Wednesday, May 8, 2013

The appeal of austerity...and why it doesn't work

Photo by Pen Waggener
Reducing the debt is undoubtedly important. Roughly 6% of the federal budget is allocated each year to pay interest on our national debt. As deficits and debt increase, so too do our interest payments, which in turn limits resource allocations to other important areas (education, which is about 3% of the federal budget, comes to mind).

Austerity is an intuitively pleasing policy agenda because it relies on the simple mathematics of input and output. My issue with austerity isn't the end goal of debt and deficit reduction, it's that austerity is based on false assumptions and, most importantly, it doesn't work.

A recent study by Herndon, Ash, and Pollin entitled "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff" essentially calls bullshit on the austerity endeavor.

In 2010, Harvard economists Reinhart and Rogoff published a set of studies that found when the public debt-to-GDP ratio exceeds 90%, economic growth comes to a grinding halt. Herndon and company found a number of issues with Reinhart and Rogoff's study worth mentioning. If your pressed for time or need a laugh, here's Colbert's take on it:


First, there are a number of gaps in data from the countries studied, largely stemming for varying start points for data collection. These gaps led to the selective exclusion of 14 data points at which varying countries experienced over 90% in the debt/GDP ration.

Second, an Excel coding error meant that Australia, Austria, Belgium, Canada, and Denmark were completely excluded from analysis. Go ahead and read that sentence again.

Finally, the data was weighted equally by country rather than by combining the country and year, an odd choice that Reinhart and Rogoff did not explain. According to Herndon and his colleagues, "equal weighting of country averages entirely ignores the number of years that a country experienced a high level of public debt relative to GDP."

All of these errors lead to bogus results which Herdon, Ash, and Pollin refute:
Our most basic fi nding 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 di fferent than when public debt/GDP ratios are lower.
So a 28-year-old graduate student made respected economists look damn silly, which would be funny except for the fact that so much damage has already been done by Reinhart and Rogoff's work. Again, according to Herndon, Ash, and Pollin:
Reinhart's and Rogoff 's website lists 76 high-profil le features, including The Economist, Wall Street Journal, New York Times, Washington Post, Fox News, National Public Radio, and MSNBC, as well as many international publications and broadcasts. Furthermore, RR 2010a is the only evidence cited in the "Paul Ryan Budget" on the consequences of high public debt for economic growth. 
The only evidence for the leading economic mind behind Republican fiscal policy, Paul Ryan (and God knows how that happened), turns out to be fundamentally flawed. But the page one story of the Ryan Budget won't be undone by this page 16 retraction.

Moreover, austerity already has taken its toll, and for all the U.S. deficit hawk warnings that "we're headed down a path to Europe," those same European countries have arguably been more eager to adopt austerity policies than the United States -- and it's been disastrous. Even Ireland, the poster child for austerity economics, is having its doubts after budget cuts have wreaked economic havoc.

The problem we have isn't simply one of input and output, its understanding the difference between expenditures and investments. And since austerity minded policies tend to correlate with Republican leanings as do strength of religious beliefs, I'll illustrate my point with the biblical story of Joseph, son of Jacob.

Joseph was sold into slavery by his brothers and was eventually imprisoned in Egypt. There, he interpreted a dream of the Pharaoh and correctly predicted that seven years of bountiful harvests would be followed by seven years of famine. Joseph advised the Pharaoh to store up grain during the years of plenty to prepare for years of famine, which he did, and all was well in Egypt.

The moral of the story: shortsightedness is idiocy. We are idiots. We spent all our resources during times of plenty and landed ourselves in this proverbial famine. The solution is a Keynesian one: spend money from the public sector when the private sector is unwilling, which in turn spurs the economy.

This solution means taking on more debt, which is unfortunate, but it's the right thing to do. If we fail to make the necessary investments now, we'll be paying for those poor choices long into the future, much like we're paying for past failures now. What we need isn't a shortsighted solution, but rather one that accounts for inevitable cycles of boom and bust that capitalist societies experience.

The only hard thing about enacting such a policy is recognizing our historically poor decision making patterns and realizing that a something-for-nothing culture is not sustainable in the long term.

1 comment:

  1. Imagine what could have happened if you change two things - Bush tax cuts never occur, Iraq never invaded. Put half the savings toward paying down debt and half toward investments in education and infrastructure (particularly energy). With lower debt we're more willing and able to spend our way up out of recession, and we have a better base of knowledge, skills, and technology to face our new challenges. Instead we got a small amount of increased take home pay for the typical family compared to the slightly higher tax scenario, and an Iraq that has no Saddam but is just as likely to have people killed and to breed terrorists as before we went in.

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