Quartz recently ran a piece from University Michigan economics prof Miles Kimball and research assistant Yichuan Wang that re-analyzed the data in the original research by Reinhart and Rogoff that was used to justify the so-called austerity policies put in place in most of the developed economies over the last decade. What did they do and what did they find?
Here is what we did to focus on long-run effects: to avoid being confused by business-cycle effects, we looked at the relationship between national debt and growth in the period of time from five to 10 years later. In their paper “Debt Overhangs, Past and Present,” Carmen Reinhart and Ken Rogoff, along with Vincent Reinhart, emphasize that most episodes of high national debt last a long time. That means that if high debt really causes low growth in a slow, corrosive way, we should be able to see high debt now associated with low growth far into the future for the simple reason that high debt now tends to be associated with high debt for quite some time into the future.
Here is the bottom line. Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.
The full post is here. So austerity could turn out to be the Iraqi invasion of fiscal policy: a self-destructive debacle based upon no plausible supporting evidence. Comforting, eh?