Austerity has been tried and found wanting in practice. Instead of expansion and growth, Europe has been driven back into recession. With Britain’s credit rating downgraded, its economy contracting, its unemployment rolls soaring, its debts rising, three years of rosy forecasts shredded, Tory Chancellor George Osborne’s tears at the lavish funeral for Margaret Thatcher may well have been for the burial of his own reputation. Britain is “playing with fire,” warned the International Monetary Fund’s chief economist, Olivier Blanchard, who told Sky News, “The danger of having no growth, or very little growth, for a long time, is very high. You get a number of vicious circles that come into play.”
And now austerity’s theoretical underpinnings have been exposed as flimflam, constructed out of a spreadsheet error and goofy logic. The austerity advocates pitched their case on the basis of a prestigious 2010 paper by the blue-chip economists Carmen Reinhart and Kenneth Rogoff; it claimed to show that when the ratio of public debt to GDP exceeded 90 percent, economic growth fell dramatically. With the United States and European nations beyond or nearing that number, any effort by the government to stimulate the economy through traditional deficit-financed jobs programs would lead only to slower growth, higher unemployment and worse debt.
Reinhart and Rogoff’s paper was cited repeatedly by everyone from conservative economists to reputable bankers to politicians from Mitch McConnell, the Republican leader of the Senate, to Republican budget guru Paul Ryan (Wis.). Alan Simpson and Erskine Bowles and the Pete Peterson-funded austerity lobby used it as proof that immediate action was needed to fend off economic ruin.
But Thomas Herndon, a graduate student in economics at the University of Massachusetts, discovered that Reinhart and Rogoff had made a truly egregious error in their calculations, omitting basic data. A working paper by Herndon and his professors Michael Ash and Robert Pollin posted last week revealed the errors along with an insupportable method of averaging GDP growth across countries and time. They showed that when the data were totaled correctly, the average rates of growth for countries with 90 percent public debt to GDP ratios from 2000 to 2009 was comparable to or higher than those for countries with debt ratios between 30 to 90 percent.
Reinhart and Rogoff admitted the arithmetic errors but claimed, incorrectly, that it was still true that high public debt levels were correlated with slower growth. But their self-defense failed to address the point made by sensible economists when the study first came out: Correlation is not causation. It’s obvious that after Wall Street blew up the economy, the recession caused lower tax revenues, and higher spending on unemployment, food stamps and stimulus programs to forestall an all-out Depression. Government deficits and public debt rose as a result of the crisis, not as a cause.
The IMF, once a bastion of austerity economics, has admitted its errors, warning that austerity is now sabotaging recovery. As the fund lowered its growth projections for next year, IMF Managing Director Christine Lagarde called on the United States and many countries in Europe to focus more on growth and less on trimming budget balances this year, warning, “We need growth, first and foremost.”
So, will the “Fix the Debt” austerity claque, the Republican Tea Party Caucus and McConnell get out of the way so the president and Democrats can pass jobs programs to put people to work?
Don’t count on it. As the case for austerity was eviscerated, Simpson and Bowles came out with yet another austerity plan, once more calling for urgent reforms to cut Social Security and Medicare benefits in order to avoid economic collapse.
Sadly, austerity’s reign of misery continues, even as it has been demolished in theory and practice. President Obama has ceded ground to the austerity hawks, proposing cuts to Social Security and Medicare as means to reduce government debt. On the other side of the Atlantic, austerity is spreading economic contraction across Britain and the continent. The Federal Reserve is even under pressure to roll back its expansionist monetary policy. We will be freed of austerity’s grip only when those in power return to common sense, fact-based politics and when we hear much more from the unemployed and the immiserated and much less from bankers and their favored economists.
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