An economic embarrassment

There was a minor earthquake in the economics profession when some graduate students found some errors in major research that has been cited around the world. What’s this about? N.C. State University economist Mike Walden responds.

“Well, this is a very interesting story. There were a couple of very prominent professors — one at Harvard, one at the University of Maryland — who published some research a couple of years ago specifically looking at how debt — debt taken out by governments — affects economic growth.

And what they found was that the more debt that a government has, the slower economic growth. And specifically, they said that there’s a threshold level where debt is above 90 percent of the economy where the economic growth rate really, really slows down and approaches zero. And obviously this has gotten a lot of play, a lot of attention.

It’s been the basis of some big policy debates. Well, about six months ago some graduate students at a university here in the U.S. were assigned a topic of replicating this research. So, they went out and they got the data and they ran the analysis. They found their results weren’t matching up to what these prominent economists found.

And what they found was there had been some coding errors, there’d been some countries left out.  And this has really caused some embarrassment for those two prominent economists. Now what difference does it make in the policy recommendations? Well, these students still found that very high debt levels — i.e., above 90 percent of the economy –were associated with slower economic growth, but the growth rate slowed to two percent rather than 1.5 percent.”