Just as orthodox economics utterly failed to foresee the bursting of the housing bubble that led to the Great Recession, so too it has failed at trying to revive the economy via austerity. The ongoing austerity craze of the political elites—whose budget cutting mania has thrown millions of people around the world out of work and into poverty—is bad economics based on sloppy research that was blissfully ignored by those eager to shred social safety nets for their own reasons, according to an academic paper published last week.

The sloppy economics in question is the most influential economics paper of the last five years, “Growth in Time of Debt,” by Harvard economists Carmen Reinhart and Kenneth Rogoff. The paper, which argues that debt levels above 90% of a country's GDP cause severe harm to economic growth, has been used by advocates of austerity from Paul Ryan (R-Wisconsin) to British Prime Minister David Cameron to justify draconian budget cuts.

The problem is that austerity has been a failure, as every country that has tried it—from Greece to Spain to the U.K.—has seen worsening economic conditions as a result. Although heterodox economists, i.e., those who do not accept all the tenets of neoclassical, market-oriented economics as gospel, foresaw the bubble bursting, rejected austerity and critiqued flaws in Reinhart and Rogoff's paper, it was a student's homework that ultimately blew the lid off.

Graduate student Thomas Herndon, who is studying Economics at the largely heterodox University of Massachusetts at Amherst, found he was unable to complete an assignment of replicating Reinhart and Rogoff’s data, and asked them for their data spreadsheet. Analyzing the sheet with professors Michael Ash and Robert Pollin, Herndon found multiple problems, including selective exclusion of years with high debt and average growth, a problematic method of weighing countries, and a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.

The errors all had the effect of overstating the dangers of debt and overselling the benefits of austerity. The data simply do not support the idea that too much debt inevitably ruins an economy.

Herndon, Ash, and Pollin conclude: “Our most basic finding is that 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 RR claims. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when public debt/GDP ratios are lower.” (emphasis added.)

In other words: there is no reason in the data to believe that austerity will help improve economic conditions.

-Matt Bewig

To Learn More:

Reinhart, Rogoff... and Herndon: The Student who Caught out the Profs (by Ruth Alexander, BBC News)

Meet the 28-year-old Student Who Exposed Two Harvard Professors Whose Shoddy Research Drove Global Austerity (by Lynn Stuart Parramore, AlterNet)

Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff (by Thomas Herndon, Michael Ash & Robert Pollin, Political Economy Research Institute) (pdf)

Surprise! Budget Cuts Lead to Rioting…a 90-Year History (by Noel Brinkerhoff and David Wallechinsky, AllGov)