It's been a very bad week for the merchants of austerity.
In Europe, the just-released statistics on first quarter performance show EU nations sliding deeper into recession. In Spain and Greece, unemployment rates are approaching a staggering 30%. In Britain, the Tory government took as good news the fact that the U.K. managed to eke out 0.3% growth. Even Germany, the prime sponsor of these policies, is on the edge of recession.
One nation after another is challenging German Chancellor Angela Merkel and the European Central Bank, the two lead purveyors of economic pain as the cure for fiscal sin. The governments of France, Italy, Spain and Portugal are pressing Merkel to relent, and EU Commission President Jose Manuel Barroso, the ultimate weathervane, now says the EU needs to focus on growth instead of belt-tightening. The International Monetary Fund, usually one of the sponsors of fiscal masochism, says Europe is imposing too much pain.
Here in the U.S., the first quarter numbers were lousy. The economy grew at a rate of just 2.5%, less than forecasters projected, and not enough to improve the unemployment rate or raise wages. Analysts across the spectrum correctly blamed the slowdown on the sequester, which cut the budget by $85 billion this year, on top of the January deal that raised taxes, mostly on workers, by another $200 billion.
You don't promote growth by slashing demand. Supposedly, fiscal tightening improves business confidence. But if some entrepreneur somewhere decided to break ground for a new factory because the president and Congress at last cut the budget, nobody could find such a person.
Even the Washington Post editorial page, which has long been promoting a budget bargain built on more cuts, warned in its lead Sunday editorial, that austerity is pinching too hard -- in Europe, that is. How about at home?
And Ken Rogoff and Carmen Reinhardt had a really terrible week. Their now infamous 2010 claim that nations get into economic trouble when their debt ratios exceed 90% of GDP was blown to hell by a graduate student at the University of Massachusetts. For three years, critics have been pressing R&R to share their raw data. When Thomas Herndon and colleagues Michael Ash and Robert Pollin finally got hold of the research and reworked R&R's numbers, it turned out that they had selectively used data and made basic errors of arithmetic.
Far from corroborating R&R's claim that countries with debt ratios above 90% have growth significantly lower than those with lower levels, the reworking revealed the opposite.
Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90% is actually 2.2%, not 0:1% as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90% is not dramatically different from when debt/GDP ratios are lower.
We also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90% of GDP consistently reduce GDP growth.
It turned out that R&R had achieved their results by excluding the post WWII experience when all major Atlantic nations had huge debt ratios but experienced a record boom built on public investment. R&R then compounded the error with spreadsheet mistakes.
In an op-ed piece in last Friday's New York Times, the unrepentant authors were stunningly disingenuous. Reinhart and Rogoff contended that the UMass researchers did not overturn their fundamental finding that high debt levels are associated with lower growth. In fact, this is exactly the contention that the reworking demolishes.
And then, R&R blithely added the point that the cause and effect can run in either direction -- poor growth can cause a high debt ratio as well as vice versa.
Now they tell us! This, of course, is exactly what austerity is producing in Europe, and risks doing in the United States. The more their budgets are cut, the worse the economies of Greece, Spain and Portugal do. If you clobber GDP, the existing debt looms larger and the ratio worsens.
In their Times op-ed, R&R were also falsely modest in contending that they are just innocent academic researchers ("We find these attacks a sad commentary on the politicization of social science research") when in fact their work has been cited over and over again by deficit hawks warning of the horrific effects of high public debt with no demurrer from R&R. They did not disclaim the attention when they were invoked as scholarly validators of bad policies, and even in their ivory tower they are surely aware that austerity is a highly charged political debate. What a lame excuse to publish flawed conclusions used to justify flawed policies and then to bemoan the politicization of research.
Despite the fact that the cold-bath cure has now been disproven both by events and by corrections of bogus research, the actions of Chancellor Merkel and the budget dance of President Obama and the Republicans are still following their own perverse momentum. Merkel shows no sign of relenting, and Obama keeps pitching a grand bargain that would result in a decade of budget cuts almost double the scale of the sequester -- and thus a decade of needless slow growth and high unemployment.
The only good news lately is that President Obama stepped on a progressive hornets' next when he proposed to cut Social Security. Democrats in Congress seem pretty united on the proposition that Social insurance shall not be cut as long as there are tax giveaways for the rich to be reversed. But while it would be an important victory to spare Social Security from the budget axe, it is just as important to spare the larger economy from the even greater folly of austerity as the general cure for recession.
Critics of austerity can win the argument based on the facts on the ground, and based on the findings of economic research. But until critics win on the politics, the austerity parade will march grimly on.