Austerity frenzy proven to be wrong. So will it be halted?
Claims that an Excel error is to blame for moves by politicians and policymakers to shun people without jobs are disingenuous
In this age of information, maths errors can lead to disaster. Nasa's Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase's "London Whale" venture went bad in part because modellers divided by a sum instead of an average. So, did an Excel coding error destroy the Western world's economies?
The story so far: at the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, "Growth in a Time of Debt", that purported to identify a critical "threshold", a tipping point, for government indebtedness. Once debt exceeds 90 per cent of gross domestic product, they claimed, economic growth drops sharply.
Reinhart and Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to "pivot" from stimulus to austerity. As a result, the paper instantly became famous; it was, and is, surely the most influential economic analysis of recent years. In fact, Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact, including in a Washington Post editorial earlier this year.
For the truth is that Reinhart-Rogoff faced substantial criticism from the start and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around. Another problem emerged: Other researchers using comparable data couldn't replicate the Reinhart-Rogoff results.
Finally, Reinhart and Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet - and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these and you get what other researchers found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign of a 90 per cent "threshold".
In response, Reinhart and Rogoff have acknowledged the coding error, defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth. That's a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But what really matters isn't what they meant to say, it's how their work was read: austerity enthusiasts trumpeted that 90 per cent as a reason to slash government spending, even amid mass unemployment.
So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policymakers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programmes.
What the Reinhart-Rogoff affair shows is the extent to which austerity has been sold on false pretences. For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 per cent of GDP. But "economic research" showed no such thing. Policymakers abandoned the unemployed and turned to austerity because they wanted to, not because they had to. So will toppling Reinhart-Rogoff from its pedestal change anything? I predict that the usual suspects will just find another dubious piece of economic analysis to canonise, and the depression will go on and on.
The New York Times
Jake van der Kamp is on holiday