Under steady attack after their seminal research was found to be riddled with errors, Harvard economists Carmen Reinhart and Kenneth Rogoff are making a show of backing away from the austerity that their research encouraged.
They claim that their views on austerity have never changed, but the record tells a different story. They're still trying to have it both ways -- advocating for government belt-tightening while trying to avoid being seen as political.
For those readers who have spent the past month held prisoner by the Sleestaks from "The Land Of The Lost," let me catch you up: Reinhart and Rogoff wrote a paper back in January 2010, called "Growth In A Time Of Debt," which strongly suggested that government debt of more than 90 percent of gross domestic product caused bad things to happen to economies. In the years since its publication, that paper has been cited by many politicians, from Rep. Paul Ryan (R-Wis.) to George Osborne of the U.K., to justify harsh belt-tightening programs despite deep, widespread economic pain in the U.S., U.K. and Europe.
Two weeks ago, a University of Massachusetts-Amherst grad student, Thomas Herndon, destroyed their paper's credibility by pointing out that it was riddled with errors, including glaring data omissions and a goofy Excel spreadsheet mistake. Suddenly, the Paul Krugmans of the world, who have spent the past few years arguing fruitlessly against austerity, had the upper hand. The austerity movement had been discredited, along with the research from Reinhart and Rogoff that underpinned it.
Of course, Reinhart and Rogoff have repeatedly claimed that their work has not been discredited at all, that the bulk of the data still supports their thesis that debt is a really, really bad thing. And austerity advocates claim, accurately, that they weren't relying only on Reinhart and Rogoff in pushing for austerity. They still believe debt is a really, really bad thing, with or without Reinhart and Rogoff's numbers.
As part of the effort to rehabilitate their image, Reinhart and Rogoff have taken the additional step of trying to distance themselves from austerity altogether by claiming they were never advocates. In a Financial Times piece on Wednesday (subscription required) and in a New York Times op-ed last week, they argued that "austerity is not the only answer" to the oh-so-serious problem of government debt. In fact, a whole toolkit must be used -- a little austerity here, a little financial repression there, maybe a little inflation.
And with Wednesday's FT column, a surprising new tool appears in the kit: More government debt! Although not too much more, and only if it's used for the right things (emphasis added):
To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched....
Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. 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.
But Reinhart and Rogoff never argued, in many of the high-profile columns they wrote following the release of their paper, that governments should take on more debt for infrastructure spending, or for anything else. In fact, they strongly suggested that governments had better hurry up and start cutting their debt, tout de suite, lest a new financial crisis hit.
This is what they wrote in the FT in January 2010, around the time of the publication of "Growth In A Time Of Debt" (emphasis mine):
Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it.
Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different.
In July 2011, they wrote in Bloomberg:
Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today's low borrowing costs, much less to interpret them as an "all clear" signal for a further explosion of debt.
Rather than suggesting that it might be okay to increase crisis-response spending temporarily, they allow only that spending can be reduced "gradually." Which is austerity by another name. And they warn governments against "a further explosion of debt" to pay for infrastructure or stimulus or anything else, even when interest rates are at record lows and people are suffering.
In June 2012, Rogoff did call "debt-ceiling absolutists" naive in their belief that governments could suddenly just stop taking on debts necessary to pay for stuff like armies and roads. But he also scolded the "simplistic Keynesians" like Krugman who have called for more debt and more government spending: "[E]xpanding today's already large deficits is a risky proposition, not the cost-free strategy that simplistic Keynesians advocate."
A little later, in August 2012, Rogoff claimed that he had "always favoured investment in high-return infrastructure projects that significantly raise long-term growth." But as Slate's Matthew Yglesias noted at the time, this is a stingy sop -- okay, fine, we can spend some money, but only as long as we're sure we're spending it on "high-return" projects. Good luck figuring out what those are.
And for the past three years, as their paper was used as a political weapon by austerity advocates, Reinhart and Rogoff remained mute, never complaining that their paper was being misconstrued or taken too far. In fact, their columns and congressional consultations only fanned austerity's flames. Rogoff in 2011 told Congress that right now was "absolutely" the time to start cutting debt, according to Sen. Tom Coburn (R-Okla.).
Now that their thesis has suffered a potentially fatal blow, and the "fiscal tsunami" of soaring interest rates they predicted has still not materialized, Reinhart and Rogoff are re-writing history and appearing to get a little cozier with the idea of debt. Given the damage that austerity has already caused, any apparent abandonment of it is welcome. Still, there's no better proof that the intellectual case for austerity has always been empty.
Also on HuffPost:
The Deficit Has Grown Mostly Because Of The Recession
The deficit has ballooned not because of specific spending measures, but <a href="http://research.stlouisfed.org/fred2/graph/?s[id]=FYFSD" target="_hplink">because of the recession</a>. <a href="http://www.whitehouse.gov/omb/budget/Historicals" target="_hplink">The deficit more than doubled</a> between 2008 and 2009, as the economy was in free fall, since laid-off workers paid less in taxes and needed more benefits. The deficit then shrank in 2010 and 2011.
