This spring, an unusual David and Goliath battle played out in the field of economics: A graduate student from the University of Massachusetts at Amherst discovered important flaws in an influential paper written by Harvard economists Carmen Reinhart and Kenneth Rogoff. The student showed that statistical errors and what seems to be selective use of data, undermine Reinhart and Rogoff’s claim that if countries have debt of more than 90 percent of gross domestic product, their economic growth decreases dramatically.
And why does this matter?
If Reinhart and Rogoff are right, state spending to stimulate economic activity is off the table for any country that already has debt of more than 90 percent of GDP. Debt at this level, they argue, reduces growth and makes those who buy government bonds demand higher yields to cover their risk. Instead, the authors argue that countries should resort to austerity, or cutting public spending to regain investors’ confidence. And, sure enough, austerity advocates have cited the Harvard scholars’ study to justify spending cuts.
A lot of ink has been spilled decrying the role of austerity in eviscerating core social institutions of Western societies, from public schools to social security. In light of the fact that there are historic reductions in the services and protections offered to citizens, a discussion of the shaky premises of austerity economics is long overdue. But even as this battle pitting the UMass student against the Harvard professors has played out in the media, some of the most punishing ways in which Reinhart and Rogoff’s work has figured into policy has gone completely unnoticed.
As their “90 percent criterion” was repeated more often, it came to be seen as a hard and fast benchmark that states disregarded at their peril. However, 90 percent is not the only figure mentioned in their paper. It also finds that when debt reaches 60 percent of GDP, growth is reduced by 2 percent.
This is remarkable in light of the fact that this lower threshold, which constrains states even more, is widely used by important international actors, most notably the International Monetary Fund and the European Commission. Citing Reinhart and Rogoff, both began using models that assume that debt should not be higher than 60 percent to produce policy recommendations for austerity measures. Over time, this assumption has come to be built into models without any explanation or justification.
Reinhart and Rogoff’s work is now under attack from all directions. Though their research was, on the whole, less sanguine about the virtues of austerity than it has been made out to be by some detractors, Reinhart and Rogoff have now become the public face of this failing policy. But in light of the uproar over their work, it is astonishing that the IMF and the European Commission’s policy recommendations on debt reduction have stayed under the radar of public debate given that they demand austerity for even lower levels of public debt.
Indeed, the results of the UMass paper are just as damaging for the IMF and European Commission projections as they are for Reinhart and Rogoff. It shows that since the end of the Cold War, if a country had between 30 and 60 percent government debt it grew on average by 2.4 percent. Instead of seeing their growth fall, countries that had between 60 and 90 percent debt per GDP grew more (by 2.5 percent).
If this is true, this means that cutting government debt below the level desired by the IMF and the European Commission will leave you with less, rather than more growth. Certainly, in light of today’s financial market volatility these findings have to be interpreted cautiously. Nevertheless they pose an undeniable challenge to the many European countries that engage in drastic and sustained austerity in the hope of appeasing the gods of finance.
This piece was co-authored by Oddny Helgadottir. Helgadottir is a PhD student in international relations and comparative politics at Brown University. She is primarily interested in international political economy, financial and economic policy, financial crises and economic ideas. She previously worked as a journalist, independent writer and filmmaker in Iceland.