The Austerian Economists’ Error
In the battle of opinions for managing sluggish economies, rhetoric often misrepresents the research.
Listener: 13 June, 2013
Keywords: History of Ideas, Methodology & Philosophy; Macroeconomics & Money;
The right response to high unemployment and lethargic economic activity is to cut back government spending, according to “Austerians”, whose name is a pun on “austerity” and “Austrians”, a rightish version of economics. Some fiscal conservatives, including me, argue that many governments in debt have to be restrained because their creditors are reluctant to lend them more. But Austerians go a step further, holding that the adjustment should be only on the spending side and that there is no place for tax increases.
They claim their policies work by reducing interest rates, thereby stimulating private-sector investment. So far this has not really happened. Their position often seems ideological. You hear austerity advocacy most in the public comment of politicians, ideologists and rhetoricians who take it that somewhere there is a theory that justifies their prejudices, even if they do not know where.
Some reputable economists take an Austerian line, but generally they don’t join in the rhetoric. Their greatest contribution has been to critique anti-Austerians – sometimes called “modern Keynesians” – the most prominent of whom is Paul Krugman (who sometimes descends into rhetoric, too, obscuring what a fine economist he is).
There is a science that underpins economics. The discipline is in three parts: research, policy and rhetoric (which typically misrepresents the research). The division is nicely illustrated by a recent kerfuffle.
Carmen Reinhart and Ken Rogoff are also fine economists, whose book, This Time Is Different, is a monumental and respected historical study of financial and banking crises. More recently they published a paper that said that when the ratio of government debt to GDP exceeds a 90% threshold, the economic growth rate markedly falls. Austerians seized the research as evidence for their policies.
Research needs to be capable of reproduction in some manner. Economics has few experiments, but then it’s the same with astronomy, evolutionary biology and geology. As a rule, I require a large number of confirming studies before accepting an economic finding as “verified”. But the first test is whether the result can be repeated.
When economists tried to reproduce the Reinhart-Rogoff findings, they found them flawed to the extent that the two have apologised and withdrawn them.
Yet, as has happened with earlier research, a collapse in evidence that Austerians had claimed proved their case has done nothing to dissuade them. One is left with the impression of drunks using a lamp post for support rather than to shed light. When the post falls over they wander on looking for another one.
One critical flaw centred on New Zealand; without it the results look decidedly shaky. It turned out that the two misinterpreted what was going on here. I’ve been involved with a handful of economists in New Zealand, France, the Netherlands and the US trying to sort out the mess. The work has been detailed; describing it would be time-consuming, but it does illustrate that much scientific research is tediously boring.
More generally, research economists have concluded there is no debt threshold that, once crossed, collapses economic growth. They recognise a connection between high debt and poor economic performance, but don’t know which causes which.
This finding is so feeble that it has had little impact on most economists’ policy thinking. In contrast, the Reinhart-Rogoff book had considerable impact.
My view remains that countries in weak debt positions need to be fiscally cautious, but that a number of key countries in a better position – particularly the US, Germany and China – should be more fiscally expansionary. That would benefit the weak.
I remain fiscally cautious for New Zealand, but unlike the Government, I do not think all the adjustment should be from cutting government spending.
I argued for funding the Canterbury earthquake recovery by a small income-tax surcharge and borrowing to spread the burden over a generation. Regrettably, the Government blew that one. We are going to pay a high price in the future as the public sector malfunctions from the emphasis on spending cuts.
Unlike the Government, I do not think all the adjustment should be from cutting government spending.