04/21/2013 12:27 pm ET | Updated Jun 18, 2013

The Scandal that's Discrediting All Conservative Economists


The fracas that the fraudulent "research" paper by leading Harvard conservative economists Kenneth Rogoff and Carmen Reinhart has generated, is going straight to the heart of the economics profession, and also to the heart of public policy for dealing with the economies in the U.S. and many other countries. Here is the fundamental issue that's involved in this important history-shaping matter:

The basic war among professional economists has been between the "austerity" camp (of which this paper was the biggest gun), and the "growth" camp.

Austerians say that the way for the world to address the slowdown in the developed economies is for governments to cut government spending. (The fraudulent "research" paper provided selective, jiggered, and even bogus, data supporting this view.)

Growthers say that the way to address it is instead for those governments to increase government spending.

Austerians say that government spending is waste, which drains productive spending by corporations. Austerians say that government spending just increases the national debt.

Growthers say that government spending is sometimes productive, and that corporate spending is itself sometimes wasteful. Growthers say that even sometimes when government spending turns out to be wasteful, and always at times when it turns out to be productive, government spending puts money into the hands of workers and consumers, so as to increase their ability to make purchases, which gets factories and businesses humming again, which increases the nation's economic output and restores the taxes flowing into the government's coffers, so that even the government's debt will decline, over the long term. It's a win-win situation, growthers say: the public benefits, the government benefits, and even corporations benefit over the long term, because their sales-volumes become restored.

The Rinehart and Rogoff "research" was prominently cited by Republicans when preaching conservative economic mythology around the world. One Chairman of George W. Bush's Council of Economic Advisers, Douglas Holtz-Eakin, praised recently in Britain's Guardian, "The canonical work of Carmen Reinhart and Kenneth Rogoff," referring there to that fraudulent "research" paper. Another former Chairman of GWB's CEA, Glenn Hubbard, wrote recently in Germany's Handelsblatt, citing "the investigations of the two U.S. economists," R&R, as proving that (as his essay was titled), "Nicht von Amerika Lernen," or "You Shouldn't Copy America" in (the Democrats') supposedly too-growth-oriented policy. Conservative preaching is based upon such hoaxes and errors, because that's all they've got. (It's like George W. Bush's proclamations about the fictitiousness of global warming, and about the reality of Saddam Hussein's WMD and other Iraqi dangers to America.)

Even before the exposure of that fraudulent paper, the austerians' case had already been definitively destroyed by numerous research papers, which were authentic.

Here's the book on that: The International Monetary Fund (IMF) issued in October 2010, a "World Economic Outlook," whose entire third chapter was devoted to "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" (otherwise called 'austerity,' or the Republican approach in the U.S.). This summary of the research answered its title question with a decided yes, and said: "Based on a historical analysis of fiscal consolidation in advanced economies, ... it finds that fiscal consolidation typically reduces output and raises unemployment in the short term," which causes the taxes that are coming into the government to go down, which causes the government's deficits and debt to rise (thus failing at everything). "Fiscal consolidation typically has a contractionary effect on output. ... When interest rates are stuck at zero [as they currently are], the output cost of fiscal consolidation doubles. ... During this time, the central bank is powerless to offset the slump in aggregate demand and inflation induced by the cut in government spending. The resulting fall in inflation raises the real interest rate, which in turn exacerbates the decline in aggregate demand, amplifying the short-term contractionary effect." In July 2011, an "IMF Working Paper" by Guajardo, Leigh and Pescatori, was titled "Expansionary Austerity: New International Evidence," and it concluded: "Our main finding that fiscal consolidation is contractionary holds up [even] in cases where one would most expect fiscal consolidation to raise private domestic demand," so that "Expansionary Austerity" was basically just a right-wing myth. At around the same time, Roberto Perotti's "The 'Austerity Myth': Gain Without Pain?" at the Bank for International Settlements, reported that, "These results cast doubt on at least some versions of the 'expansionary fiscal consolidation' hypothesis, and on its applicability in the present circumstances." In September 2011, the IMF issued yet another study, "Painful Medicine: ... Slamming on the brakes too quickly will hurt incomes and job prospects." It found: "The pain is not borne equally. Fiscal consolidation reduces the slice of the pie going to wage earners." On 18 July 2011, economist Mark Thoma headlined to summarize "The Crumbling Case for Austerity," and economist Chad Stone bannered "The Crumbling Case for Cutting Spending to Stimulate the Economy." The matter was essentially closed.

