Thought they’d hit the stylised-fact jackpot

From Science Fictions by Stuart Ritchie.  Page 123.  

Physics has laws, mathematics has proofs, and social science has ‘stylised facts’: statements such as ‘people with more education tend to get a higher income during their lifetime’ and ‘democracies tend not to go to war with one another’. These may not be as ironclad as laws or proofs, but they’re supposed to express broad, important and replicable findings in simple language. Just as physicists would love to discover a new law (or a way to break the ones we already know), and just as mathematicians work endlessly to prove their theorems, many social scientists, particularly economists, long to discover a stylised fact that can be associated with their name – and that the people who make important decisions can easily keep in mind. When they published a major paper in 2010, the economists Carmen Reinhart and Kenneth Rogoff thought they’d hit the stylised-fact jackpot.
 

For two years, politicians had been frantically trying to address the fallout of the 2008 financial crisis and the ensuing Great Recession. Amid all the conflicting advice, Reinhart and Rogoff’s paper, entitled ‘Growth in a Time of Debt’, was a godsend, providing strong evidence to recommend one particular course of economic action: austerity.  Reinhart and Rogoff had studied the debt-to-GDP ratio – the relationship between what a country owes to its creditors (its public debt, which, perhaps confusingly, is also known as its government debt or its sovereign debt) and what new goods and services it can produce (its Gross Domestic Product). They investigated the relation between this ratio and the rate of growth in the country’s economy. Using historical data from several dozen countries, their paper showed that when the debt-to-GDP ratio was low – say, when debt was between 30 and 60 per cent of GDP – there wasn’t much of a link to be drawn with growth, but countries with ratios above a very specific threshold – 90 per cent – had shrinking economies.
 

Perhaps because its main result lent itself so easily to becoming a stylised fact (‘debt-to-GDP ratios above 90 per cent are bad for growth’), the study became enormously influential. Not only was it covered extensively in the media, but it helped shape many states’ policies of austerity in response to the recession – the idea being that governments should try to pay off their debts (by cutting spending, increasing taxes, or both) to get that ratio below the crucial number of 90 per cent. The study was explicitly mentioned in a major speech by the UK’s Chancellor of the Exchequer of the time, George Osborne, and in a statement by Republican members of the US Senate and House Budget Committees.3 According to the economist Paul Krugman, a critic of Reinhart and Rogoff’s message, so many pro-austerity politicians referenced the study that it ‘may have had more immediate influence on public debate than any previous paper in the history of economics’.
 
Which makes what happened next all the more concerning. In 2013, critics of the paper discovered a mistake in the Microsoft Excel spreadsheet Reinhart and Rogoff had used in their analysis: the debt of several countries had been left out of the equations. Specifically, the spreadsheet omitted the debt of Australia, Austria, Belgium, Canada and Denmark from its calculation. The horribly banal reason? A typo. When this was corrected, along with amendments to another couple of debatable analytic choices Reinhart and Rogoff had made, the relation between the debt ratio and growth changed dramatically.  The paper had said average growth above the 90 per cent ratio was −0.1 per cent; after the corrections it was +2.2 per cent. There was nothing magic about that 90 per cent number after all; growth didn’t suddenly turn negative after that threshold. In reality, there was ‘a wide range of GDP growth performances at every level of public debt’.  If it had always had a more circumspect claim like this, one much more complicated than the original stylised fact, it’s hard to imagine the paper would have received so much attention.