By Brad Lowell
A University of Massachusetts, Amherst, graduate student, recently exposed major flaws in research done by two economists which has had a significant influence on Rep. Paul Ryan and the majority of his pro-austerity colleagues in Congress.
Ryan, chairman of the House budget committee, in his current budget proposal cites research by Carmen Reinhart and Ken Rogoff, economists at the University of Maryland and Harvard, respectively, which claims that economic growth slows dramatically anytime public debt crosses the threshold of 90 percent of gross domestic product.
Gross Domestic Product is the market value of all goods and services produced in a country during a given amount of time. The GDP of the U.S during 2012 was $15.7 trillion with public debt standing at 82 percent of GDP.
Painfully, for the deficit scolds, as Princeton economist Paul Krugman calls them, Thomas Herndon, the Amherst graduate student, was joined by economists Michael Ash and Robert Polin of the University of Massachusetts to critique Reinhart and Rogoff's 2010 paper. The online critique exposed a significant number of errors in their computations.
An additional error was the simple failure of using an Excel spreadsheet correctly, according to economist Mike Konczal at the Roosevelt Institute 's Next Time New Deal blog.
Herndon, while doing a class assignment, couldn't replicate the results reached by Reinhart and Rogoff.
He found that correcting the errors changes the findings dramatically and increases the average GDP growth for high-debt countries from a negative 0.1 percent to 2.2 percent.
According to a Huffington Post article‚ "The most important error found by Herndon appears to be a failure to include years of data that showed Australia, Canada and New Zealand enjoying high economic growth and high debt at the same time. Including all of the years of data boosts New Zealand's growth rate under high debt to 2.58 percent from a negative 7.6 percent, the UMass economists claim.
Now what in the world does this have to do for anyone living in Concordia, Kansas, you might ask?
Dean Baker of the Center for Economic and Policy Research helps explain why we should all be concerned when he wrote, "This is a mistake that has had enormous consequences. If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere.
Krugman wrote in the New York Times Monday that, "the overriding fear driving economic policy today has been debt hysteria, fear that unless we slash spending we'll turn into Greece any day now." He points out that the famous red line on debt in the Reinhart-Rogoff research was an artifact of dubious statistics reinforced by bad arithmetic.
Economics is a complex subject. Few people want to spend the time trying to understand it.
It's much easier to accept the explanation that we need to manage the public money as we would the family budget and not spend more than we take in. Good advice, except during times of high unemployment when government spending is needed to help stabilize the economy and provide a safety net for the less fortunate.
The time for us to begin worrying is when the cost of borrowing goes up. Krugman states that after years of warnings from the deficit hawks that a fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.