The
intellectual edifice of austerity economics rests largely on two academic
papers that were seized on by policy makers, without ever having been properly
vetted, because they said what the Very Serious People wanted to hear. One was Alesina/Ardagna on the macroeconomic effects of austerity, which immediately became
exhibit A for those who wanted to believe in expansionary austerity. Unfortunately,
even aside from the paper’s failure to distinguish between episodes in which
monetary policy was available and those in which it wasn’t, it turned out that
their approach to measuring austerity was all wrong; when the IMF used a
measure that tracked actual policy, it turned out that contractionary policy was
contractionary.
The
other paper, which has had immense influence — largely because in the VSP world
it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone
“knew” that terrible things happen when debt passes 90 percent of GDP.
Some
of us never bought it, arguing that the observed correlation between debt and
growth probably reflected reverse causation. But even I never dreamed that a
large part of the alleged result might reflect nothing more profound than bad
arithmetic.
But it
seems that this is just what happened. Mike Konczal has a good summary of a review by Herndon, Ash, and Pollin. According to the
review paper, R-R mysteriously excluded data on some high-debt countries with
decent growth immediately after World War II, which would have greatly weakened
their result; they used an eccentric weighting scheme in which a single year of
bad growth in one high-debt country counts as much as multiple years of good
growth in another high-debt country; and they dropped a whole bunch of
additional data through a simple coding error.
Fix
all that, say Herndon et al., and the result apparently melts away.
If
true, this is embarrassing and worse for R-R. But the really guilty parties
here are all the people who seized on a disputed research result, knowing
nothing about the research, because it said what they wanted to hear.
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Growth in a Time of Debt by Peter
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