Lost amid the tidal wave of media coverage over the Boston Marathon bombings this week was the destruction of a foundational argument of the Avatars of Austerity, aka “deficit hawks.”
Thanks to a little fact checking and spreadsheet analysis by a U Mass grad student and his associates, they proved beyond a shadow of a doubt that key economic data used by the Austerians to justify their slash and burn budget prescriptions is full of shit.
The bogus data is enshrined in a paper by two Harvard economists, Reinhart and Rogoff, frequently cited as Holy Writ by everyone form Erskine-Bowles to Paul Ryan to Fux News. Details to follow, but first, an overview.
Following the collapse of the international financial system during the George W. Bush Administration, deficits worldwide exploded as former tax paying workers were laid off in the tens of millions. Instead of putting them to work building infrastructure and the like, the strategy chosen by FDR during the last Great Depression to re-start the economy and thereby raise government revenues, the uber rich offered their own re-cycled remedy of trickle-down economics, with a twist– tax cuts for them and budget cuts for everyone else.
While the subtext of the Austerians’ campaign to slash government budgets, which overwhelmingly disadvantage the poor and middle class, is obvious: the One Percenters resent having to pay taxes that benefit society as a whole (see Willard Romney’s attack on the 47% as parasites demanding “free stuff”); and while the actual real world results of austerity regimes currently in place in Europe have resulted in deeper economic dislocation and misery — Great Britain is in the middle of a triple dip recession despite deep cuts in vital government institutions like the BBC — one would think that the Austerians would accept reality and admit their anti-Keneysian belief system is wrong.
Fat chance. Depression levels of unemployment in Greece, Spain, and Portugal, accompanied by negative GDP, the contagion effect of austerity is being felt in even healthy exporting countries like Germany, to the extent that even the IMF came out this week against austerity. Despite irrefutable facts, the Austerians remain convinced of the rightness of their crusade. Ignoring Einstein’s definition of insanity — doing the same thing over and over again and expecting a different result — they argue for even greater cuts, and more time for them to work their expected magic.
Just what is behind their rationalization, the keystone upon which the Austerians<a href=”http://news.firedoglake.com/2013/04/19/austerity-economics-takes-a-major-blow-as-key-research-paper-discredited/#comments“> base</a> their unshakable faith?
[T]he Rogoff-Reinhart paper entitled Growth In A Time Of Debt became the intellectual backbone for the austerity movement/plutocrats and their apparatchiks in Washington and elsewhere. The big take away was that a high government debt to GDP ratio – past 90% – would hurt economic growth. Hence, the austerity movement’s central claim that cutting government spending is necessary to restore higher growth levels. And if you are following along, you probably realize why this argument does not even work in its own context. Cutting spending does not eliminate debt – which increases perpetually with interest. Nor is debt itself a reflection of spending levels, debt merely represents borrowing. The government can spend as much as possible and avoid high debt to GDP ratios if taxes are levied to pay for the spending. In fact, the highest growth period in the history of America was during one of its highest tax periods. Neither taxes, debt, nor government spending are, in and of themselves, determinative of economic growth.
Sounds reasonable enough on the surface, assuming that the data they used and its analysis reflect reality. But Houston, we have a problem:
Thomas Herndon, a 28-year-old economics grad student at UMass Amherst, just used part of his spring semester to shake the intellectual foundation of the global austerity movement.
Herndon became instantly famous in nerdy economics circles this week as the lead author of a recent paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” that took aim at a massively influential study by two Harvard professors named Carmen Reinhart and Kenneth Rogoff. Herndon found some hidden errors in Reinhart and Rogoff’s data set, then calmly took the entire study out back and slaughtered it.
What Herndon had discovered was that by making a sloppy computing error, Reinhart and Rogoff had forgotten to include a critical piece of data about countries with high debt-to-GDP ratios that would have affected their overall calculations. They had also excluded data from Canada, New Zealand, and Australia — all countries that experienced solid growth during periods of high debt and would thus undercut their thesis that high debt forestalls growth.
Oopsie. Paul Krugman in his Friday column asks the logical, resulting gobsmacking question:
So, did an Excel coding error destroy the economies of the Western world?
Informed of the mathematical mistake that undergirded his and his BFF Alan Simpson’s whole austerity thesis, Democrat deficit hawk Erskine Bowles in essence replied that he didn’t care–he still believes in its viability, the facts be damned.
“I have obviously read the report and have referenced it a number of times,” Bowles said. “I know they had a worksheet error in the report and my understanding is that does make a difference.”
“But what it doesn’t change is the common sense and my own personal experience in both the public and private sector that when any organization has too much debt that is an enormous risk factor and your risks go up then people lending you money will want more money for their money,” Bowles said.
Translation: “Pay no attention to that man behind the curtain!”
So, Bowles is reduced to playing the “common sense” card so popular among conservatives these days when one of their pet ideologically driven crusades fails an objective analysis of its underlying facts. Sure, there is evidence that debt in excess of 90% of GDP retards economic growth by a measurable percentage. But it doesn’t drive it down anywhere near the level the Austerians maintain, making their Chicken Little The Sky Is Falling routine absurd on its face.
(Reminds me of the cognitive dissonance I used to see operating inside the criminal justice system. As advocacy groups like the Innocence Project has shown, not everyone convicted of a crime is guilty, as post-hoc DNA tests regularly show. You’d think that the original police investigators and prosecutors would eat a little humble pie for being proven wrong, but you’d be wrong. Like chest thumping politicians, they are geniuses at rationalization, maintaining that the victim was guilty for some other reason, because, well, just because. After all, they are professionals, experts who know their stuff.)
Other problems with R&R’s analyses includes the counterfactual case of England, which despite violating the 90% threshold for 19 continuous years, still maintained positive economic growth; and worse, cancelling its influence on the overall data set by giving it equal weight with a single year of severe negative economic growth in New Zealand in the early 1950s. Furthermore, economic conditions change over the decades, and when one analyzes R&R’s data from the beginning of the 21st century forward, the presumed relationship between the 90% level of economic stagnation becomes even more tenuous.
The question now is whether this cold slap of mathematical reality will be enough to end the hysteria of debt obsession that has the Serious People is D.C. so enthralled, and whether the far more critical and economically productive emphasis on job creation is once again the subject of serious policy debate.
I wouldn’t bet on it, since this isn’t a debate about economics but politics. Just as the Ryan Budget, which cited as its only academic justification the now discredited R&R paper, isn’t about deficit reduction but an ideological crusade to roll back the New Deal. As DSWRight over at the Lake <a href=”http://news.firedoglake.com/2013/04/19/austerity-economics-takes-a-major-blow-as-key-research-paper-discredited/#comments“>puts it</a>:
Democratic accountability has been sucked out of the nation-state system and deposited into the hands of a planetary bureaucracy of transnational corporations and central bankers. And from their perspective there is no crisis, at least not anymore, just a continued redistribution of wealth up and the necessity of building a police state to protect it. Austerity forever.
As the Master of Disaster W. once said: “Fool me once, shame on, shame on, you. Fool me–you can’t get fooled again!”