The findings may not have much impact on the debate over government debt, and it probably won't cause those who have spent the past several decades panicking over government debt to stop their panicking. But it seriously erodes the intellectual underpinnings of the pro-austerity argument -- and makes the damage done by austerity in Europe and the U.S. in recent years all the more poignant.
"This is a mistake that has had enormous consequences," wrote Dean Baker of the Center for Economic and Policy Research. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."
The new paper, by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst, set out to reconstruct the findings of an influential 2010 paper by Reinhart and Rogoff, called "Growth In A Time Of Debt." Reinhart and Rogoff, of the University of Maryland and Harvard, respectively, claimed that economic growth slowed fairly dramatically for countries whose public debt crossed a threshold of 90 percent of gross domestic product.
The problem is that other economists have been unable to recreate Reinhart and Rogoff's findings. Herndon, Ash and Pollin now say they were able to do so -- but only by leaving out big, important pieces of data.
Using the same spreadsheet that Reinhart and Rogoff used for their research, Herndon, Ash and Pollin found that "Growth In A Time Of Debt" was built around a handful of significant errors. Correcting for those errors changes the findings dramatically: Average GDP growth for high-debt countries jumps from negative 0.1 percent to 2.2 percent.
The most important error appears to be a failure to include years of data that showed Australia, Canada and New Zealand enjoying high economic growth and high debt at the same time. Including all the years of data boosts New Zealand's average economic growth rate under high debt to 2.58 percent, from negative 7.6 percent. Given the small amount of data used in Reinhart and Rogoff's study, this has a huge impact on the overall findings.
"We literally just received this draft comment, and will review it in due course," Reinhart and Rogoff wrote in a long and detailed emailed statement Tuesday afternoon. "Nevertheless, the weight of the evidence to date -- including this latest comment -- seems entirely consistent with our original interpretation of the data." (Read the whole statement here.)
Update: At about 2:00 a.m. ET on Wednesday, Reinhart and Rogoff emailed a fuller statement defending their work, the full text of which you can read here. They admit to the spreadsheet error, but defend their weighting of data and say they have corrected for some of their omissions in subsequent work. They stand by the gist of their conclusion, that higher debt is associated with lower growth.
Even before the errors cited in the new study came to light, many economists doubted Reinhart and Rogoff's conclusion that high debt causes low growth, given the glaring chicken-and-egg problem at the heart of the research. Did these countries have slow growth because they had high debt, or did they have high debt because they had slow growth?
(Reinhart and Rogoff noted in their Tuesday statement that they have been careful not to claim that high debt causes slow growth, but rather that it has an "association" with slow growth.)
Beyond that, Baker notes, there were lots of other reasons to question Reinhart and Rogoff, including the fact that their gloomy conclusions about debt relied heavily on slow U.S. economic growth immediately after World War II. At the time, the U.S. was deep in war debt and dismantling its war machine. That relatively brief state of affairs was quickly followed by arguably the greatest economic boom in history.
Despite these questions, Reinhart and Rogoff's 90-percent threshold has been discussed ad nauseum in the press and used frequently to justify austerity measures in the U.S. and Europe, as detailed by Quartz's Tim Fernholz. The 2012 version of the pro-austerity budget plan of Rep. Paul Ryan (R-Wis.) cites Reinhart and Rogoff by name, and specifically refers to the 90-percent threshold.
Washington's constant state of panic over government debt and budget deficits has contributed to severe cutbacks in government spending that have slowed economic growth and helped keep unemployment high. The situation has been even worse in Europe, particularly in troubled nations like Greece, where austerity has been enforced as a bailout condition, only to result in slower growth and higher debt burdens.
Still, that evidence has been in sight all along, yet the pro-austerity crowd has kept up its drumbeat of deficit panic. This new research probably won't change that.
"There are other threshold papers out there," The Economist's Ryan Avent tweeted. "And people hate to change their minds."
-- Zach Carter contributed to this report.