I have a policy of not discussing items that directly refer to me in this blog, but I will make an exception today because the issues raised by Robert Samuelson are important. In his column Samuelson makes two key arguments. First, that the Reinhart-Rogoff conclusions about high debt leading to slow growth still stand even after the errors in the original paper were corrected, and second, that this work was never really the basis for austerity anyhow.
Taking these in order, Samuelson constructs a chart showing the originally reported and corrected relationships between debt levels and GDP growth.
He then tells readers:
“After recalculating the Reinhart/Rogoff data, the UMass economists confirm that high debt implies lower economic growth.”
No, that is not right. The recalculated numbers show that high debt levels in the countries examined by Reinhart and Rogoff were associated with lower growth. However as the paper by Thomas Herndon, Michael Ash and Robert Pollin that exposed the error clearly explained, the growth falloff for countries with debt-to-GDP ratios above 90 percent was not statistically significant. In fact, they found a much stronger negative relationship between debt and GDP growth at very low ratios of debt-to-GDP. This means that if someone was basing policy on the corrected Reinhart-Rogoff numbers they would be arguing for debt-to-GDP levels in the range of 15-20 percent. That is not what Reinhart and Rogoff or anyone what else in this debate is saying.
More importantly, there was always the issue of causality, which is ignored by Samuelson. It is just as likely that weak growth leads to high debt as high debt leads to weak growth. If the former is true, getting upset about high debt levels would be like saying that hospitals cause people to be sick. UMass economist Arindrajit Dube did a nice test of causation and found the causality from growth to debt is very strong, while finding no real evidence of causation in the opposite direction.
This is hardly surprising. Debt is an arbitrary category. Countries also have assets (e.g. land, mineral rights, fishing rights, broadcast frequencies etc.). If the debt side of the balance sheet could lead to a sharp slowdown in growth, then they would be foolish not to sell off some of these assets. This would lower the debt-to-GDP ratio and produce a huge growth dividend, if anyone believed the Reinhart-Rogoff story.
Of course no one advocated selling off large amounts of assets, which brings us to Samuelson’s second point, that Reinhart-Rogoff paper was never really the basis for policy. His argument was that political figures wanted to pursue austerity anyhow and just grabbed Reinhart-Rogoff as a fig leaf.
Samuelson will get little argument from me on that point. Why would political leaders want to pursue austerity? Well, let’s look at the impact of the policy. High unemployment has weakened workers’ bargaining power, allowing employers to get the vast majority of the gains from productivity growth over the last 5 years. While the rise in profit shares may not always offset the loss in profits due to weaker growth, this is likely true today in many countries, including the United States.
From this vantage point, austerity is just great for those on top. The pressure for austerity also opens the door for lowering tax rates on the wealthy in the future, for example by cutting back programs like Medicare and Social Security in the United States, and their equivalents overseas. If these sorts of social commitments can be reduced, then the wealthy can look forward to being able to keep more of their income 10-20 years in the future. And if we think there is nothing that the government can do about unemployment because of the demands of the austerity gods, then we can blame workers’ problems on their lack of skills and inability to deal with the technological advances of a global economy.
In short, austerity serves some very useful purposes for the rich and powerful. It would hardly be surprising to me that the political figures they support are more likely pursuing austerity to please them than because of anything that Reinhart and Rogoff wrote. On the other hand, it is extremely useful to have ostensibly reputable studies like Reinhart and Rogoff that can be used to make the case that austerity serves the general good and not just the rich.
However corrupt politics in the United States might be, it just doesn’t look good for the President of the United States to go on national TV and say that, “I am cutting back spending on Social Security and other important programs to keep the unemployment rate high so that my rich campaign contributors will get even richer.” It is far more respectable if he can hold up a paper by two professors from Harvard and tell the American people that we have no choice but to cut back spending or the economy will go down the toilet.
The research from the UMass crew has taken away the fig leaf. The question is whether the austerity gang will be able to continue to press their case for upward redistribution even in the full light of day.
Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.