Nel's New Day

May 4, 2013

GOP Austerity Plan a Hoax

Since the GOP Tea Party took over Congress over two years ago, they’ve been screaming—sometimes literally—about the importance of spending cuts and tax cuts: in one word, austerity. I’m convinced that they know less about economics than I do—and I know almost nothing. But they have held up the golden words of Carmen Reinhart and Kenneth Rogoff, two Harvard economists who wrote “Growth in the Time of Debt.” The message of this paper is that economic growth slows dramatically the very instant that a country’s gross debt to GDP ratio crosses 90 percent. How can we doubt people with their credentials! Journalists and policy-makers jumped on the bandwagon driven by deficit hawks.

Economists, on the other hand, thought that the research was shoddy and the conclusions absurd. Thomas Ferguson and Robert Johnson wrote in “A World Upside Down? Deficit Fantasies in the Great Recession” that too little data had skewed R&R’s conclusions after they eliminated over a century of British data when British debt loads exploded but economic growth raced forward. Marshall Auerback criticized the relevance of the cases that they had used. But major media such as the Washington Post didn’t listen, and conservative consensus was that the United States could move its economy forward by cutting jobs, stripping away vital public services, and letting the infrastructure crumble.

R&R’s entire cover has been blown by a 28-year-old graduate student at the University of Massachusetts, Amherst, Thomas Herndon, a 28-year-old graduate student, when he tried to replicate the Reinhart-Rogoff results as part of a class exercise. It didn’t work so he asked R&R for their data spreadsheet. In it, Herndon found disastrous problems, which he passed by his professors, Michael Ash and Robert Pollin, mistakes such as selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and, worst of all, a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries. Mother Jones dubbed it “the Excel Error Heard Round the World.”

With the two professors, Herndon wrote:

“A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49…This spreadsheet error…is responsible for a -0.3 percentage-point error in RR’s published average real GDP growth in the highest public debt/GDP category.”

Fixing these mistakes results in an anti-austerity rationale: countries can cross artificial debt-to-GDP “threshold” and grow. The new paper from the two professors and the graduate student, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” shows:

“When properly calculated, 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. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

The entire foundation for the disastrous global push for austerity and debt reductions in the 21st century was based on bad data and a spreadsheet mistake. R&R’s premise was the basis of Rep. Paul Ryan’s (R-WI) draconian Path to Prosperity budget, for GOP rejection of further stimulus, and the Fix the Debt crowd’s frenzied calls for urgent action. Even President Obama joined up with his “chained CPI” for federal programs.  In Europe, R&R’s work justified austerity policies that pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. This mistake had “enormous consequences” for real people, wrote economist Dean Baker in “How Much Unemployment Did Reinhart and Rogoff’s Arithmetic Mistake Cause?”

R&R also have close ties to Wall Street billionaire Pete Peterson, who has worked on cuts in Social Security and Medicare for decades. Almost every think tank and non-profit that works on deficit- and debt-related issues have been bankrolled by Peterson, including the Peterson Institute for International Economics where Reinhart is a Senior Fellow. Her husband, Vincent Reinhart, does similar work for the American Enterprise Institute, also bankrolled by Peterson. Rogoff is listed on the Advisory Board of the Peterson Institute.

The new R&R book using the same flawed data that Herndon discovered, A Decade of Debt, is bankrolled by Peterson.

As usual when academics are caught in a mistake, R&R tried to dig themselves out of the hole but just went farther in:

“Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested. […] Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places…. Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists.”

R&R aren’t alone in trying to lie their way out of an awkward, world-destroying mistake. Alberto F. Alesina and Silvia Ardagna tried to show that spending cuts are actually “expansionary” because all these draconian cuts are automatically followed by economic growth. Basically, the International Monetary Fund discovered that A&A were cooking the books by the way through extraneous effects in its statistical techniques. As Paul Krugman wrote, A&A didn’t crash and burn like R&R, but they did became gradually discredited.

Now some of the big players are opposing austerity: the manager of PIMCO, the largest bond-buying firm in the world; top figures at Blackrock, one of the most influential investment banks in the world; the President of the European Commission, Jose Manuel Barroso; and Martin Wolf, world-renowned finance commentator for the Financial Times. Those who want more information on why austerity doesn’t work might want to read Mark Blyth’s new book, Austerity: History of a Dangerous Idea, a collection of austerity disasters during the 20th century.

Why do conservatives want austerity? Paul Krugman, Nobel Prize winner, theorizes that it’s a moral tale of punishing excess. People who live beyond their means must pay the price. Unfortunately, “living beyond our means” means all the costs from George W. Bush’s preemptive wars and tax cuts for the wealthy.

Conservatives refuse to understand that the country’s current problems come from too little spending; they want the redemption of suffering. But their mandate for suffering all goes to the poor and middle class through cuts on health care and Social Security, which they call “entitlements,” despite the fact that the poor and middle class fund these programs.

Economic science, according to conservatives, evolves from what the top 1 percent wants. Right now the they think that the economic recession serves them well. The stock market has shot to the top during the push toward austerity, and the wealthy have acquired all the net worth during the past few years.

Between 2009 and 2011, the richest 8 million families, the top 7 percent, saw their average wealth rise from $1.7 million to $2.5 million each. The bottom 93%, 111 million families, each lost an average of $6,000. Therefore, the top 7 percent gained $5.6 trillion in net worth, an increase of 28 percent, while the rest of the people in the nation went down by 4 percent.

No wonder the wealthy don’t want anything to change, despite dire predictions for the country’s economy. They’re just fine right now. They fail to understand that their wealth depends on the spending of the rest of the people, spending that they cannot do if the economic inequality continues.


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