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April 19, 2013
April 19, 2013

The student that made a fool of the theory of cuts

Author: Manuel Ángel Méndez Translator: Sara R. Romo
Source: Gizmodo  Category: On the crisis
This article is also available in: elespt-pt
The student that made a fool of the theory of cuts

Photo: Getty Images

If you haven’t read the story, you have to. A couple of days ago we told you about it: one of the studies constantly cited by politicians and economists in order to impose their policies of cuts and austerity, Growth in a Time of Debt, published in 2010, was wrong. And all this because of a mistake in an Excel formula. A bug that has served to justify the huge cuts in education, health and wages in half of the world. A 28 year-old Economics student, Thomas Herndon, has revealed the mistake.

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Herndon became instantly famous last week. His doctoral thesis, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff was published together with two other professors from the University of Massachusetts and has proven the report of the prestigious economists Carmen Reinhart and Kenneth Rogoff to be wrong. The authors themselves, Reinhart and Rogoff, did not have a choice but to admit it. And everything was due to a simple formula. A mistake that slaps on the face those who defend the effectiveness of the cuts in order to reduce the public debt and create economic growth.

Herndon says he decided to analyse the Reinhart and Rogoff report because it had been one of the most influential in the past years and it had been used to justify the theories of austerity. He repeatedly contacted the two important economists asking for the data, but he had no success. They ignored him for weeks. One day, Carmen Reinhart wrote to him saying she did not have the time to look at his request but that he could have the data. He could do whatever he wanted with the results. Well, he sure did.

The economic model in Excel concluded, among other things, that countries whose debt exceeded 90% of the GDP experienced lower growth than those with lower debt levels. To avoid this, it was necessary to cut, cut and cut. Or not. Because, as Herndon discovered, 90% of that conclusion is based on a miscalculation.

“I clicked on the cell L51 and saw that they had calculated the mean only from row number 30 to row number 44, instead of the rows from 30 to 49,” he explains. Reinhart and Rogoff had also excluded data from Canada, New Zealand and Australia, countries that experienced periods of high growth despite their high national debt.

Even Herndon’s professors did not believe him at first. But it was true. Both Reinhart and Rogoff have had to admit this week in the WSJ their embarrassing mistake, even though they still defending the validity of their conclusions.

Herndon explains that he did not decide to analyse the 2010 report maliciously, nor to expose or ridicule the authors. He just did it because, like millions of people, he had the feeling that the cuts that have been introduced in dozens of countries, from Spain and Greece to the U.S., are actually counterproductive.

In the end, this story proves again one thing: too many times, when a politician is to make a decision, they do not care if the reality says that they will be wrong. If there is no evidence to support their decision, they will ask someone to manufacture them. Does anyone remember the famous “report” about weapons of mass destruction in Iraq? As I was saying.

Bridging the gap and the situation, something similar has happened before. And the bad thing is always the consequences: this time, five years (and many still to come) of brutal cuts that have affected and will still affect millions of people worldwide.

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