A new study reveals that one of the most cited economic principles regarding GDP and debt is most likely based on a "sloppy Excel coding error." According to a 2009 book by Carmen Reinhart and Kenneth Rogoff, This Time It's Different, countries with a high debt to GDP ratio have slow economic growth. But three economists at the University of Massachusetts have published a critique of Reinhart and Rogoff entitled: "Does High Public Debt Consistently Stifle Economic Growth?" They found a major and embarrassing error in the original calculations.
Basically, a teeny tiny Excel cell was set incorrectly, and as a result, Reinhart/Rogoff left out Austria, Australia, Denmark, Belgium, and Canada. Once fixed, their calculation of a -0.1 percent growth rate should actually be 0.2 percent growth rate. When other revisions were carried out, the scholars found that the true growth rate should have been 2 percent.
Slate's Matthew Yglesias breaks down the ramifications of this error in his MoneyBox post:
"This is literally the most influential article cited in public and policy debates about the importance of debt stabilization, so naturally this is going to change everything. Or, rather, it will change nothing."
So you can either rethink everything you thought about GDP:debt ratios or just chill out because nothing will change anyway, depending on how much energy you feel like expending.
[Slate, image via Roger Jegg - Fotodesign-Jegg.de/Shutterstock]