But more studies still poured in, confirming the point. In August 2012, the International Labour Office in Geneva issued "Macroeconomic Policy Advice and the Article IV Consultations: A Development Perspective," and their study showed that: "The 'one size fits all' approach" that the IMF had previously been using, which targets low government spending as being a country's way out of debt "has an uneasy existence with the empirical literature," which proves that it doesn't work. Then, in January 2013, the Center for Economic and Policy Research titled a study "Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study," and found that austerity ("fiscal consolidation") failed not only with underdeveloped nations, but also with EU nations.

Finally came the coup de grace against the austerians, in an important new study published by the IMF at the start of this year. Olivier Blanchard, the Chief Economist at the IMF, shockingly admitted that their having respected and accepted the advice of conservative economists has turned out to be a blunder, which has cost and is costing the world's advanced economies dearly, and which must therefore be stopped and reversed if the world is to avoid an economic tailspin.

The basic topic of this definitive paper was the core empirical issue that separates the austerians from the growthers: the actual size of the economist John Maynard Keynes's "multiplier" - the real-world size of the stimulus to the economy that's generated by increasing government spending during flat or declining economic times, such as these.

Keynes had said that in circumstances such as these, the "multiplier" effect of increased government spending is sufficiently large to more-than-counteract the negative economic effect of adding to the government's debt during an economic downturn. Conservative economists assume instead that the multiplier is simply too small to counteract that negative effect.

This new "IMF Working Paper," issued January 2013 and titled "Growth Forecast Errors and Fiscal Multipliers," was prepared by Blanchard and Daniel Leigh of their Research Department, and it reports that whereas the IMF had been accepting conservative economists' estimates that the multiplier was "about 0.5" percent growth, the "actual multipliers were substantially above 1 early in the crisis," which was the period when the IMF was recommending and pursuing "fiscal consolidation," which is the economists' jargon, that is called in the United States (and generally among the world's public) "austerity." In other words, the policy that's recommended by the Republican Party's economists, and which has actually been tried especially in Europe, has failed miserably, and this monumental IMF study nailed that, with the empirical data, attacking the IMF's own previous simply false assumptions about the size of the multiplier..

Here are some of the things this IMF study reported: "Fiscal multipliers can exceed 3. ... Based on data for 27 economies during the 1930s, ... Alumnia and others (2010) have concluded that fiscal multipliers were about 1.6." The IMF report referred to "our findings that short-term fiscal multipliers have been larger than expected" during the current crisis, and they wondered whether this underestimation by economists was unusual. "How special is the crisis period? ... For the set of two-year intervals during the precrisis decade (1997-2008), we find ... the estimate ... is near zero," which was even farther off the empirically demonstrated mark. They wondered why "fiscal consolidation [or as Americans say, "austerity"] flops. "We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation." According to Keynesian theory (which was pursued and that got us out of the Great Depression), "growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found" in the post-2008 period. The report's "Abstract" said: "We find that, in advanced economies, stronger planned fiscal consolidation [the 'austerity' that is being pushed by John Boehner, Mitch McConnell, and other Republicans] has been associated with lower growth than expected. ... Fiscal multipliers were substantially higher than implicitly assumed by forecasters."

Here in the U.S., a similar recent study was done by the research arm of the U.S. Congress. That study covered only the U.S. economy, and it focused like a laser on only U.S. economic history. The specific question it examined was whether economic growth has been spurred in the United States by cutting taxes for the rich and by introducing austerity for the nation-as-a-whole by the Federal Government, or whether such economic policies have failed to generate economic growth in this country. It found that they have failed. Since the study was American, and the standard version of anti-Keynesianism in this country has been "supply-side economics," which combines austerity with top-end tax-cuts, this study dealt with only the peculiarly American form of conservative anti-Keynesian (i.e., austerian) economic theory. However, its findings were entirely consistent with the recent IMF global findings.

On 17 September 2012, which was a timely moment during the national debate and congressional negotiations over the "fiscal cliff," bannered "New Study Finds Tax Cuts For The Rich Cause Income Inequality, Not Economic Growth," and reported that, "According to a new report by the Congressional Research Service, cutting taxes for the wealthiest does not cause economic growth, despite constant conservative claims that it will. Instead, tax cuts for the rich merely exacerbate income inequality." This finding, by the Congress's own research service, essentially destroyed the foundation-stone of the Republican Party's economic arguments. The entire Republican argument against Obama's proposal to hike top-end ($250,000+) taxes was decimated by these findings. Few newsmedia published or linked to this stunning news story; it was too devastating to the Republican campaign. Democrats tried to get it into circulation, but pretty much failed. Thinkprogress linked to the study, which was titled "Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945."

