FT Long Short

Economic bloggers love Excel, so they have leaped on the discovery that Ken Rogoff and Carmen Reinhart, two of the most famous economists out there, aren’t very good at spreadsheets.

The story is told elsewhere in detail, and the academic paper debunking R&R’s maths is full of delicious examples of mistakes (look at footnote 6 for a lovely example).

The gist of it is that enormous weight is given to one year in New Zealand, 1951, when R&R recorded GDP falling by 7.6 per cent.

This year is given a lot of weight for three reasons: First, four previous post-war years were excluded. Second, the average was worked out by producing an average for each country, then averaging those. The combined effect was to give one year in NZ the same weight as 19 years of Greece. Third, a whole bunch of other countries were excluded by mistake.

R&R admit the Excel error in excluding other countries, but are sticking to their other exclusions (because their data on debt-to-GDP had gaps at that point), and to their method of averaging. They also point out that the broad conclusion, that growth slows as debt rises, is still supported by the data, just not so dramatically.

The New Zealand figure is intriguing, though. The 7.6% drop in GDP appears to come from a series compiled by the late Angus Maddison, the great economic historian.

But 1951 was a very strange year for the Kiwis, and the falling GDP then is not an example of weak growth with high debt. The price of wool tripled in 1949-50, and since it made up about half of the country’s exports this boosted GDP enormously. When prices fell back, GDP fell again. Government debt really wasn’t an issue. Read more