Harvard debt luminaries: We don’t like austerity as much as you think

Reuters: Two academics whose research became an intellectual touchstone for pro-austerity politicians want everyone to know they have been misunderstood. They actually don’t think harsh austerity is such a great idea for an ailing economy. In the political debate over debt since the financial crisis, no body of research has generated more howls of approval and disdain than that of Carmen Reinhart and Kenneth Rogoff.

The two Harvard economists have compiled centuries of data to show a strong correlation between heavy government indebtedness and weak economic growth.

Critics, especially on the left, contend this doesn’t mean that debt causes growth to slow, but that perhaps weak growth makes governments borrow more. At the same time, conservative politicians around the world have said the academics’ findings back their own prescriptions to slash bloated deficits.

The debate heated to a boil this month when a group of academics called attention to embarrassing errors in one of Reinhart and Rogoff’s papers, a paper that some conservatives have used as a foundation in proposals to massively cut back government spending.

Critics claimed the spreadsheet coding errors, now acknowledged by Reinhart and Rogoff, to be a mortal blow against the intellectual argument for austerity. But in an opinion piece published in the New York Times on Friday, Reinhart and Rogoff said politicians and pundits were putting words in their mouths.

“The politically charged discussion, especially sharp in the past week or so, has falsely equated our finding of a negative association between debt and growth with an unambiguous call for austerity,” the two Harvard researchers wrote.

The errors found in Reinhart and Rogoff’s study undermined its gravest finding that on average economic growth contracted when government debt exceeded 90% of gross domestic product. But even correcting for the spreadsheet errors and other alleged methodological missteps, the new study appeared to confirm the Harvard economists’ findings that heavily indebted countries do indeed grow more slowly.

In an emotional argument, Reinhart and Rogoff on Friday said they had received threatening emails from people who blamed them for recent austerity measures embraced around the world, which have cost government workers their jobs and led to tax hikes.

Indeed, the two said their message was merely that debt matters for countries’ long-term growth prospects, but that they never gave approval for the austerity-now campaign. “Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists,” they wrote, calling on politicians to rethink current efforts to shrink debts.

“We know that cutting spending and raising taxes is tough in a slow-growth economy with persistent unemployment,” they said. A report on Friday on US economic growth underscored the mainstream view in academia, also taken by the International Monetary Fund, that Washington is hitting the fiscal brakes with too much gusto.

The US economy grew at a lackluster 2.5% annual rate in the first three months of the year, dragged down by weaker government spending. Government spending has fallen in 10 of the last 11 quarters. Austerity in the Euro zone, meanwhile, has helped keep the bloc mired in what increasingly looks like a depression. “A sober reassessment of austerity is the responsible course for policy makers,” Reinhart and Rogoff said.