Country ... USA
Is the debt a big ussue?

How an Excel error fueled panic over the federal debt

Burgess COMMENTARY

Peter Burgess

How an Excel error fueled panic over the federal debt

Rep. Paul D. Ryan ponders the federal budget. (J. Scott Applewhite / Associated Press)

Your take? ... Do we worry too much about the federal debt? Yes or No

One of the most fearsome statistics in the war against the federal deficit has always been the country's ratio of debt to gross domestic product. When this ratio reaches 90%, the argument goes, watch out -- lower economic growth is on the horizon. And that's scary, because that's where the U.S. has been heading.

This idea comes from Harvard economists Ken Rogoff and Carmen Reinhart, who featured it in a 2010 paper and popularized it in a book entitled 'This Time is Different: Eight Centuries of Financial Folly.'

Since then, the stat has been cited countless times, including by Rep. Paul D. Ryan in rationalizing the draconian spending cuts in his proposed budgets. Now it turns out the authors may have counted wrong.

A new study by three researchers at the University of Massachusetts finds that Rogoff and Reinhart made several mistakes that invalidate their thesis.

In their analysis of growth rates of 20 industrialized countries, including the U.S., from the postwar period through 2009, Rogoff and Reinhart excluded data for three countries that had both high debt-to-GDP and high economic growth, which contradicted their finding. They tweaked other figures in a way that minimized overall growth rates for some high debt/GDP countries.

Most important, they made a spreadsheet error that resulted in their leaving five countries out of an all-important average of countries with higher than 90% debt-to-GDP ratios. By restoring the full average, the UMass authors say, the growth rate for countries in that range becomes 2.2%, not the -0.1% cited by Rogoff and Reinhart. That makes the average growth rate at that ratio 'not dramatically different than when debt/GDP ratios are lower.'

Rogoff and Reinhart haven't yet responded to the UMass paper. But if the new analysis holds up, it knocks a key leg out from under the argument that our economic growth depends on cutting the deficit and reducing the national debt without delay.

One irony of the finding stems from the fact that the debt-to-GDP ratio always was something of a heffalump. As economist Robert Shiller pointed out in 2011, yoking the two statistics together doesn't necessarily tell you anything useful. Debt is measured in currency, he observed; GDP is measured in currency units per year. But there's 'nothing special about using a year.... A year is the time that it takes for the Earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.'

If GDP were conventionally measured not over a single year but over five years, or 10, the ratio would look much lower -- indeed, that ratio might make more sense, because debt typically comes due over the long term, not in a year.

The one-year juxtaposition, however, did make for a convenient rhetorical yardstick because it generated big numbers, and as we all know, extreme numbers are the devil's debating tools.

Draft comment ... too long by far:

This is a perfectly sound article but it does not go far enough. Economists and increasingly investors make decisions about the future based on yesterday's correlations ... yet one of the best things going on in the world at the moment is the fastest rate of innovation in history.

From my perspective, more and more sophisticated analysis of yesterday's performance is likely to be more and more wrong about tomorrow's performance which is going to be based on tomorrow's innovation and productivity.

But the scenario is worse than this. There was a time when increased productivity meant that quality of life was going to go up. If we go back to Adam Smith ... who some say invented modern economics when he published a book (in 1776) ... the situation was that productivity was low and no matter how hard everyone in the world worked, there was still a shortage of almost everything, especially food. Fast forward 200 years, and productivity was getting to the stage that more productivity meant less labor would produce all the goods and services that those with money needed. Since 1976 improved productivity has meant more profit and more unemployment. Worse, more powerful technology that has enabled outsourcing of both manufacturing and back office work from the USA (and Europe) to lower labor cost parts of the world. Since 1976 the wealth of labor has gone down ... it went down much more than the buying power because the banks found ways to balloon credit in appalling ways ... in the process the economy of the United States has been gutted.

The relationship between debt and GDP means absolutely nothing. What does matter is how the money raised through having debt is used ... helping those at the lower end of the economic ladder is good, building and maintaining needed infrastructure is good, making healthcare affordable is good, making education effective is good. Corporate welfare is generally bad (it distorts the economy and is usually not really needed). Science and research investment is generally good. Financial sloppiness in the military is bad ... courage in the military is amazing. GDP growth reflecting more and more consumption and waste is bad. Stock prices going up because profits are going up and wages are going down is likely much more bad than good.

Correlation is dangerous because it is rarely right. Cause and effect is better.

It is time we started to measure what matters, and then expect leadership to make decisions based on better reliable data.

I get the feeling that things are starting to change ... but the reform of metrics in society and the economy is long overdue ... and if the reform of metrics is done well it will change everything. Soon it will be time to hold your breath!

Peter Burgess TrueValueMetrics

This is a perfectly sound article but it does not go far enough. Economists and increasingly investors make decisions about the future based on yesterday's correlations ... yet one of the best things going on in the world at the moment is the fastest rate of innovation in history.

From my perspective, more and more sophisticated analysis of yesterday's performance is likely to be more and more wrong about tomorrow's performance which is going to be based on tomorrow's innovation and productivity.

But the scenario is worse than this. There was a time when increased productivity meant that quality of life was going to go up. If we go back to Adam Smith ... who some say invented modern economics when he published a book (in 1776) ... the situation was that productivity was low and no matter how hard everyone in the world worked, there was still a shortage of almost everything, especially food. Fast forward 200 years, and productivity was getting to the stage that more productivity meant less labor would produce all the goods and services that those with money needed. Clearly this is problematice, and in the subsequent 30 odd years more productivity has meant more profit and less labor.

The links between GDP growth and quality of life and the future of the planet are not good links. Quality of life goes up when labor wages go up. This is not happening ... but it must!

Peter