Empirical Basis of Deep Budget Cuts in the US May Be Wrong, Say Researchers

Two of the world's best-known economists have been accused of erroneous statistics, giving ammunition to critics of the austerity drive in the US, Britain and Japan. The proponent of deep and rapid cuts in the federal budget in the US, Rep. Paul Ryan, had cited the work of Harvard economists Kenneth Rogoff and Carmen Reinhart as "empirical evidence" that heavy public debts lead to economic contraction.  


Researchers at the University of Massachusetts, Amherst are challenging Rogoff and Reinhart, whose widely read paper in 2010 concluded that economic growth falls to a mean average of minus 0.1 per cent when public debt is greater than 90 per cent of output.


The Rogoff-Reinhart result is one of the strongest arguments for quickly raising taxes or cutting public spending to keep debt below the 90 per cent limit.


But the University of Massachusetts researchers said that when they repeated the analysis with the same data, they got a figure of plus 2.2 per cent.


"Coding errors, selective exclusion of available data, and unconventional weighting of summary statistics led to serious errors that inaccurately represent the relationship between public debt and GDP growth," they said.


The findings by Reinhart and Rogoff “have served as an intellectual bulwark in support of austerity policies,” the University of Massachusetts academics said. The fact that their results “are wrong should therefore lead us to reassess the austerity agenda.”


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