Austere trial and error
Numbers crunched by two economists became grounds for swingeing global cuts but a doctoral student has found fault in the new orthodoxy
Was it - or more to the point, is it, since it is still going on - the economic recession triggered by an Excel spreadsheet error?
Not only the arcane world of academic economists, but finance ministries around the world have been shaken by the discovery that the enormously influential economists Carmen Reinhart and Kenneth Rogoff made some stupid errors in their research, which has been the basis of many countries' austerity programmes.
Reinhart and Rogoff (R+R) asserted on the basis of hundreds of years of data that countries where national debt reached 90 per cent of gross national product suffered low growth, in fact negative growth of 0.1 per cent in the period from 1945 to 2009.
Their work gave governments around the world the ammunition for policies of austerity, including sharp cutbacks to spending, in the hope of preventing worse happening later.
Paul Ryan, Republican vice-presidential candidate and chairman of the House of Representatives budget committee, cited R+R in his role as chief deficit hawk. R+R also lobbied US senators, urging them to take action immediately rather than wait to cut debt.
In Britain, Chancellor of the Exchequer George Osborne took their findings to heart and made deep cuts to government spending. The International Monetary Fund and the European Union also urged heavily indebted countries to take austerity measures even at the expense of economic growth and employment.
It was a case of the medicine being at least as harmful as the cure - as recession bit, unemployment stayed high and cuts to government benefits took their savage toll, especially on poor families without work.
Even government budgets suffered, as low or negative growth meant that revenues suffered in a dangerously vicious spiral.
But then a funny thing happened. Thomas Herndon, a 28-year-old PhD student at the University of Massachusetts Amherst, was puzzled that he could not replicate R+R's findings. When he finally got spreadsheets of R+R's work, he discovered that they had accidentally excluded five rows of figures, the lack of which depressed the results.
In their critique, Herndon and his professors, Michael Ash and Robert Pollin, claim that correcting for the spreadsheet error and adding in some countries that had high debts but also high growth raises the growth rate of countries with gross debts of 90 per cent of GDP to 2.2 per cent.
Herndon's critique is already having an impact. While advising countries to keep up their reforms, IMF managing director Christine Lagarde last week stressed the importance of growth and of job creation, especially creating jobs for the young.
When Osborne dismissed that criticism as "just one voice", the IMF's No2, David Lipton, said Britain's economy had been "somewhat weaker than had been foreseen" and "our view is that the pace of consolidation ought to be reconsidered".
R+R admitted their mistake in accidentally omitting the five lines of data from the spreadsheet, but claim that their inclusion would raise the growth of the high debt countries to 0.2 per cent. Adding in data from the new countries, which R+R say was not available when they did their 2010 paper, would take the figure to 0.5 per cent.
They explain away the difference between this figure and Herndon's by attributing it to a difference in the weight given to countries in the counting.
Osborne claimed that the criticism of R+R was being "used as an excuse by those who are always opposed to make any attempts to control public spending or deal with public debt". Olli Rehn, the EU commissioner for economic and monetary affairs, said: "We are not deciding our economic policy in Europe on the basis of one single study."
Fitch Ratings, in downgrading Britain from AAA to AA-plus, claimed that it had no "fiscal space to absorb further adverse economic and financial shocks".
It is not often that economists are so influential that their policies set a standard. Adam Smith is the standard-bearer for free markets, though his caveats and stress on the plurality of human motivations, the connections between ethics and economics, and the importance of institutions have often been ignored by gung-ho free marketers, who have turned Smith on his head.
More recently, John Maynard Keynes has been another much misquoted economic guru.
With their mammoth work on the implications of heavy government debts and growth, R+R were becoming the standard authority.
It reminds me of the old saying: "If you laid all the economists in the world end to end they would not reach a conclusion".