Monday, 22 April 2013

Reflections on Reinhart & Rogoff

It turns out that there is no slump in economic output once government debt rises above 90% of GDP – the case for austerity has been blown apart! That is the conclusion of people who have joined the attack on a widely cited piece of research by Carmen Reinhart and Kenneth Rogoff, from the economics editor of the Financial Times, the head of PIMCO, one of the world’s largest investment funds, and many others.

Reinhart and Rogoff’s thesis was that higher government debt, above a trigger level of 90%, would produce much lower growth, so that more government spending to escape recession would backfire.[1] A recent academic paper showed that, among other things, they had miscalculated some of the numbers underpinning the result.[2] The authors admit the miscalculation error, but argue that their broad conclusions remain valid. What should we make of this policy spat?

A debate over econometrics, of all things, has risen to such prominence because austerity is under way in many countries. Opponents of these policies want to show it is unnecessary: there is an alternative; a Thatcherite ‘no alternative’ should have been buried with the rusting Iron Lady last week.

But consider an issue of principle. What if the data, properly assessed, had indeed shown that more government spending – leading, at least in the short-term, to more government debt – was bad for growth? After all, other studies, not simply Reinhart and Rogoff’s, have made the point that high levels of all kinds of debt are associated with weaker growth.[3] Does that mean that austerity can now be an acceptable policy? This indicates the narrow terms of such a debate; one that takes for granted that what is good for the health of the capitalist economy is good for humanity, give or take a bit of redistribution. Not surprisingly, none of the opponents to Reinhart and Rogoff argued that capitalism is a reactionary system whose imperatives should be rejected.

It is difficult to express quite how stupid the usual debate is when the capitalist system is faced with its most serious economic crisis. However, what underlies the common critical view of capitalist policy is not concern with the depredations visited upon the victims of imperialism, but the growing realisation that the cost of the system is now also to be borne by (most of) the inhabitants of the imperialist powers.

The problem they face is that the rationale for government spending cuts as part of a policy to reduce debt and restore conditions of profitable accumulation does make some sense. After all, more or less everything else has already been tried in the major capitalist powers, and to no lasting effect. We have seen a dramatic rise in government spending, including taking on the liabilities of a blown out financial system that was the main source of the previous ‘prosperity’, close-to-zero interest rates at which banks can borrow from the central bank and extraordinary measures of ‘quantitative easing’, including the latest gambit from the Bank of Japan.

To presume that austerity is being introduced as a mistaken policy measure ignores the unwelcome fact that there are basically no alternative policies left. Yes, austerity will bring economic pain and destruction, and (hopefully) political turmoil too, but that is the nature of the beast. Unless that nature is understood, the beast will not be overcome. The most that advocating ‘alternative policies’ rather than a wholehearted opposition will do is delay the beast’s bloody meal of its opponents from breakfast until lunchtime.

Tony Norfield, 22 April 2013

[1] Carmen Reinhart and Kenneth Rogoff, ‘Growth in a Time of Debt’, NBER Working Paper 15639, January 2010.
[3] See Stephen G Cecchetti et al, ‘The Real Effects of Debt’, August 2011, on the BIS website at Also see the articles on this blog: ‘Debt and Austerity’, 8 August 2011 and ‘Capitalist Crisis, Keynesian Delusions’, 5 September 2011.