Recent developments have shaken two of the pillars of the austerity consensus.
First, the IMF has been backing further and further away from its historic role as the black-jacketed austerian enforcer. After releasing a mea culpa study finding that austerity damaged European economies far worse than they had previously predicted, they recently provided the following advice to Canadian government officials, “Although fiscal consolidation is needed to rebuild fiscal space against future shocks, there is room to allow automatic stabilizers to operate fully if growth were to weaken further.” In other words, easy on the austerity, especially if the economy begins to look shaky.
Similar advice was given to the U.K as the IMF advised, “Where recovery is weak owing to lackluster demand, consideration should be given to greater near-term flexibility in the fiscal adjustment.” Again, given the IMF’s history, this is quite an astonishing about-face. The Washington Post has a lovely article describing this shift:
There has been a current of thought at the Fund questioning old assumptions about what impact fiscal austerity has on an already-depressed economy, conclusions that have made the economists there wary of slashing deficits too fast.
But the real trend evident in the Fund’s prescriptions for the world economy is bigger than that. Part of the reason we have independent institutions like the IMF is that political leaders have a tendency toward short-termism, a desire to enact policies that might feel good in the short term (high deficits and easy money) but cause pain in the long run (fiscal crises and inflation). The IMF, and politically independent central banks, help counteract those tendencies.
Credit to the IMF for looking past old beliefs to what is actually taking place. Maybe if we’re lucky they’ll be able to knock some sense into our leaders.
Second, a new paper from Thomas Herndon, Michael Ash and Robert Pollin investigated the data behind a 2010 paper released by economists Carmen Reinhart and Kenneth Rogoff called “Growth in a Time of Debt”. It argues that “median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower” and has been quoted by Paul Ryan, Tim Geithner, numerous Senators, and the head of the European Commission. Apparently, the paper is rife with dubious methodology, including an astonishingly amateurish Excel error. Brad Plumer of Wonkblog writes:
For one, the economists argue that Reinhart and Rogoff excluded three episodes of high-debt, high-growth nations — Canada, New Zealand, and Australia in the late 1940s. Second, they argue, Reinhart and Rogoff made some contestable assumptions about weighting different historical episodes.
Now, those are two debatable methodological critiques. But there’s also a third problem, as Mike Konczal details here. Reinhart and Rogoff appear to have made an error with one of their Excel spreadsheet formulas. By typing AVERAGE(L30:L44) at one point instead of AVERAGE(L30:L49), they left out Belgium, a key counterexample
When the changes are taken into account “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff.” This ought to be bad news for everyone out there trying to defend austerity and arguing that debt is strangling our grandchildren, but as Alex Pareene writes, it probably won’t be.