In last week’s Catalyst, James Kiawoin presented an incomplete narrative of both the Reinhart and Rogoff (R-R) debacle, and the wider discussion of economic austerity. Kiawoin asserts that the question of economic austerity should not hinge upon whether or not it is the best policy for countries with high levels of public debt during economic downturns, but upon the fact that public debt is morally reprehensible. I disagree.

In a recent NYT op-ed, Paul Krugman evaluated the problem of formulating the austerity debate in moral terms by observing that, “The people now suffering aren’t at all the same people who sinned during the bubble years.” The people that prospered before the recession aren’t the same individuals who are now harmed by economic austerity: so much for moral and fiscal responsibility.

Kiawoin skims over the central points of both the disproven R-R study and the austerity debate as a whole in order to skip to his thesis that austerity is a moral imperative. In doing so, he casually claims that economic policy should not be contingent upon empirical evidence, despite the fact that empirical evidence is what policymakers used to justify austerity in the first place.

I suppose Kiawoin means to highlight the fact that social science research is often inconclusive, and thus, policy decisions should not be based on incomplete evidence. However, I’m not sure why that should result in a disavowal of empiricism altogether. In reality, it seems that the notion is to disregard those studies that disprove one’s position, much in the same way that R-R disregarded the cases that did not support their thesis.

Policy makers used R-R’s “Growth in a Time of Debt,” and Alesina and Ardagna’s (A-A) “Large Changes in Fiscal Policy: Taxes versus Spending” to justify economic austerity in Europe and the U.S. despite an array of studies arguing against such policies. R-R initially claimed that economic growth stops (meaning the economy contracts) when public debt reaches 90 percent of GDP.

However, in addition to publicizing the obvious excel mishap, the UMass Amherst paper pointed out methodological errors in the study that may even disprove the alleged relationship between low growth and high debt: data supporting R-R’s thesis was weighted more than the data contradicting their thesis. Upon fixing these errors, the UMass Amherst economists determined that economic growth during times of 90 percent public debt was +2.2 percent (not R-R’s original -0.1 percent).

A-A’s 2009 paper claims that “fiscal adjustments […] based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases.” However, Mike Konczal and Arjun Jayadev (another UMass Amherst economist) observed that A-A’s “examples of successful consolidation were, on average, growing strongly the year before the year of adjustment.” That is, the countries A-A used to evaluate austerity implemented economic austerity during economic growth rather than economic contraction (in contrast with the U.S.’s -2 percent growth rate between 2007 and 2009, the average growth rate in the 26 countries A-A surveyed was 4.1 percent the year before they implemented austerity).

A-A’s study ironically supports the argument of the “anti-austerity crusaders” and highlights the oft-repeated characterization of austerity critics implicit in Kaiwoin’s formulation of austerity as a moral imperative. Adding that “unrestrained government spending is indefensible and irresponsible,” Kaiwoin implies that Democrats, or at least Keynesians, always advocate for bigger government, in both good and bad times. This is simply not the case.

Government spending is necessary during economic downturns to sustain and stimulate the economy until the private sector recovers. Spending decreases during recessions because of unemployment and economic uncertainty; less spending means less income, which means even less spending. However, increased government spending can ameliorate unemployment, which increases income, and, thereby, spending.

Hence the term ‘demand-side economics’: public-sector spending during a recession provides jobs and income, which increases demand for services and goods in the private sector. Thus, governments should increase spending during recessions to prevent continued contraction and catalyze growth, while they should reduce spending (and debt) during economic expansion. In fact, if one insists on situated austerity as a moral issue, austerity should be viewed explicitly as immoral; cuts in social spending have been harmful to health and human rights in the U.S. and Europe.

I suppose that Kiawoin and other austerity proponents would reply that there isn’t any money left for the government to spend; in fact, high public debt signals that there hasn’t been money to spend for quite some time. Setting aside the $6,000,000,000,000 we spent in Iraq and Afghanistan, the question of economic austerity necessitates an evaluation of whether or not such policies yield increased growth or decreased debt during recessions. The truth is that since the implementation of austerity, public debt has increased and economic growth has decreased in Great Britain, Ireland, Italy, Spain, Greece, and Portugal.

Supporters of austerity might respond that austerity represents a net gain, and these countries are simply experiencing the “valley of tears” that necessarily accompanies austerity. However, the IMF supported austerity on the basis of their predictions that €100 of austerity would yield €50 worth of lost growth and unemployment, which it deemed an acceptable tradeoff. Unfortunately, the IMF acknowledged last year that its predictions had been incorrect: every €100 of austerity actually yielded between €90 and €150 of lost in growth.

As for the “valley of tears” argument, perhaps the past five years will be viewed retrospectively as the “valley of tears” that precipitated economic growth and stability in Great Britain and the Eurozone, but the current economic situation and projections imply otherwise. The future, however, is bright for proponents of austerity, because a reduction in austerity measures seems imminent.

Given recent criticisms of austerity by members of the IMF, WTO, EU, and UN, intergovernmental organizations seem poised to retract, or at least reduce, austerity policies if they can convince Germany to agree to such concessions. Thus, if austerity is retracted or reduced, its supporters can blame the policy deviation if Great Britain and the Eurozone do not recover. But, if they do recover, they can argue that austerity succeeded in the end despite the best efforts of “anti-austerity crusaders” to ensure that it fails. Given the facts, as we know them today, this illogical reasoning may be the only one left for future supporters of austerity.

Caleb Thompson

Guest Writer

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