Imagine for a moment you were planning a trip from Brighton to Manchester in quite bad weather. You don’t want to screw up and find yourself stuck on the M23 so you get a couple of world famous experts to help - a meteorologist and a renowned geographer - the sort of people whose words count.
They produce a paper “Travel in a time of bad weather”.
You’re delighted and proud to have sponsored it until you find using this paper to help you on your journey means you end up in Mannheim not Manchester. Your two academics are unabashed describing their failure to check their work as trivial and that the general thrust is fine. They also say Mannheim is a very nice city with a much better climate than Manchester with a particularly fine landmark water tower.
Well, check out the story of Carmen Reinhart and Ken Rogoff, two economists to whom all peers bend their knee. They are the business when it comes to setting governments right. And their paper “Growth in a time of debt” has been helping shape global economic policies.
Very simply it suggests economic growth slows dramatically when the size of a country's debt rises above 90% of a county’s Gross Domestic Product. This pretty well confirms the feeling that many have so…….
Ah, not quite.
A student (Thomas Herndon and his Professor Michael Ash) have found a few errors in their work.
- Data from 5 countries out the 20 supposedly studied were accidentally omitted, embarrassingly those with rather better than average economic results (Australia, Austria, Belgium, Canada and Denmark)
- They averaged their data so one bad year for a small country like New Zealand, was disproportionately emphasised because it was given the same weight as, for example, the UK's nearly 2 decades with high public debt.
The effect of correcting this is to show whilst high debt correlates with somewhat lower growth, the relationship is much gentler and there are lots of exceptions to the rule. So it doesn’t change black to white but certainly to a shade of grey.
Put it this way, you wouldn’t bet your own economy on the Reinhart/Rogoff work. Meanwhile they have made a generous admission of culpability – well not so much generous as rather grudging:
“We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”
I think it’s why we ought to tell economists to just rog off.