The Stimulus Cost Much Less Than Bush's Wars, Tax Cuts
Republicans frequently have blamed <a href="http://projects.nytimes.com/44th_president/stimulus" target="_hplink">the $787 billion stimulus</a> for the national debt, but, when all government spending is taken into account, the stimulus frankly wasn't that big. In contrast, <a href="http://www.huffingtonpost.com/2011/06/29/cost-of-war-iraq-afghanistan_n_887084.html" target="_hplink">the U.S. will have spent nearly $4 trillion</a> on wars in the Middle East by the time those conflicts end, according to a recent report by Brown University. <a href="http://www.washingtonpost.com/blogs/fact-checker/post/revisiting-the-cost-of-the-bush-tax-cuts/2011/05/09/AFxTFtbG_blog.html" target="_hplink">The Bush tax cuts have cost nearly $1.3 trillion</a> over 10 years.
The Deficit Grew Under George W. Bush
When George W. Bush took office, <a href="http://www.whitehouse.gov/omb/budget/Historicals" target="_hplink">the federal government was running a surplus</a> of $86 billion. When he left, that had turned into a $642 billion deficit.
The Deficit Is Shrinking
<a href="http://www.whitehouse.gov/omb/budget/Historicals" target="_hplink">Last year's federal budget deficit</a> was 12 percent lower than in 2009, according to the Office of Management and Budget.<a href="http://www.whitehouse.gov/omb/budget/Historicals" target="_hplink">The deficit is projected to shrink</a> even more over the next several years.
Investors Are Paying Us To Borrow Money
<a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield" target="_hplink">The interest rate on 10-year Treasury bonds</a> is <em>negative</em>, according to the Treasury Department. Investors are even paying us for 30-year Treasury bonds, when adjusted for inflation.
Investors Are Not Running Away
<a href="http://www.businessinsider.com/niall-ferguson-has-been-wrong-on-economics-2012-8" target="_hplink">Conservative commentators</a> have been warning for years that investors will run away from Treasury bonds because of the national debt. So far it's not happening. <a href="http://www.huffingtonpost.com/2012/05/30/treasury-yield-record-low_n_1555975.html" target="_hplink">Interest rates on Treasury bonds</a> continue to hover at historic lows.
Health Care Reform Reduces The Deficit
<a href="http://www.huffingtonpost.com/2012/09/04/republican-platform-2012-factual-mistakes_n_1840795.html#slide=1461142" target="_hplink">Republicans have blasted the Affordable Care Act</a> as "budget-busting." But <a href="http://www.huffingtonpost.com/2012/09/04/republican-platform-2012-factual-mistakes_n_1840795.html#slide=1461142" target="_hplink">health care reform actually reduces the deficit</a>, according to the Congressional Budget Office.
The U.S. Is Borrowing Less From China
<a href="http://krugman.blogs.nytimes.com/2012/08/30/fear-of-china-syndrome/" target="_hplink">The U.S. government is borrowing much less from foreign countries</a> than before the recession, according to government data cited by Paul Krugman. That is because the U.S. private sector is financing our bigger deficits.
We Spend A Lot On Defense
<a href="http://www.cbpp.org/cms/index.cfm?fa=view&id=1258" target="_hplink">Defense spending constituted 20 percent</a> of federal spending last year, or $718 billion, according to the Center on Budget and Policy Priorities. This adds up to <a href="https://twitter.com/AJInsight/statuses/241269134996959234" target="_hplink">41 percent of the world's defense spending</a>, according to Bloomberg TV anchor Adam Johnson. <a href="http://www.huffingtonpost.com/2012/07/19/mitt-romney-military-budget_n_1687601.html" target="_hplink">Mitt Romney has vowed</a> to not cut defense spending if elected president.
We Spend A Lot On Health Care
<a href="http://www.cbpp.org/cms/index.cfm?fa=view&id=1258" target="_hplink">Health insurance, including Medicare and Medicaid, constituted 21 percent</a> of federal spending last year. In contrast, education constituted 2 percent of federal spending. Meanwhile, <a href="http://www.miamiherald.com/2012/08/19/2956609/middle-aged-blues-over-paul-ryans.html" target="_hplink">Mitt Romney and Paul Ryan have promised not to change Medicare</a> for Americans age 55 and older.
Republicans May Want Large Deficits For Now
<a href="http://www.businessinsider.com/corporate-taxes-deficits-and-labor-vs-capital-during-reagans-first-term-2012-7" target="_hplink">The federal budget deficit ballooned</a> under Ronald Reagan, and that may be just the way Republicans like it. <a href="http://www.forbes.com/2010/05/06/tax-cuts-republicans-starve-the-beast-columnists-bruce-bartlett.html" target="_hplink">Some Republican thinkers</a> have proposed <a href="http://www.nytimes.com/2010/02/22/opinion/22krugman.html" target="_hplink">"starving the beast"</a>: that is, cutting taxes in order to use larger deficits to justify spending cuts later. Since Republicans ultimately want lower taxes and a smaller government, what better way is there to cut spending than to make it look urgent and necessary?