THE LAST WEEK has been rough for Kenneth Rogoff and Carmen Reinhart, too. The Harvard economists, celebrated for their work on financial crises, stand accused of analytical errors — the correction of which debunks their famous 2010 finding that a national debt-to-gross domestic product ratio above 90 percent may substantially retard economic growth.
The Rogoff-Reinhart goof was no harmless error, the critics charge, but the intellectual trigger for spending cuts and tax increases, in both the United States and Europe — at a time when the world really needs more demand, fueled by government borrowing, to fight mass unemployment.
Mr. Rogoff and Ms. Reinhart acknowledged a mistake in spreadsheet coding, which caused them to overstate the negative correlation between government debt and growth. However, they rebutted broader charges leveled by the University of Massachusetts team that spotted the spreadsheet mistake — namely, that Mr. Rogoff and Ms. Reinhart selectively omitted some crucial data and improperly weighed others. The U-Mass. economists’ reworking of the data shows an association between a plus-90 percent debt-to-GDP ratio and slower growth, just a smaller one than Mr. Rogoff and Ms. Reinhart found.
Whatever the validity of the Rogoff-Reinhart hypothesis, it’s preposterous to blame it for global “austerity” and recession. Yes, budget-cutters from Rep. Paul Ryan (R-Wis.) to European Union official Olli Rehn have invoked the 90 percent benchmark. But does anyone think that these two would have thought differently absent the two economists’ work? Certainly the German predilection for balanced budgets now being imposed on Southern Europe has far deeper roots than the Rogoff-Reinhart hypothesis.
As for our own purported reliance on the Rogoff-Reinhart hypothesis to justify “austerity,” this, too, has been rather overstated in some quarters. We supported President Obama’s 2009 stimulus package — albeit with quibbles about its composition; we’ve praised Federal Reserve policy under Chairman Ben S. Bernanke, while voicing reservations that some of the Fed’s own top officials have raised; we’ve chided Germany for imposing fiscal restraint on Southern Europe without reducing Berlin’s trade surplus.
What we do insist is that the United States cannot afford to neglect its long-term fiscal predicament, and that it needs a more aggressive response than even current versions of a “grand bargain” would provide. The diminution of long-term potential growth is one reason for our concern. Another is that a deeply indebted government would have less “fiscal space” for necessary stimulus during a cyclical crisis. Yet another is vulnerability to a loss of confidence in the bond markets. There’s also the risk that unreformed entitlements crowd out other priorities and transfer scarce resources from young to old.
To some, such arguments amount to fetishizing “austerity” while the jobless suffer. Actually, the problems of the U.S. and global economies are not only cyclical but also structural, and pummeling an “austerity” straw man can be a way to avoid addressing the latter.