Anders Aslund’s new piece on Foreign Policy’s “Think Again” blog makes a convincing case that well-managed austerity, not Keynesian stimulus, is the path to recovery and growth. His points are well taken– food for thought, if nothing else. Aslund cites a paper that came out of UMass Amherst last week, in the wake of the revelation that the conclusions of Carmen Reinhart and Kenneth Rogoff’s 2010 paper, “Growth in a Time of Debt”, were compromised by some subtle spreadsheet errors.
“Growth in a Time of Debt” claimed to find that a debt/GDP ratio exceeding 90% corresponded to a sharp drop in growth. This had the effect of solidifying 90% in the consciousness of some as a kind of magic number, a cap on public debt beyond which an economy was sure to collapse. These numbers have been conclusively challenged in the UMass paper – “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” – authored by Thomas Herndon, Michael Ash and Robert Pollin and cited by Aslund.
The problem with Aslund’s new FP piece is the following line, from which the rest of the article draws substantial legitimacy: “According to economists at the University of Massachusetts, GDP growth falls substantially – and predictably – with rising public debt”. This is half-true. The numbers Aslund provides via the UMass study – average annual real GDP growth of 3.2%, 2.4%, and 1.6% relating to debt ratios of 60-90%, 90-120% and 120-150% respectively– are correct. But this drop-off is no way “substantial”, certainly not in the revelatory way presented originally by “Growth in a Time of Debt”. We’re speaking here of differences in GDP growth of 0.8%. With a margin of error of 0.5% in GDP growth reporting, we could be talking about a cost of between 1.3% and 0.3%.
The charts provided by the UMass researchers evidence close-to-negligible GDP growth losses with a debt/GDP ratio between 35% and 90%. There is a slight downturn above 90%, but it’s nothing compared to the nearly 2% cost to growth seen between 0% and 35% debt/GDP.
Again, Aslund’s case against the case against austerity is convincing, and clearly worth a conversation. But he can’t sell austerity as a cure for economic woes based on the UMass numbers, which serve as a refutation of the Reinhart/Rogoff figures, not a reinforcement.