Months of silence on this shattering news were finally broken a few months later, late enough so that it couldn't affect the election-results. Then, on November 2nd, The New York Times headlined, with perhaps intentional dullness (so as to help assure that the matter would stay out of the political debate), "Nonpartisan Tax Report Withdrawn After G.O.P. Protest," and Jonathan Weisman reported there the actually historic news, that, "The Congressional Research Service [which he failed to note was the most respected nonpartisan research organization concerning legislation] has withdrawn an economic report that found no correlation between top tax rates and economic growth, ... after Senate Republicans raised concerns about the paper's findings," findings that contradicted "a central tenet of conservative economic theory," which was supply-side economics: the belief that top-end tax-cuts trickle down to everybody and so produce a growing, expanding, economy. (Weisman deceived there: Calling supply-side economics "economic theory" or a "central tenet" of any, would be taken as an insult by most economists, since it's not, and it was always considered marginal, at best, among academic economists. Calling it "conservative economic theory" was laughable, since it was actually just Republican economic theory - the Republican economic theory - not respectable enough to be broadly believed even by conservative academic economists.) "The decision [by CRS], made in late September against the advice of the agency's economic team leadership, drew almost no notice at the time." Buried in this obscurantistly-written, and way understated-headlined, news story, from the ever-subtly Republican-slanted NYT, was the crucial: "Congressional aides and outside economists said they were not aware of previous efforts to discredit a study from the research service." In other words (to decode here): This action by Senate Republicans was a historically unprecedented deep-sixing, by a political Party, of a research report by the official research arm of the United States Congress. It was terrifying. It was Orwellian. After more than two hundred years, the research service of the U.S. Congress was zapped regarding a scientific finding that a political Party had blocked from even being issued. The headline for this story should instead have been "In Historically Unprecedented Move, Congressional Research Service Finding Is Squelched." But that would have attracted attention to the matter, so it wasn't done.

The reason that the CRS report was squelched wasn't reported by the Times. This reason was that without supply-side theory, the entire Republican economic program had no argument. The conservative owners of The New York Times wouldn't permit reporting this key historical fact. But they did permit reporting most of the facts that would enable an intelligent and knowledgeable reader to figure it out on his own. (Democrats had been trying to circulate this study. That's why, on September 17th, had headlined about it, "New Study Finds Tax Cuts For The Rich Cause Income Inequality, Not Economic Growth." But then, the study just fell down the memory-hole.) In order to become an editor at that newspaper, one needed to be acceptable to the closeted Republicans who controlled the NYT corporation.

Since this news report was veiled, it had no real political impact, just as was intended. (The NYT Corp. could now claim that they had covered this news, even when they really hadn't, actually.)

At the end of the NYT's news report was the article's final take-away on the matter: After presenting Republicans' complaints that the study was biased, the article itself said that the study's writer "has contributed at least $5,000 this election cycle," all to Democrats. Why was this reported? Because it was the Republican Party's talking-point, no other reason. It was pure propaganda, presented by the NYT as if it were a legitimate element of this particular news-story, when it was actually nothing more than what the Republican Party had communicated to the reporter that they wanted the public to be made to know. But there was no law saying that federal researchers and other employees were prohibited from donating to political campaigns. Should a $5,000 donation by the article's editor have been reported in the article, if it had happened? Of course not. Should federal employees, or members of the press, not be permitted to vote? Of course not. This fact was reported by The New York Times, only because The New York Times Corporation was a Republican propaganda operation, no other reason. Republicans thought that corporations were people, but evidently they thought that government employees were not people, or at least shouldn't be allowed to donate to political campaigns. Buried near the end of this propaganda-article was the study's finding that "top tax rate reductions appear to be associated with the increasing concentration at the top of the income distribution." That crucial finding, too, would have made a more striking headline than the miserable one that the newspaper's editors (hirees of the controlling owners) wrote and published.

On 2 November 2012, Nick Wing and Ryan Grim headlined at huffingtonpost "Congressional Research Service Report on Tax Cuts for Wealthy Suppressed by GOP," and provided an honest news report regarding this matter, which had been suppressed by the GOP and then deep-sixed by the NYT. They also presented the study's key quotes, such as "Reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution." They also linked directly to the suppressed study. Its author was Thomas L. Hungerford, Specialist in Public Finance. Hungerford told huffingtonpost, "CRS reports go through many layers of review before they're issued." Moreover, "Hungerford said that he had never experienced suppression like this before."

Basically, this was like when, in the George W. Bush White House, scientific studies were withdrawn or rewritten because they didn't say what Republicans (and their oil company financiers) wanted to be said about global warming.

