Turns Out All Those 'Austerity Measures' Were Unnecessary

Calls to keep debt to GDP ratios low are, primarily, tied to a book by Carmen Reinhardt and Kenneth Rogoff called This Time It's Different. Their conclusion was that countries with a high debt to GDP ratio suffer from slow economic growth. It turns out that not only were they, probably, wrong but even their math was incorrect.

Atlantic Wire says:
"Everything We Knew About GDP Is Probably Wrong So, the guys who originally did GDP research and concluded that having a high debt-to-GDP ratio would slow economic growth were probably really wrong. A new study argues that an Excel spreadsheet error and an ignoring of certain information in the original research messed up the results in a major, major way. When corrected, their -0.1 percent decline in growth becomes a 0.2 percent increase. This has to mean something, right?"

The Atlantic Wire was kind enough to put it in English. They link to a slightly-something-other-than-English version at Slate's Moneybox. However Moneybox says that even without the errors the study proved nothing to begin with:
"As I've said many times, citations of the Reinhart/Rogoff result in a policy context obviously appealing to a fallacious form of causal inference. There is an overwhelming theoretical argument that slow real growth will lead to a high debt:GDP ratio and thus whether or not you can construct a dataset showing a correlation between the two tells us absolutely nothing about whether high debt loads lead to small growth. The correct causal inference doesn't rule out causation in the direction Reinhart and Rogoff believe in, but the kind of empirical study they've conducted couldn't possibly establish it."

The long and short of it is that all of the austerity measures that the West has been taking were probably completely unnecessary from an economic perspective and made the Great Recession far harder than it needed to be for everyone.

It's also somewhat ironic that conservatives (of various global stripes) have hacked away at social programs in the name of a single, flawed, study while at the same time many of them referred to evolution and global warming as 'unproven theories'.
Previous
Next Post »