In recent years, the Republican obsession with slashing the federal budget even at a time of high unemployment rested on the intellectual foundation of a study purporting to prove that government debt strangled economic growth. But that foundation crumbled when a computation error was revealed, as Beverly Bandler explains.
By Beverly Bandler
Regarding the Austerity Scandal, I wonder if you are as angry as you should be. I am outraged. This is indeed a significant story that the corporate mainstream media appears to be ignoring.
One reader tells me that he has the impression that the Reinhart-Rogoff scandal has not been widely reported. He says Jon Stewart had Thomas Herndon on his program. Herndon is the graduate economics student who revealed the flaw in the R&R data. Herndon said the error in Reinhart-Rogoff’s spreadsheet was so blatant that it was spotted by his girlfriend, a sociology student. (I don’t like to use exclamation points, but this deserves a couple: !!)
Economists Kenneth Rogoff and Carmen Reinhart.
This scandal is important because the economic theory presented by Carmen Reinhart and Ken Rogoff was central to the Republican-led demands for sharp austerity even at the cost of continued high and painful unemployment. The two economists claimed that their data proved that government debt equal to 90 percent of GDP would strangle the economy, thus justifying extreme steps to bring the debt down immediately.
However, other economic studies of the same question came up with dramatically different results, showing continued GDP growth at that level of debt. Finally, Reinhart and Rogoff made their data available to a team at the University of Massachusetts at Amherst and the mystery was solved. The two economists had made an obvious computation error. In other words, the austerity hysteria that had fueled Republican insistence on slashing spending was driven by a botched economic analysis.
The Washington elite had made major economic policy decisions that have affected every single American based on a single paper that had errors so blatant that the mistakes were spotted by a sociology student? The elite policymakers then ignored all the reliable economics work of practically every reputable economist in the nation who questioned the Reinhart-Rogoff study?
Would you want a surgeon to do your brain surgery based on one new technique that had never been vetted and was seriously questioned by other surgeons, including some of the best in the field? But that is how the Republicans and some “deficit hawk” Democrats slashed spending and killed proposals to invest in infrastructure, fund research and rehire laid-off police, firefighters and teachers. God help us!
Not only political “elites,” but financial elites bought into the one paper. Bill Gross, manager of the world’s largest bond fund for PIMCO, in 2010 “warned that UK debt levels were too high, leaving gilts ‘resting on a bed of nitroglycerine,’” basing his warning on the widely cited R&R paper now under fire for “possible statistical errors.”
Gross has changed his tune: he is now criticizing efforts by Britain and much of the Euro Zone to cut debt rapidly with severe austerity measures, warning that such action risks stifling recovery. “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term is the way to produce real growth,” he stated to the Financial Times, “It is not. You’ve got to spend money.”
Slate business and economics correspondent Matthew Iglesias writes “the academic research bolstering the austerity drive was confused, at best.” It is important to remember that the “academic research” to which he refers was one paper, one research study.
Does this mean the political and financial elites have never read the economic history of the Depression? Updated and related empirical studies of same? That they have never read Paul Krugman, Christina Romer, Joseph E. Stiglitz and a host of other prominent economists and instead chose to embrace one paper “as gospel,” not vetting it, not reading the responses to the paper from other economists when it shot out of the gate?
Incredible!
Beverly Bandler’s public affairs career spans some 40 years. Her credentials include serving as president of the state-level League of Women Voters of the Virgin Islands and extensive public education efforts in the Washington, D.C. area for 16 years. She writes from Mexico.
It wouldn’t take much space to explain just how deliberately erroneous the R&R “study” is. Ten years of British growth during high debt/GDP was left out, but one year (1951)of New Zealand with very negative growth during high debt/GDP not only left in but averaged with the overall average of utilized data. This in addition to the “accidental” exclusion of some fields on the Excel spreadsheet makes this study suspect indeed. It’s incredible only in the sense that they thought they could get away with it, yet maybe they will.
An old line holds that mathematicians theorize two plus two equals five. Accountants prove it. So, it seems, can economists.
The reinhart and rogoff paper is the economic equivalent of the “Dodgy Dossier”, colin powell’s UN show, and all the “evidence” used by the w bush administration to invade Iraq. Watch as conservatives rationalize and justify this one, whilst also trying to convince us that anthropogenic climate change is a conspiracy of left wing forces dedicated to the destruction of business! america! children!!… and intent on sapping and controlling our precious bodily fluids. Who (whom?) is it that is bent on the destruction of civilisation?
Economics is no longer merely the dismal science; it is now the Dark Science. Economists can “prove” anything they set out to “prove.”
Bottom line: The government budget can hardly be characterized as “austerity” when it runs a 3.4 billion dollar DAILY deficit — every day of the month — as it did last month. Despite the deficit spending the problems of citizens exist and worsen for several basic reasons, including endless expensive war and job outsourcing, both of which are promoted by the corporate-supporting government.
It is true that federal spending remains high. Since 2009, it has remained a steady $3.5 trillion yearly. Since GDP has been increasing during this time, the effective rate of spending as a percentage of GDP has dropped. The drop is from a high of 25% to about 22% at the moment. Since 19% spending is the historical “break-even” rate, we hopefully can drop to such a level (as we did in the 2000 and 2001 fiscal years). Trouble is, a lot more people are receiving government assistance and not paying income tax than were doing so back then. Worse, extremely low tax rates (but very high benefits)for the plutocracy have caused overall revenue to slip to $2.5 trillion, or 15% of GDP.
So the study was ‘botched’ was it? Personally I think that is an overly charitable assumption.
The financial powers that be we’re looking for a study that would support their tax cuts and offshore loopholes. R&R’s “study” fit the bill just fine. So what if its flawed? It served its purpose. It’s not like the deficit hawks are changing their minds anytime soon anyway.
You’d be surprised at how many “brain surgeons” pick and choose from the literature that supports their cherished premises, and ignore that which doesn’t. As soon as “evidenced based” therapeutic rationales became the rage in medicine, a rash of funding became available to support pseudoscientific medical literature supporting “faith based” and other ludicrous treatment protocols. The ‘science’ is just as sloppy as the work of some of these economic charlatans, but just because it gets published, it becomes ‘evidence’ in the evidence based mind-set of those whose purposes it serves. Most medical professionals don’t actually read the literature they cite (Scary, isn’t it?), and the same is probably true in economics as well as many other ‘soft sciences’. I wouldn’t put it past them to have knowingly made the ‘honest mistake’ comfortable in the certainty that, despite claims of “peer review”, a tidal wave of crap gets published every year in “scientific” journals.
It also helps explain why they have so many friends in the evangelical Christian community. These folks constantly quote out of context and cherry pick science and the Bible itself to create an argument for their predetermined conclusions.