THINK PROGRESS
In the debate over government spending, the central data point wielded by fans of austerity
is the claim that once a country reaches a debt load over 90 percent of
its economy — a threshold the United States is approaching — economic
growth goes into a tailspin. That argument came from a 2010 study
by Carmen Reinhart and Kenneth Rogoff. After surveying a wide number of
countries, they found that, on average, once the 90 percent mark is
crossed, economic growth slows. Though the paper always had problems
that kept many economists from embracing it, that didn’t stop it from
becoming “the most influential article cited in public and policy
debates about the importance of debt stabilization” as Slate’s Matt
Yglesias put it.
There were already problems
with the Reinhart-Rogoff study, but up until now, other researchers
haven’t been able to replicate or pick through its numbers. A new paper finally has, and as Mike Konczal over at Next New Deal reports, it dug up some truly mortal flaws.
First, Reinhart and Rogoff excluded the post-war years for certain
countries that enjoyed robust economic growth despite debt levels well
over 90 percent. They also chose a skewed method of weighting the data:
for example, New Zealand’s single year of terrible growth while over the
90 percent threshold wound up counting just as much as Britain’s 19
years of healthy growth. And they even incorrectly input at least one Excel spreadsheet formula, wrongly excluding several countries form their calculations.
In short, the central argument in support of austerity — cited by MSNBC’s Joe Scarborough, the New York Times’ David Brooks, and multiple times
by House Budget Committee Chairman Rep. Paul Ryan (R-WI) — is now
defunct. No one disputes that a country should avoid a big build-up in
debt over the long-term. But every concrete signal
we’re getting from the American economy — our high unemployment, our
low inflation, our extraordinarily low interest rates, and our negative
real interest rates — are a signal that more debt spending in the short
term to fight the depression is perfectly appropriate. Thanks to the
austerity drive that was heavily influenced by Reinhart and Rogoff’s
study, American lawmakers ignored those signals (and plenty of others) and cut spending, delivering the most destructive fiscal policy we’ve had in any recession since at least 1980...............
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