Did an Excel mistake cripple the world economy?

On 4 January 2010, in the Marriott hotel in Atlanta, two giants in the world of economics, Prof Carmen Reinhart and former chief economist of the International Monetary Fund, Ken Rogoff, were presenting their research paper, ‘Growth in a Time of Debt’.

The headline message was clear and head-turning...

When the size of the country’s debt rises above 90% of Gross Domestic Product, economic growth slows dramatically.

This message, and its authors, were getting an awful lot of attention. The 90% debt-to-GDP limit was quoted by people like EU Commissioner Ollie Rehn and prominent US Republican Paul Ryan. The paper was frequently cited during the 2012 US presidential campaign. It strongly influenced economic policy in the UK, under the coalition government, driving an increase in taxes, a cut in spending and the ‘No pain, no gain’ mantra. This was heavyweight economic research being taken seriously, and shaping the opinions of politicians around the world.

Thomas Herndon, a 28-year-old graduate student spent a whole semester attempting, and failing, to reproduce the results of the paper.

‘Everyone says seeing is believing, but I almost didn’t believe my eyes,’ (source: BBC News). Herndon called his girlfriend to double-check his discovery.

He had unearthed a basic spreadsheet error. Reinhart and Rogoff had accidentally missed out 5 of the 20 countries in their calculation of average GDP growth of countries with high public debt (the countries were listed but the formula didn’t include the data for those countries). The countries they had missed were Australia, Austria, Belgium, Canada and Denmark. And there was more...

Yet another compounding problem was the way in which Reinhart and Rogoff averaged their data. They did not take into account the size of the country or the duration the debt was held for.

‘New Zealand’s single year, 1951, at -8% growth is held up with the same weight as Britain’s nearly 20 years in the high public debt category at 2.5% growth’, Michael Ash says (Source BBC News).

No-one is immune to the problem of flaws in calculations. In the story of Growth in a Time of Debt, the key to uncovering the problem was independent checking of results, access to the original data and dogged determination by Thomas Herndon..

There is an extremely good chance that problems like this exist somewhere within your data and your organisation. The key questions are:

• Do we have a way of preventing issues like this from happening?
• Do we have a system for uncovering existing issues?
• Is there a structured approach for preventing problems from recurring?

Finally, the scariest of all questions:

‘How many decisions have we made on the basis of invalid data and results?’

Let’s just hope that any of the existing problems you uncover haven’t crippled the global economy.