Conventional wisdom dictates that economics is politics masquerading as science. Economics is not a science, its theories are unfalsifiable, its logic often contradictory and tortured. The chief value of economics as a field is a rationalization and justification of power politics. Sometimes for propaganda purposes and sometimes to quell the anxiety of elites over their own fears of illegitimacy.
Enter a paper by Kenneth Rogoff and Carmen Reinhart. The Rogoff-Reinhart paper entitled Growth In A Time Of Debt became the intellectual backbone for the austerity movement/plutocrats and their apparatchiks in Washington and elsewhere. The big take away was that a high government debt to GDP ratio – past 90% – would hurt economic growth. Hence, the austerity movement’s central claim that cutting government spending is necessary to restore higher growth levels. And if you are following along, you probably realize why this argument does not even work in its own context. Cutting spending does not eliminate debt – which increases perpetually with interest. Nor is debt itself a reflection of spending levels, debt merely represents borrowing. The government can spend as much as possible and avoid high debt to GDP ratios if taxes are levied to pay for the spending. In fact, the highest growth period in the history of America was during one of its highest tax periods. Neither taxes, debt, nor government spending are, in and of themselves, determinative of economic growth. Which is another problem with economics, the phenomena are almost always too large and complex to make simplistic universal laws with.
As if the logic of those Austerians seizing on the paper to promote their politics was not unsound enough, the paper itself would come under scrutiny when an obscure graduate student decided to investigate the data Rogoff and Reinhart used to formulate their paper.
Thomas Herndon, a 28-year-old economics grad student at UMass Amherst, just used part of his spring semester to shake the intellectual foundation of the global austerity movement.
Herndon became instantly famous in nerdy economics circles this week as the lead author of a recent paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” that took aim at a massively influential study by two Harvard professors named Carmen Reinhart and Kenneth Rogoff. Herndon found some hidden errors in Reinhart and Rogoff’s data set, then calmly took the entire study out back and slaughtered it
Herdon discovered a major excel error in Rogoff and Reinhart’s research which skewed the data to support their thesis and found that when that error was corrected their data actually supported the contrary view. Boom goes the dynamite.
What Herndon had discovered was that by making a sloppy computing error, Reinhart and Rogoff had forgotten to include a critical piece of data about countries with high debt-to-GDP ratios that would have affected their overall calculations. They had also excluded data from Canada, New Zealand, and Australia — all countries that experienced solid growth during periods of high debt and would thus undercut their thesis that high debt forestalls growth.
The bad excel error and subsequent omissions have lead to the paper being discredited. The intellectual edifice of austerity economics, as Paul Krugman notes, is now mostly ashes. In fact, if any universal truth can be gleaned from our current economic situation it is that austerity is a great way to kill economic growth.
But will this paper being discredited change much? Not really. The economic crisis is the result of a political crisis. Democratic accountability has been sucked out of the nation-state system and deposited into the hands of a planetary bureaucracy of transnational corporations and central bankers. And from their perspective there is no crisis, at least not anymore, just a continued redistribution of wealth up and the necessity of building a police state to protect it. Austerity forever.