Reinhart and Rogoff: Lesson in statistical terms

Advocates of government spending are enjoying the recent news that errors were discovered in an often quoted 2010 analysis by economists Reinhart and Rogoff that showed countries with debt at levels (resulting from high spending) greater than 90% of GDP had an average GDP growth rate of -0.2%, which was statistically lower than countries with lower debt levels.

Recent corrections show that these countries actually had averaged 2.2% growth, not -0.2%, which is not statistically different from countries with lower debt levels.

Critics have accused R&R’s analysis of spurring irresponsible austerity in government spending and may have prevented more beneficial government stimulus spending around the world.

But, wait. The corrected analysis shows that countries with lower debt had higher GDP growth rates ranging from 3.1% to 4.2%. Yep. In this data set, apparently 2.2% is not statistically different from 4.2%.

That doesn’t mean that the data shows that government spending helps (or hurts) GDP. It also doesn’t mean that ‘austerity’ hurts or helps.

To be clear…it means nothing. Government spending advocates are not wise to use the the corrected stats bolster their case.

Not statistically different means that from the size and sample of this set of data, it cannot be concluded with high confidence that the differences in GDP growth rates are caused by the differences in debt levels.  But, it doesn’t rule it out either.

If anything, the analysis still provides directional support that debt may hurt, rather than help.

Personally, I’m not a fan of GDP. I explain why herehere and here. Basically, it’s because GDP treats an expense like an income.

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