April 21, 2013
In Carmen Reinhart and Ken Rogoff’s (R&R) famous and now largely discredited “Growth in a Time of Debt,” New Zealand’s -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high debt) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt.
To make the story better, today I received a tweet that informed me that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months. Perhaps this dispute can be linked to New Zealand’s high debt at the time, but the connection is far from obvious. This is the sort of problem you get when using very small samples.
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