In 2010, just after the Greek financial crisis, two respected conservative Harvard economists, Reinhart and Rogoff, published a paper ‘Growth in a time of debt’ that said that once debt exceeded 90% of GDP, economic growth drops off sharply. Their thesis added great weight to those urging austerity on such countries as Greece, Spain and many others.
Paul Krugman in the New York Times of April 18 has drawn attention to a major flaw in their ‘tipping point’ theory for national debt. According to Krugman, Reinhart and Rogoff, allowed researchers at the University of Massachusetts to examine the spreadsheets that helped produce this precise 90% ‘tipping point’. The researchers found that some data had been omitted, they highly questioned statistical procedures that had been used, but most importantly of all they found that Reinhart and Rogoff had made an Excel coding error.
After corrections were made for these mistakes there was confirmation that there was a relationship between high debt and slow economic growth, which almost all economists agreed with, but there was no confirmation of the 90% ‘tipping point’.
Unfortunately the Reinhart and Rogoff thesis has been influential in the conservative case for governments, particularly in Europe, to enforce more and more austerity on the public. Greece now has an overall unemployment rate of 27% and a rate of 59% for young people aged 15-24. In Spain the unemployment rate is 57% for the same 15-24 age group.
Hopefully the flaws in the Reinhart and Rogoff analysis and thesis will force a rethink by the ideologues who keep espousing austerity to reduce deficits and debt, regardless of the tragic consequences for millions of people. There is surely no particular virtue in a government surplus or deficit. In some situations a deficit is more appropriate; in other circumstances a surplus is more appropriate. Surpluses and deficits are means to an end, particularly full employment and stable prices.
But the conservative economists and commentators will surely think up other reasons for austerity at the expense of vulnerable people.