Money Matters
5:04 am
Tue April 23, 2013

How an Excel error derailed the federal deficit debate

Some call it the spreadsheet error heard 'round the world. 

The 2010 Reinhart-Rogoff paper, Growth in a Time of Debt, was the most authoritative report providing hard data on why government spending needs to be cut. Too much debt, the study said, impedes economic growth.

But a mistake in coding the Excel spreadsheet skewed the results. Mike Konczal at Business Insider says the spreadsheet mistake is one of three glaring problems in the study.

The whole debacle serves as a prudent reminder to maintain a healthy sense of skepticism about economic statistics.

Errors, either by commission or omission, happen once in a while in the financial world. Companies fail to report negatives, or make them extremely difficult to uncover, in financial results. Companies will offer reduced forecasts for securities analysts to ensure rosier reactions when they release their actual results.

Unemployment and other economic statistics can be misleading because of seasonal adjustments few understand. Statistics can be subject to dramatic revisions. A hot topic: Statistics for China’s economy are suspect because some say they overstate growth by a factor of two.

Now comes the Reinhart-Rogoff study that has been a cornerstone for those who believe austerity is the right path for economic growth. 

U.S. Representative Paul Ryan, among others, used the study to back up his budget proposal.

It was a simple Excel error, which Rogoff and Reinhart acknowledge, causing much of the damage. Statistics for certain countries that would have reversed a key point of their thesis were dropped because of an erroneous formula.

The formula showed a range that produced a result saying countries with debt more than 90 percent of GDP yielded a negative growth rate of 0.1 percent. Adding the five countries excluded at the bottom of the Excel range, the rate would have been plus 2.2 percent.

Economists and commentators jumped in on both sides. Reinhart and Rogoff, supported by many, said the error did not materially change their conclusions. Others, some vehement, argued otherwise. It may take years, if ever, to prove which side is right.

One thing is certain: this incident serves as yet another example of why economics is nicknamed "the dismal science".