To boil all of this down now: austerity during a sluggish economy causes the economy to contract, and that contraction causes people's incomes and spending to decline, and that causes taxes into the Federal Government to decline, and that decline in tax-income into the government causes its deficits to soar, and that, long-term, causes the government's debt to soar.

The time for austerity is thus when the economy is booming, which was what Bill Clinton did during boom-times, when he increased top-end taxes and reduced government spending. But we're not in boom-times now. In order to restore boom-times, we would need to do what FDR did starting in 1937, and which worked during the last Great Depression: massive federal spending increases on infrastructure and public welfare, precisely what the Republican Party fights against, and what our Republican-Democratic President Barack Obama refuses to fight for, but does give sporadic lip-service to (while not giving even a hint of the now enormous empirical economic evidence for it).


Republican Congressman Kevin Brady of Texas is the new Chairman of the Joint Economic Committee of Congress, and he is leading the Republicans' charge on this matter. In the Republican magazine National Review, he headlined on 21 February 2013, "What Kind of Cuts Grow the Economy?" (which assumes that some kind of cuts do "Grow the Economy"), and he argued that, "Time and again, economic studies have shown that countries that reduce their government deficits through spending cuts - rather than tax increases - can boost economic growth and job creation even in the short term." He cited as his source there the report that his own office had produced for the Joint Economic Committee Republicans, "Spend Less, Owe Less, Grow the Economy," which was dated 15 March 2011. However, he ignored the much more recent report from the Congress's own nonpartisan research arm, the Congressional Research Service, which was dated 11 January 2013 and titled "Can Contractionary Fiscal Policy Be Expansionary?" which stated boldly, "This view [i.e., Brady's] contrasts with that held by most economists and found in conventional models. In those models, cutting spending will contract the economy. Chairman Bernanke of the Federal Reserve was referring to this view when he cautioned against large and immediate spending cuts." The CRS study (which Brady and other Republicans ignore) went on to cite grave deficiencies in the studies that Brady was relying upon. For example, the CRS report noted that a 2010 study from the IMF, "Macroeconomic Effects of Fiscal Consolidation," which was much more comprehensive than the chief study that Brady's report had relied upon (which was issued in 2009), obtained results that "are consistent with the mainstream view of fiscal policy" and it found "that deficit reduction has a contractionary effect on output, with deficit reduction equal to 1% of GDP reducing output by 0.5% of GDP." Furthermore, "Some recent analyses have questioned the applicability of Alesina and Ardagna's findings [the findings in the 2009 study upon which Brady's JECR report had chiefly relied] to the current U.S. fiscal situation."

Perhaps in order to provide another means of repudiating Keynesianism so as to embrace the sequester cuts, Brady's "Spend Less, Owe Less, Grow the Economy" report also misrepresented what Keynsianism itself actually is. His summary of the "Keynesian View" didn't even so much as mention the Keynesian "multiplier," which is at the core of Keynesian economics, and which the new IMF study, "Growth Forecast Errors and Fiscal Multipliers," had examined in detail, and had re-estimated upward, when it had concluded that the IMF itself had previously underestimated the effectiveness of Keynesian policy - which depends upon there being a large enough "multiplier effect" from deficit spending on infrastructure and other government investments. Rather than so much as even just mentioning the "multiplier," Brady's report - the official Republican analysis - simply assumed that Keynesianism relies instead upon the discredited theory that, as he put it, "additional government debt 'crowds out' private investment through a higher real interest rate." However, that "crowding out" theory actually goes back instead at least as far as Malachy Postlethwayt's 1757 Great Britain's True System, which stated: "The national Debts first drew out of private Hands, most of the Money which should, and otherwise would have been lent out to our skillful and industrious Merchants and Tradesmen: this made it difficult for such to borrow any." The "crowding out" theory had nothing to do with Keynesianism, which was first formally introduced into economics in 1936, in John Maynard Keynes's The General Theory of Employment, Interest and Money. If anything, Keynes's theory would even suggest that such "crowding out" of private investment by public investment would be only short-term, and that the long-term result (whenever there is underinvestment generally) would be for it to boost private investment.

So: Republicans and other conservatives are now left with attacking Keynesianism by misrepresenting what it is, and with defending a fraud by two of their economists, and with ignoring consistent mountains of accumulating empirical evidence, all contradicting conservatives' claims.

However, since the international aristocracy is unalterably determined to fool the publics everywhere into believing that austerity is the path to restore the fiscal soundness of nations whose economies are depressed, we shouldn't expect science to get in the way of fraudulent and other false economics and economists.


Investigative historian Eric Zuesse is the author, most recently, of They're Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST'S VENTRILOQUISTS: The Event that Created Christianity.