Back in April and May of this year, an arcane debate erupted of the sort commonly known only inside the ivied halls of academia, especially its departments of economics, home to the discipline Carlyle called the dismal science. The debate revolved around the very serious, if decidedly unsexy, question of whether higher public debt leads to slow growth (a key proposition of the austerity movement) or vice versa.
In the red corner, representing the budget cutters, were Harvard professors and celebrity economists Kenneth Rogoff and Carmen Reinhardt, whose 2010 paper on the subject in the American Economic Review (“Growth in a Time of Debt”) set the stage for this intellectual version of WrestleMania by purporting to show that economic expansion slowed dramatically when government indebtedness rose above 90% of gross domestic product (GDP); they thereby endorsed, intentionally or not, the policies of political austerians here and abroad.
In the blue corner, arrayed against Rogoff and Reinhardt, was an unlikely coalition composed of University of Massachusetts (at Amherst) graduate student Thomas Herndon, his faculty advisors Robert Pollin and Michael Ash, and the esteemed Paul Krugman, columnist for the New York Times and Nobel Prize-winning Princeton economics professor.
It was Herndon’s discovery, made in the course of a student assignment and later confirmed by his professors, that initially kicked off the controversy; Rogoff and Reinhardt, it seems, had made statistical mistakes arising from computer spreadsheet errors and omissions, which prejudiced their findings and undermined their conclusions. In particular, they unaccountably left out historical data for several countries that ran counter to their case.
What made Herndon’s revelations front-page news was that, for two years previous, Rogoff and Reinhardt had provided ammunition and encouragement for fiscal conservatives everywhere, even testifying before a receptive Congress on behalf of their theory. Tightfisted Sen. Tom Coburn (R-Okla.) became a fan. Likewise House Budget Committee chairman and supposed economic big thinker Paul Ryan (R-Wis.). So, too, the austerity-obsessed European Union’s Economic Affairs Commissioner Olli Rehn, as well as Britain’s incumbent Conservative budget czar George Osborne. In 2011-12, Republican deficit hawks in Washington cited the Harvard study constantly in their alarmist offensive against government spending.
In light of Herndon’s devastating critique of their methodology, Rogoff and Reinhardt have recently backed off a bit, admitting some errors but nevertheless refusing to abandon their basic call for debt-reduction policies. So the controversy continues, kept alive partly by Paul Krugman’s outspoken public support of Herndon and the angry Rogoff-Reinhardt response. Keynesianism versus austerity. Princeton versus Harvard. Professional economist versus professional economist. Student versus professors. It’s a media confrontation made in Heaven, and dismal scientists are suddenly rock stars. Protagonist Thomas Herndon himself has lately done the talk-show circuit.
Putting aside all the hullabaloo over what a now defensive Rogoff and Reinhardt dismiss as an “academic kerfuffle,” there are major issues at stake here. Economic policies across the Western world have for over two years relied on the supposition underlying the flawed Harvard study — namely, that public debt is the cause of everything. Those policies have been proven wrong time and again, yet governments stubbornly cling to them in the face of disastrous results.
The latest evidence comes from the European Union, which remains mired in recession three years into austerity. Euro Zone GDP figures released on May 15 show negative and declining growth for every EU country except Germany, along with the highest combined unemployment rate (12.1%) since 1995. Economists from the International Monetary Fund now admit that the recessionary impact of Continental austerity was “more severe” than expected.
Better late than never, but realizing where one is wrong doesn’t guarantee one will do what is right, which in this instance would be to double down on the inadequate stimulus programs of 2009-10 and deficit-spend in the name of job creation. But politicians, like generals, always fight the last war, and they’re reluctant to move in that direction because of the Tea party’s brief success in the US two years ago and the emergence of similar “populist” rump movements in Europe. A fear of challenging the received conventional economic wisdom (deficits are always bad) is also playing a role in freezing things in place.
Contributing to the problem of political paralysis is that, after 30 years of relentless conservative propaganda, elected officials, including many on the Left, don’t really believe government spending works; this was evident in the grudging 2009 stimulus vote and the failure to defend or replicate it. History, however, suggests otherwise.
At the risk of frightening the children, the country that proved the case for deficit spending was none other than Nazi Germany. More so than even FDR and John Maynard Keynes, it was Adolf Hitler who led the way in finding a cure for the Great Depression with his ad hoc big-spending response to the international crisis.
Economist John Kenneth Galbraith, building on the research of historian John A. Garraty in the 1970s, pointed out that Der Fuhrer borrowed money and spent massively from 1933 onward for civilian projects like railroads, canals, public buildings, and, most famously, the Autobahnen “By late 1935,” Galbraith wrote in The Age of Uncertainty, “unemployment was at an end in Germany.” The US successfully followed suit, but largely waited until the war years and spent mostly on armaments.
It’s characteristic of Washington that it’s always ready and willing to spend on war and defense. The challenge lies in transferring this military-Keynesian mindset to peacetime purposes, a necessary step if there is any realistic hope of lifting the economy out of its doldrums.
A generation ago, two progressive economists who, like Rogoff and Reinhardt, were products of Harvard, produced a small, largely forgotten tract entitled A Primer on Government Spending (Knopf, 1963) that pointed the way. Its authors, Robert Heilbroner and Peter Bernstein, contended that “a government deficit is essentially a way of raising demand,” and that “if the process of business demand-creation is insufficient [precisely the problem in 2013] there is no other way to avoid unemployment.”
So, who’s right, Harvard present or Harvard past? Obviously, the Rogoff-Reinhardt approach has led from austerity to misery. Heilbroner-Bernstein, on the other hand, whose liberal prescription was approved government policy at the time, were heralds of the last great period of broad-based American prosperity. The choice is ours.
Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He is the author of two prizewinning books.
From The Progressive Populist, September 1, 2013
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