The “Excel Spreadsheet Error” In Context

You’ve heard that an incredibly influential economic paper by Reinhart and Rogoff (RR) – widely used to justify austerity – has been “busted” for “excel spreadsheet errors” and other flaws.

As Google Trends shows, there is a raging debate over the errors in RR’s report:

Even Colbert is making fun of them.

Liberal economists argue that the “debunking” of RR proves that debt doesn’t matter, and that conservative economists who say it does are liars and scoundrels.

Conservative economists argue that the Habsburg, British and French empires crumbled under the weight of high debt, and that many other economists – including Niall Ferguson, the IMF and others – agree that high debt destroys economies.

RR attempted to defend their work yesterday:

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

This view generally reflects the state of the art in economic research


Back in 2010, we were still sorting inconsistencies in Spanish G.D.P. data from the 1960s from three different sources. Our primary source for real G.D.P. growth was the work of the economic historian Angus Madison. But we also checked his data and, where inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and Spain’s monumental and scholarly historical statistics, had very different numbers. In our 2010 paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would have strengthened our results, since Spain had very low public debt in the 1960s (under 30 percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over that period.


We have never advised Mr. Ryan, nor have we worked for President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of the 2012 Economic Report of the President, recreating and extending the results.

In the campaign, we received great heat from the right for allowing our work to be used by others as a rationalization for the country’s slow recovery from the financial crisis. Now we are being attacked by the left — primarily by those who have a view that the risks of higher public debt should not be part of the policy conversation.

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring.

Initially, RR never pushed an austerity-only prescription.  As they wrote yesterday:

The only way to break this feedback loop is to have dramatic write-downs of debt.


Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.”

Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work.

Indeed, the nation’s top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.

Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.  Unless we shrink the financial sector, we will continue to have economic instability.

Leading economists also say that failing to prosecute the fraud of the big banks is dooming our economy.  Prosecution of Wall Street fraud is at a historic low, and so the wheels are coming off the economy.

Moreover, quantitative studies provide evidence that private debt levels matter much more than public debt.  But mainstream economists on both the right and the left wholly ignore private debt in their models.

Finally, the austerity-verus-stimulus debate cannot be taken in a vacuum, given that the Wall Street giants have gotten the stimulus and the little guy has borne the brunt of austerity.

Steve Keen showed that giving money directly to the people would stimulate much better than giving it to the big banks.

But the government isn’t really helping people … and has  instead chosen to give the big banks hundreds of billions a year in hand-outs.

If we stopped throwing money at corporate welfare queens, military and security boondoggles and pork, harmful quantitative easingunnecessary nuclear subsidies,  the failed war on drugs, and other wasted and counter-productive expenses, we wouldn’t need to impose austerity on the people.

And it is important to remember that neither stimulus nor austerity can ever work … unless and until the basic problems with the economy are fixed.

Indeed, stimulus and austerity are not only insufficient on their own … they are actually 2 sides of the same coin.

Specifically, the central banks’ central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.

A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.


All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.

Instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.

And instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). This would be better for the economy as well.

Why aren’t we doing this?

Profits are being privatized and losses are being socialized.  So the big banks get to keep the mana from heaven being poured out of the stimulus firehose, while austerity is forced on the public who has to bear the brunt of Wall Street’s bad bets.

The big banks went bust, and so did the debtors.  But the government chose to save the big banks instead of the little guy, thus allowing the banks to continue to try to wring every penny of debt out of debtors.  An analogy might be a huge boxer and a smaller boxer who butt heads and are both rendered unconscious … just lying on the mat.   But the referee gives smelling salts to the big guy and doesn’t help the little guy, so the big guy wakes up and pummels the little guy to a pulp.

Economists note:

A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.

Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.

(Obama’s policies are even worse than Bush’s in terms of redistributing wealth to the very richest. Indeed, government policy is ensuring high unemployment levels, and Obama – despite his words – actually doesn’t mind high unemployment. Virtually all of the government largesse has  gone to Wall Street instead of Main Street or the average American. And “jobless recovery” is just another phrase for a redistribution of wealth from the little guy to the big boys.)

We noted in 2011:

All of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else.


Economist Steve Keen says:

“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.

Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.

And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.

The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …

… and ending up in the pockets of the fatcats.

In other words – underneath the easing-versus-tightening debate – this is not a financial crisis … it’s a bank robbery.

Category: Really, really bad calls, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Missing the Bigger Picture in the Reinhart & Rogoff Debate”

  1. capitalistic says:

    BR, austerity and stimulus work. The problem is when policy makers use the wrong medicine. Every country/economy has an intrinsic dynamic. I am still waiting for the bond vigilantes.

    I remember working as a banker during the credit madness. Overnight, assets that were considered A+, were considered distressed. That was my evidence that the market and economics is purely behavioral.

  2. vavoida says:

    Great overview, one smaller technical issue which is imho missing and very evident in this specific case is sharing academic research data by default to replicate the results.

    If the data & code were available upon publication already in 2010, it may not have taken three years to prove these technical results wrong and the whole public debate, R-R reputation, … would probably have taken another course.

    It’s 2013, sharing economic research data / open access to that data should be standard by default. This could increase the quality slighty, and don’t worry, there will be still plenty of work left interpreting “solid” numbers as the profession has shown over decades.

    Open Data in economics

    study Open Access to Data: An Ideal Professed but Not Practised

    Out of the sample, 435 researchers (89.14%) neither have a data&code section nor indicate whether and where their data is available. We find that 8.81% of researchers share some of their data whereas only 2.05% fully share.

  3. jarrodwilcox says:


    It seems to me that David Stockman’s recent book, which takes some of the same view on these points, should not be dismissed. Putting aside the fact that he criticizes government as well as Wall Street, and that he does not appear to offer much in the way of implementable solutions, what do you think?

