Now that the academic and evidentiary support for austerity is shot full of holes, President Obama has an opportunity to perform a face-saving extrication from his position. Will he do it?
A recent study by a grad student at the University of Massachussets has pointed out critical errors in celebrated Harvard economists Carmen Reinhart and Ken Rogoff’s study which has been the much-cited intellectual underpinning of the austerity movement. In short R-R’s study showed a correlation between high levels of national debt (with a stated critical threshold point at 90% of GDP) and slow economic growth. The results of the study have been often stated as proof that debt at 90% GDP causes slow economic growth and that austerity measures must be employed to bring down debt.
Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.
Many prominent economists had previously pointed out another major error in the way that the study has been used by those who favor austerity:
There were good reasons for not accepting the Reinhart and Rogoff results even before this error was uncovered, as many of us had argued. Most importantly there is a serious issue of the direction causation. Countries tend to have high debt levels because their economies are doing poorly.
Unfortunately, there was not much press notice of the causation problem in R-R’s study, probably because it’s the kind of story that the media find too difficult to explain. But when the grad student from the University of Massachussets discovered spreadsheet errors in their work, now there was an issue that our news media could latch onto with confidence that it was within their ability to explain it. Consequently it has gotten quite a bit of coverage and R-R’s study has been discredited.