Excel Error Impacts Millions

A recent headline stood out to me: “Argument for Austerity Based on an Excel Error.[1]” I was stunned when I saw it.  How could a spreadsheet error be so big that it could shape economic policy?  This story shows how drastic the results of a single miscalculation can be.

In 2010, Harvard Economists Ken Rogoff and Carmen Rienhart published a paper titled “Growth in a Time of Debt[2]” that became highly influential. Policy leaders from around the world cited this paper when debating economic plans. Reinhart & Rogoff claimed to show that economic growth normally slows when a government’s debt exceeds 90% of the country’s annual economic output.  Since the release of the paper, policy makers have used this data to support the argument for and the implementation of austerity measures to address this potential problem.

The term ‘austerity’ in this context refers to strict measures used by governments to reduce budget deficits during adverse economic conditions. One of the measures most frequently taken is a combination of spending cuts and tax increases, measures that by other schools of economic theory could stunt economic growth.  According to Euronews, the observations of Rogoff and Rienhart and the subsequent conclusion that countries must cut public spending have meant hardship for millions[3].

The twist in this story is that the data supporting this theory was recently found to be flawed.  There was an error in an Excel formula. Thomas Herndon, a student at UMASS Amherst, could not replicate the results of Reinhart and Rogoff’s paper while working on a graduate assignment.  Not giving up, Herndon e-mailed Reinhart & Rogoff, who provided Herndon with the actual working spreadsheet used to obtain their results.[4] Herndon quickly noticed the basic spreadsheet error that had excluded data from Canada, New Zealand, and Australia – all countries that experienced solid growth during periods of high debt.  Consequently, in contrast to Reinhart and Rogoff’s paper, Herndon found [5] that countries with high economic debt did not see their economies shrink 0.1% but instead saw them grow by 2.2% over the time period covered by the study.

Many of us who have worked with spreadsheets have seen countless formula errors. No matter how simple the errors might be, we have learned that the results can be significant.  Analyzing bad data can influence an organization to form a misguided strategy which in turn can lead to a misguided budget.  While your budget may not shape global economic policy, it will be used to shape the direction of your organization.  So having a dependable budget process that removes many of the perils of common spreadsheet errors is crucial.