A breviary of austerity questioned

In terms of austerity, there is practice and theory.

The first is the affair of the European governments who are engaged in it – with no other result, for the moment, then a continental recession; the second, that of the economists who justify it by their work. Two of them, the Americans Carmen Reinhart and Kenneth Rogoff, are today in a delicate situation. According to a critical study, their argument would be tainted with errors.

When Reinhart and Rogoff published an article in 2010 entitled “Growth in debt time“, it is widely reported by the media and some politicians. Based on international historical data, “R & R” establishes a relationship between debt level and GDP growth. According to their main conclusion, a debt ratio higher than 90% of GDP would lead to a significant fall in the average rate of growth, whatever the level of development of the country.

“Serious mistakes”

The article is received as an encouragement to purify the public debt as soon as possible. According to economist Paul Krugman, winner of the 2008 Nobel Prize, his influence was “immense”: “Very quickly, everyone” knew ” that terrible thing happen when the debt exceeds 90% of the GDP”. Admittedly, recurrent criticism sees low growth as a cause of high levels of indebtedness, and not a consequence. But the conclusions of Reinhart and Rogoff are nonetheless a solid point of support for the supporters of austerity.

Until April 15 and the publication by an economics student, Thomas Herndon, and his two professors, Michael Ash and Robert Pollin, of an article entitled: “Does a strong public debt slow down growth substantially?”. The publication is a rebuttal to the work of Reinhart and Rogoff. It notes errors in the processing of data, the atypical weighting of some of them, or the enigmatic exclusion of figures not consistent with their thesis: all anomalies leading to “serious mistakes”.


In fact, according to the economists’ own calculations, “average growth when debt exceeds 90% of GDP is not significantly different than when it is lower. ” Since then, the debate has raged between economists. “I never dreamed that such an important part of their results reflects nothing but bad calculations,” Paul Krugman writes on his blog. If it’s true, it’s more than embarrassing for “R & R”. But the real culprits are all those who seized this controversial result, knowing nothing of the research, because he said what they wanted to hear. ”

A similar debate arose in January when two IMF economists acknowledged that the depressive effects of austerity had been underestimated by the institution. “In the developed economies, stronger fiscal consolidation has gone hand in hand with weaker growth than expected,” wrote Olivier Blanchard and Daniel Leigh. A natural explanation is that tax multipliers [the coefficients measuring the effect of austerity, ed] were significantly higher than the forecasts implicitly estimated. ”

Their defense

Reinhart and Rogoff were quick to react to the article accusing their work. In a response released on Wednesday by the Financial Times, they deny having voluntarily dismissed some data. Economists, however, acknowledge an error in the use of the Excel spreadsheet, producing “noticeable changes in the average growth rate of more than 90% of indebted countries. ” In another response, they assert a “correlation”, not a causality, between debt and low growth.

On the merits, however, Reinart and Rogoff hold on. According to them, their opponents “find their own weaker growth when the debt is over 90%”. To have. Certainly, according to the trio PAH, the average growth is 4.2% in countries indebted to less than 30%, and only 2.2% in countries with more than 90% debt. But even this last figure is well above the -0.1% found by Reinhart and Rogoff. In other words, see the effects of payday loan consolidation.

The episode is a new blow to the theories supporting austerity in any horse. Not sure, however, that it is enough to make the European governments give up on it.