Errors of the Austerity Argument
Republicans have been on the losing side of a lot of debates recently. In the past year or so, long-standing, deeply held GOP positions against gun control, same-sex marriage, higher taxes on the rich and humane immigration legislation have seen steep declines in the estimation of the public. And perhaps as a result, Republican legislators are starting to back away from some of these positions (though owing to the intensity and geography of Americans’ views on gun sale background checks, conservatives in the Senate dug in their heels on that issue last week).
This month, three intrepid economists have exposed another GOP contention as a laughing stock: Paul Ryan’s mantra that since the “crushing burden” of government debt will ruin the U.S. economy, massive budget cuts are an essential ingredient in the “path to prosperity.”
Ryan, like many conservatives in the United States and austerity advocates in Europe, argues that stimulus legislation is the wrong prescription to spur economic growth. Rolling up higher budget deficits and racking up more sovereign debt will cripple the nascent economic recovery, they say. And when Ryan et al. make this case, they invariably point to 2010 research by two prominent Harvard economists. Here is Ryan:
A well-known study completed by economists Ken Rogoff and Carmen Reinhart conﬁrms this common-sense conclusion. The study found conclusive empirical evidence that gross debt (meaning all debt that a government owes, including debt held in government trust funds) exceeding 90 percent of the economy has a signiﬁcant negative effect on economic growth. This is bad news for the United States, where gross debt exceeded 100 percent of GDP last year.
The bad news for Ryan and fellow austerity-pushers is this: Rogoff and Reinhart’s main claim, as University of Massachusetts at Amherst researchers Thomas Herndon, Michael Ash and Robert Pollin argue in a recent paper, is erroneous:
[Rogoff and Reinhart]…made significant errors in reaching the conclusion that countries facing public debt to GDP ratios above 90 percent will experience a major decline in GDP growth. The key identified errors…including spreadsheet errors, omission of available data, weighting, and transcription, reduced the measured average GDP growth of countries in the high public debt category. The full extent of those errors transforms the reality of modestly diminished average GDP growth rates for countries carrying high levels of public debt into a false image that high public debt ratios inevitably entail sharp declines in GDP growth. Moreover, as we show, there is a wide range of GDP growth performances at every level of public debt among the 20 advanced economies that RR survey.
This scatterplot, taken from p. 19 of the paper, shows the “wide range of growth performances” and belies Rogoff and Reinhart’s claim that high debt translates into -0.1 percent growth:
The data is all over the place! While the shaded line suggests an overall modest downward curve in growth rates as public debt rises, at no point do debt levels correlate to economies falling off a cliff. Growth is still in positive territory up to debt-to-GDP ratios of 150 percent, and some high-debt countries (look northeast of the line) are actually growing quite robustly. As usual, my candidate for Best Living Human, Stephen Colbert, has digested this news item with clarity and a uniquely cutting wit:
The error of Ryan and other anti-debt crusaders was putting too much faith in a single paper by two star economists, so it would be rash to elevate the Herndon et al. response as a new dogma. But judging by the evasive and only superficially apologetic response from Rogoff and Reinhart (compounded by their craven New York Times op-ed), the anti-austerity position has the better of the argument at the moment. As Paul Krugman wrote yesterday, the debt-obsessed deficit hawk position has the whiff of “a simple expression of upper-class preferences, wrapped in a facade of academic rigor.”
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