If This Is the End of “Austerity,” When Did Austerity Begin?

By:  Thomas R. Eddlem
If This Is the End of “Austerity,” When Did Austerity Begin?

Keynesian economist Paul Krugman crowed in the June 6 edition of the New York Review of Books that “the case for austerity has crumbled,” but careful analysts should be cautioning “real austerity was never even attempted.”

The centerpiece in the Princeton University economics professor's gleeful call for expanded government spending was a study released in April by researchers at the University of Massachusetts at Amherst. That U. Mass. study partially debunked a widely cited 2010 study by Harvard Professors Carmen Reinhart and Kenneth Rogoff, which claimed economic growth falls off a cliff when government debt exceeds the 90 percent of gross domestic product (GDP). “Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics,” Krugman wrote, noting that the Harvard study had been cited by Rep. Paul Ryan and top European officials. The Nobel Prize-winning economist noted that the U. Mass. professors revealed that Reinhart and Rogoff had made multiple mistakes in analysis, including, in Krugman's words:

one actual coding error, although that made only a small contribution to their conclusions. More important, their data set failed to include the experience of several Allied nations — Canada, New Zealand, and Australia — that emerged from World War II with high debt but nonetheless posted solid growth. And they had used an odd weighting scheme in which each "episode" of high debt counted the same, whether it occurred during one year of bad growth or seventeen years of good growth.

The University of Massachusetts research paper concluded: “Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.” Two of the co-authors of the U. Mass. study, Robert Pollin and Michael Ash, concluded that “Reinhart and Rogoff are wrong about austerity” in an op-ed for the April 17 London Financial Times, claiming instead that “judicious deficit spending remains the single most effective tool we have to fight against mass unemployment caused by severe recessions.” 

The analysis by Krugman and the U. Mass. authors above is accurate only so far as they pointed out errors in the Reinhart and Rogoff study; the U. Mass. scholars did find a coding error and omission of some data by the Harvard professors.

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