At The Church Of Fallacy Economics, Burning The Heretics
/I have refrained from commenting on it up to now, but there is something quite extraordinary going on in the world of economic policy, namely an incredible piling on against two economists who wrote a 2010 scholarly paper thought to support the view of "austerity" being a good thing. The fallacy Keynesians are out in great force and viciousness. It resembles nothing so much as the burning of heretics for daring to question the faith.
It started with economists Carmen Reinhart and Kenneth Rogoff, professors at Harvard, writing an article called Growth In A Time Of Debt in January 2010 for NBER. In the article, the authors did a quantitative analysis of a large dataset, and concluded that at debt levels "above 90 percent" of GDP, "median growth rates fall by one percent, and average growth falls considerably more." The consequences of this result for appropriate economic policy may not be obvious to the readers of this blog, but the explanation is not complicated. In the world of fallacy Keynesianism, economic policy is divided into two alternatives, called "stimulus" and "austerity." "Stimulus" means some combination of government spending increases and tax cuts, thus, debt increasing. "Austerity" means some combination of government spending decreases and tax increases, thus debt decreasing (or, more likely, increasing a little more slowly). So the Reinhart/Rogoff conclusion can be used to advocate that Keynesian "stimulus" policies don't work at least when debt has hit 90% of GDP. More broadly, if you don't get your government spending under control before the debt his 90% of GDP, you will go into stagnation with no obvious way to get out.
You can understand how the advocates of endlessly increasing government spending would hate the Reinhart/Rogoff conclusion, let alone the fact that they come from big-name Harvard, where all the other economists worship at the Church of Keynes. And the hatred was aggravated by the fact that known vampires like Paul Ryan had cited the Reinhart/Rogoff work in advocating for spending restraint. Well, a couple of weeks ago a grad student named Thomas Herndon and others at much less big-name U Mass - Amherst published their own article at the Political Economy Research Institute, claiming to find "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics" in the Reinhart/Rogoff paper. Let the inquisition begin!
I'll give just a few choice quotes from very many that are out there:
"This is a mistake that has had enormous consequences," wrote Dean Baker of the Center for Economic and Policy Research. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."
From the official Worst Economics Writer In America, Paul Krugman:
So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.
And this, reported by Matt Clinch of CNBC:
The two economists have also said they have received "hate-filled" and "threatening" emails since the debate began to rage two weeks ago.
Now I'm not going to get into the math of the Reinhart/Rogoff paper, whether it contains errors, and whether those errors are important to the result. The evidence of the Reinhart/Rogoff paper is a minuscule part of the vast evidence that Keynesian stimulus doesn't work. If it did, Japan would have boomed for the last 24 years. If it did, Greece and Spain would be success stories instead of needing one bailout after another. If it did, France, with spending at 56% of GDP, would be a growth model for all, instead of barely eking out 0.5% growth for the past 5 years and currently shrinking. If it did, Latvia and Estonia would have collapsed when they dramatically shrank government spending as a percent of GDP a few years ago. If it did, Hong Kong and Singapore would be basket cases instead of growth leaders. All you have to do is look around for the most basic statistics as to national economic performance.
But the Reinhart/Rogoff story is about the enforcement of orthodoxy in academia. After the firestorm hit, the pair have sent out a series of waffling missives, defending their work but also partially backing down:
"Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis," they said in the Financial Times.
It may be enough to avoid burning at the stake, although perhaps not excommunication. Remember all ye economists, this is what happens to all those whose work may suggest that government should be cut!