A personal finance columnist for the NZ Herald

Inside Money: Austerity now - was 1951 our most influential year?

Photo / Thinkstock
Photo / Thinkstock

New Zealand's disproportionate influence on world affairs has been highlighted once more as a dodgy data point sparked renewed hostilities in the austerity wars.

The controversy, and New Zealand's glorious role in it, were revealed last week after an American student, Thomas Herndon, unearthed Excel-related statistical flaws in a previously-revered 2010 study by legendary economists Carmen Reinhart and Kenneth Rogoff.

In their influential 2010 study Reinhart and Rogoff allegedly showed a strong causal link between low-growth and government debt. As soon as a country's government debt hit 90 per cent of GDP, the Reinhart and Rogoff data showed economic disaster would ensue.

However, as the Herndon data redo showed, the original paper included a number of errors that undermined the findings particularly the 90 per cent debt-to-disaster threshold.

As well as dropping out five of the 20 countries used in the historical sample, "... Reinhart and Rogoff used only one year of data for New Zealand, 1951, when growth was minus 7.6 per cent, significantly skewing the results", the Financial Post reported.

Instead of a vertiginous economic slowdown of - 0.1 per cent when government debt hit 90 per cent of GDP, the Herndon version shows the average growth fell to only 2.2 per cent.

Financial Times columnist, Wolfgang Münchau, argues the 90 per cent debunking is "hugely important" from a policy perspective as the threshold has been used to justify government austerity drives worldwide.

"[The Herndon study] pulls apart the notion of 90 per cent as some magic number which European policy makers now obsess about, just as they used to about annual budget deficits not exceeding 3 per cent of GDP, for which there was no theoretical basis," Münchau says.

An article by Megan McArdle in US news site The Daily Beast (now also hosting the online remains of Newsweek magazine), is a littler kinder to Reinhart and Rogoff than Münchau but it does focus on New Zealand's important role in this global econometric embarrassment.

"Nonetheless, I think it's fair to say that a result should not hinge on a single bad year from New Zealand," McArdle says, relegating us once again to international irrelevance.

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A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. He is the editor of industry website Investment News. David has edited magazines and websites for the financial advice, investment and superannuation industries.

Read more by David Chaplin

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