    • I like Stockman, but he goes off into the deep end of the pool in lots of what he writes. He still has too much of the rightwing hatred for FDR and programs like Social Security and Medicare. They are not the cause of our Fiscal problems –t he far right does not want to fix them, they want to end them. The tragedy of the book is he has many good things to say but makes some silly ideological-driven errors.

  4. CSF says:

    The R & R controversy shows how politicians often draw simple, black-and-white conclusions from academic research that is complex, nuanced, and intended for discourse within the academic community. It also shows how academics often get into trouble when they become pubic policy advocates, because the politicians only listen to the parts they want to hear.

    Hopefully voices like BR will allow us to move past the simplistic austerity vs. stimulus debate. We need to talk about bar-bell budget agreements (stimulus now and budget cuts later) and structural reforms, including an end to bank welfare at the expense of the real economy, tax code simplification, immigration reform, etc.

  5. call me ahab says:

    all well and good BR-

    I guess the question is . . .even the though the things you bring up [the things that “should” have happened but didn’t happen]- where is the political will to do anything at this point?

  6. DeDude says:

    The worst thing about the RR fiasco is the lack of basic “science 101” understanding that correlation is not proving causation, unless you can experimentally manipulate one parameter and determine the change in the other (with everything else keept constant). It is pathetic that these Harvard “economists” did not understand that. Their paper weasels around the issue of “causation” but their performance in the media did not, and if they wanted to retain a reputation they should have spoken up forcefully as soon as the right wing began using their work to argue that debt above 90% GDP kills growth. It Is even more pathetic that the media machine just swallowed this crap from a couple of Harvard professors – did they also fail “science 101” or were they just to lazy to turn on their brain?

    For those who actually have an open mind and wanted to know if the observed (very weak) correlation was more likely observed because debt causes low growth or because low growth increase debt – it actually is not that hard. You conduct the analysis with a lag to see if there is a stronger “effect” when you analyse with parameter 1 lagging parameter 2 than with parameter 2 lagging parameter 1. That analysis suggests that the correlation is much more likely explained by the model of low growth causing an increase in public debt (likely due to reduced income and increased social spending). Simple logic and observations could have told you that, but always nice to have a study.

  7. ciwood says:

    In multiple discussions in my International Business and Financial Planning classes, the discussions have centered on losing faith in honesty and integrity of politicians and market participants. My greatest fear is that even the marginal students are beginning to realize that trust has been broken. Trust in any and all authority is collapsing. The key to a market economy based on Capitalism is trust. If trust is broken, the magic slowly dies and it may be impossible to put the genie back in the bottle.

    Are you elected representatives listening? We trusted you and you voted against us.

  8. CSF says:

    “The worst thing about the RR fiasco is the lack of basic “science 101” understanding that correlation is not proving causation.”

    Of course you’re right to ask the question, and many have done so. Still, while I don’t want to act as an apologist, it’s worth noting that the first criticism of academic work by those outside the social sciences is always: “Correlation isn’t causation! How could they be so stupid!” Such comments are so common that they’re an inside joke among social scientists.

    In This Time Is Different R & R argue that financial crises lead to prolonged periods of low growth and this results in significant expansions of sovereign debt. In their 2010 paper they include “weasel words” to make clear that their findings are tentative and more reflective of correlation than causation. And yes, perhaps they lean too hard on their own narrative in interpreting the data, but normally in academic circles the research / peer review / publish circle of discourse would iron out these biases.

    The real difference is the way this paper became part of the political discourse, and here you make a great point about their Congressional testimony, where they should have stressed all the qualifiers in their argument, and the need for further research, instead of allowing their paper to be used for political ends. I guess we all suspect they did this because of their personal politics.

  9. Mattw says:

    “In other words – underneath the easing-versus-tightening debate – this is not a financial crisis … it’s a bank robbery.”

    You are hinting at the correct answer, but your big picture is not big enough. Over a long period of time of relative stability, a society will gradually start to experience the growth of bad ideas, bad decisions and corruption. These extend to all corners of society. A big crash in one area is a sign of these problems throughout society. Stopping the crash leaves all the problems in place.

    A big financial crash is a sign of the existence of a dragon-king, or outlier in a power-law distribution. Current income inequity is also a dragon-king. 9/11 was also a sign of a dragon-king in national security.

    So we may have bank robbery, but the real problems are a lot deeper.

  10. Odin says:

    “The big question today is not how economies do with high debt after a war, but how to handle high debts in peacetime. After a war, when physical capital is destroyed, but human capital remains, it is often possible to rebuild faster. There are also many efficiency benefits from releasing wartime controls and bringing manpower to productive use. But the first few years of such experiences, in any event, might not necessarily capture the problem that one is interested in, of today’s peacetime deficits.” – Reinhart and Rogoff 4/25/13 NYT

    Apparently not content with seeing their reputations savaged, R & R decided to commit credibility suicide by making it clear they don’t know when their country is at war. Perhaps they believe this time is different cuz they’re comparing wartime with peacetimes.

    It’d be interesting to know why so people who’ve commented on the op ed haven’t mentioned this latest glaring error. Do they believe this is peacetime too?

  11. Giovanni says:

    RE: “Instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.”

    I remember someone suggesting that instead of bailing out the banks directly, the funds should have first been used to pay off everyone’s mortgage. The banks would be where they are now but the Main Street economy would have already recovered. And think of all the robo-signing coverups that would have been avoided.

  12. The search for the tipping point which brings about the surge in sovereign bond rates to 7% is elusive and more complicated than a range of Debt/GDP ratios. Debt service includes several variables. Modeling this suggests the usa has ten years on its present course.