In the debate over government spending, the central data point wielded by fans of austerity is the claim that once a country reaches a debt load over 90 percent of its economy ó a threshold the United States is approaching ó economic growth goes into a tailspin. That argument came from a 2010 study by Carmen Reinhart and Kenneth Rogoff. After surveying a wide number of countries, they found that, on average, once the 90 percent mark is crossed, economic growth slows. Though the paper always had problems that kept many economists from embracing it, that didnít stop it from becoming ďthe most influential article cited in public and policy debates about the importance of debt stabilizationĒ as Slateís Matt Yglesias put it.
There were already problems with the Reinhart-Rogoff study, but up until now, other researchers havenít been able to replicate or pick through its numbers. A new paper finally has, and as Mike Konczal over at Next New Deal reports, it dug up some truly mortal flaws.
First, Reinhart and Rogoff excluded the post-war years for certain countries that enjoyed robust economic growth despite debt levels well over 90 percent. They also chose a skewed method of weighting the data: for example, New Zealandís single year of terrible growth while over the 90 percent threshold wound up counting just as much as Britainís 19 years of healthy growth. And they even incorrectly input at least one Excel spreadsheet formula, wrongly excluding several countries form their calculations.
In short, the central argument in support of austerity ó cited by MSNBCís Joe Scarborough, the New York Timesí David Brooks, and multiple times by House Budget Committee Chairman Rep. Paul Ryan (R-WI)ó is now defunct. No one disputes that a country should avoid a big build-up in debt over the long-term. But every concrete signal weíre getting from the American economy ó our high unemployment, our low inflation, our extraordinarily low interest rates, and our negative real interest rates ó are a signal that more debt spending in the short term to fight the depression is perfectly appropriate. Thanks to the austerity drive that was heavily influenced by Reinhart and Rogoffís study, American lawmakers ignored those signals (and plenty of others) and cut spending, delivering the most destructive fiscal policy weíve had in any recession since at least 1980.