In 2010, Carmen Reinhart and Kenneth Rogoff of Harvard University released an influential study that concluded GDP growth slows once government debt levels exceed 90 percent of GDP. For believers in the austerity doctrine, this was a major opportunity to press for spending cuts. Paul Ryan, for example, cited this study as “conclusive empirical evidence” in his Path to Prosperity budget which calls for cuts to ObamaCare and other federal programs.
If you are a fan of austerity like I am, the anemic growth rates in the US and other debt-ridden economies prove the Reinhart-Rogoff conclusion and justify the need for cuts and reforms.
As the austerity movement gained prominence in government policy in Washington, the European Union, and beyond, a new study by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts-Amherst showed that the results generated by Reinhart-Rogoff understated average growth at high debt levels. According to this new study, the Reinhart-Rogoff inquiry was troubled by Excel coding errors, bad math, and the omission of significant data sets. They concluded that there was no real correlation between the 90 percent and average growth as reported earlier.
Immediately after the UMass Amherst report, and Reinhart and Rogoff’s subsequent concession of coding error and other mistakes, Paul Krugman, Ezra Klein, and a host of other anti-austerity crusaders were quick to ridicule the austerity doctrine and Paul Ryan. Krugman, the Noble Prize-winning economist who has devoted his time to denouncing austerity and calling for more government spending to redeem the U.S. economy, wrote that the new report challenges an essential component of the “the intellectual edifice of austerity economics.”
I find it very disappointing that the anti-austerity and anti-Republican sects are failing to look at the big picture, which shows that unrestrained government spending is indefensible and irresponsible. Instead, they have devoted their attention to use this new report to undermine calls for austere fiscal reforms. Regardless of whether Paul Ryan is wrong or right, the U.S. needs to put its financial house in order. It is not a secret that massive government borrowing is hampering economic recovery and that the slow growth in America is causing hardship for many people and raising serious questions about the future of America’s global dominance.
I don’t believe that there will ever be a firm and conclusive correlation between debt level and economic growth because of structural differences across countries and other global economic dynamics. As a result, the debt debate should not be about empirical evidence, but common sense and an understanding of what is right. The fact that the 90 percent relationship was wrong does not mean that the U.S. or any other country should overspend. It does not mean that governments should mortgage their countries’ futures to appease their constituents with overly generous packages. It does not mean that governments should use the rich as scapegoats to cover up for sheer folly and fiscal recklessness. It does not mean that governments should refrain from making hard choices.
The real concern should be how to solve America’s debt and deficit problem in the shortest possible time without causing unbearable hardship or worsening the country’s fiscal health. As a believer in austerity economics, I recognize that the current situation in America will not be solved by draconian cuts alone. The way forward will require bipartisan support for austere as well as growth-inducing measures. The rich, as well as the poor, must sacrifice for the team, and the politicians must do the same.