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Reinhart-Rogoff Study Debunked

Three years ago, Harvard economists Carmen Reinhart and Kenneth Rogoff released a study that presented empirical evidence from 44 nations over a 200 year time span to demonstrate that countries with a public debt over 90 percent of GDP (the United States is at about 100 percent, Japan at 200 percent) have average growth rates one percent lower than other nations.

Forty-four countries, 200 years, Harvard -- pretty convincing, huh?

Except it was wrong.

When the PERI team finally got a hold of the data used by Reinhart and Rogoff, they uncovered gaping problems. They found that "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth." Adjusting for these errors, the Amherst team contends that "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent."

It would all be a Massachusetts "Ivory Tower" kerfluffle if the Reinhart-Rogoff study were not cited by practically everyone in Washington, including Paul Ryan, Simpson-Bowles, and the entire "Fix the Debt" crowd, to justify harmful cuts and a stalemate on stimulus currently condemning millions to mass unemployment.

And it should come as no surprise that the economists have ties to Wall Street billionaire Pete Peterson.

Study Used to Justify Harmful Cuts and High Unemployment

It is hard to understate the importance of the study. It has been cited around the globe by academics, politicians, and the mainstream media. In the U.S., it is one of Paul Ryan's favorite justifications for his draconian Path to Prosperity budget, for GOP rejection of further stimulus, and the Fix the Debt crowd's frenzied calls for urgent action. President Obama is now on the austerity bandwagon, enacting numerous cuts and proposing new cuts to programs like Social Security in order to achieve a "Grand Bargain" on deficits. As a consequence, mass unemployment is a new normal.

In Europe, "R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences" for real people, says economist Dean Baker in a piece called "How Much Unemployment Did Reinhart and Rogoff's Arithmetic Mistake Cause?"

Time and time again, economists tried to replicate the Reinhart-Rogoff results, but to no avail. Now, Thomas Herndon, Michael Ash, and Robert Pollin show us why. One mistake, admitted by the authors and gaining the most attention, is an Excel spreadsheet error. Check out the screen shot of the year.

As the authors put it: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49... This spreadsheet error... is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category." Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).

Mother Jones dubbed it "the Excel Error Heard Round the World."

Pete Peterson's Fingerprints

It will come as no surprise that Reinhart and Rogoff have ties to Wall Street billionaire Pete Peterson, a big fan of their work. Peterson has been advocating cuts to Social Security and Medicare for decades in order to prevent a debt crisis he warns will spike interest rates and collapse the economy. (Peterson failed to warn of the actual crisis building on Wall Street during his time at the Blackstone Group.)

When Washington Post writer Suzy Khimm pointed out to Peterson that the U.S. built significant deficits during the financial crisis but maintained very low interest rates, Peterson responded that America still needed to be on high alert: "you know [Kenneth] Rogoff and [Carmen] Reinhart -- I've talked to them, and they say [debt crises] are sudden, they're sharp, they're very substantial. The risk is simply too big. At some point, if we lurch from crisis to crisis, then confidence will decline on our economy in general."

As the Center for Media and Democracy detailed in the online report, "The Peterson Pyramid," the Blackstone billionaire turned philanthropist has spent half a billion dollars to promote this chorus of calamity. Through the Peter G. Peterson Foundation, Peterson has funded practically every think tank and non-profit that works on deficit- and debt-related issues, including his latest astroturf supergroup, "Fix the Debt," which has set a July 4, 2013 deadline for securing an austerity budget.

Reinhart, described glowingly by the New York Times as "the most influential female economist in the world," was a Senior Fellow at the Peterson Institute for International Economics founded, chaired, and funded by Peterson. Reinhart is listed as participating in many Peterson Institute events, such as their 2012 fiscal summit along with Paul Ryan, Alan Simpson, and Tim Geithner, and numerous other Peterson lectures and events available on YouTube. She is married to economist and author Vincent Reinhart, who does similar work for the American Enterprise Institute, also funded by the Peterson Foundation.

Kenneth Rogoff is listed on the Advisory Board of the Peterson Institute. The Peterson Institute bankrolled and published a 2011 Rogoff-Reinhart book-length collaboration, "A Decade of Debt," where the authors apparently used the same flawed data to reach many of the same conclusions and warn ominously of a "debt burden" stretching into 2017 that "will weigh heavily on the public policy agenda of numerous advanced economies and global financial markets for some time to come." (Note that not everyone associated with the Institute touts the Peterson party line.)

Bankrupt Analysis

The authors have issued two rebuttals to the Amherst study. In their latest, they object that anyone would think they were "misconstruing analysis to support austerity" or a political agenda. Perhaps it had to do with pieces like this one entitled "Too Much Debt and the Economy Can't Grow" that warns against further stimulus at a time when mass unemployment is wreaking devastation on the lives and livelihoods of workers young and old.

Economists like Herndon, Ash, Pollin, Baker, and Krugman have never bought the argument that economies can cut their way out of a crisis, and now data from the Reinhart-Rogoff study, from numerous European countries, from the IMF, and even from CMD's home state of Wisconsin (now ranked an astonishing 44th in job creation), support their contentions.

If only they had half a billion to spread the word.