Pro-austerity study debunked

A report that has been used to justify radical spending cuts is riddled with flaws.

by Ronald Dixon

In 2010, two Harvard University economists, Kenneth Rogoff and Carmen Reinhart, conducted a study called Growth in a Time of Debt. The report found that a nation whose debt rises above 90 percent of its gross domestic product would experience negative growth.

When the study was first released, there was doubt about the findings. As economist Paul Krugman noted, they only found a negative correlation between the rise in debt and the decline in growth, when in reality, it is much more likely that a depressed economy is the cause for more debt.

Recent findings by Thomas Herndon, an economics doctoral candidate from the University of Massachusetts-Amherst, reaffirmed the fallibility of the study. Herndon had access to the original Excel spreadsheets that Reinhart and Rogoff used to compute their data. He found that consequential information was miscalculated and omitted. When computing the math properly, it was found that, even with a debt above 90 percent of GDP, there was still economic growth.

Unfortunately, though, this revelation came far too late. Since the study was published a few years ago, several conservative politicians, writers and economists have used the paper to justify massive austerity cuts in the U.S. and Europe, namely in Greece. In fact, Paul Ryan, a Wisconsin congressman that ran as the vice presidential nominee with Mitt Romney last year, cited the study to attack government economic stimulation during the recession, a component of Keynesian economics.

This raises an important question: If the credibility of the study was shattered when the paper was first published, would the U.S. and nations like Greece have had to suffer from the reduction in government aid? Prior to 2010, in the wake of the American Recovery and Reinvestment Act, Keynesian economics was preferred, but as austerity gained credibility, whereby rendering those like Ryan as “policy wonks,” draconian cuts began to take center stage.

If more politicians, writers and economists would make their voices heard on the real solutions for economic growth, such as Keynesian stimulation, then we might actually see the economy greatly improve in the long term.