, and you would be rewarded with stronger growth in the future. (See, for instance, the House Republican budget.)

But some economists were skeptical of the results. Others wondered whether countries with heavy debts struggled to grow, or whether slow-growing countries ended up with heavy debts, for instance. And many noted how hard it could be to draw straight lines between debt and growth, given the panoply of factors at work.

Given the policy importance of the question, Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst, decided to try to replicate the results. They could not do so with public data, and asked Mr. Rogoff and Ms. Reinhart for their data set.

Within it, they have seemingly discovered a few errors: some simple miscalculations or data exclusions that greatly alter the results. According to their re-running of the figures, “the average real G.D.P. growth rate for countries carrying a public debt-to-G.D.P. ratio of over 90 percent is actually 2.2 percent, not -0.1 percent,” they write.

If their analysis proves to be correct, it would significantly undercut the argument that economies need to keep their debt levels down to avoid a future growth slowdown. But other studies have found similar results to those found by Reinhart-Rogoff, and the two Harvard economists have published additional studies buttressing their results.

Moreover, the argument floating around that the Reinhart-Rogoff research altered any country’s policy course – the idea that we have austerity because of a spreadsheet mistake – is dubious at best. When the global recession hit, many members of the policy elites in Europe and in the United States already believed that budget discipline begat growth. And countries that adopted austerity budgets often had to do so because of the vicissitudes of the market and the financing constraints of groups like the International Monetary Fund and the European Commission.

Article source: http://economix.blogs.nytimes.com/2013/04/16/flaws-are-cited-in-a-landmark-study-on-debt-and-growth/?partner=rss&emc=rss