It’s not only the simple folks in the eurozone periphery who protest against austerity politics anymore.
Late last year even the IMF’s chief economist Olivier Blanchard had to concede that the “recent efforts among wealthy countries to shrink their deficits (…) have been causing far more economic damage” than his research team previously assumed. So they readsjusted the ‘fiscal multiplier’ for calculating the IMF’s forecasts. Yesterday, IMF’s managing director Christine Lagarde even warned about the developement toward a “three speed world” with Europe lagging behind.
Today, we’ve come full circle as the debate about the analytical foundation of austerity politics is heating up in the academic world again. In 2010 the economists Carmen Reinhardt and Kenneth Rogoff wrote “Growth in a Time of Debt,” the theoretical blueprint for austerity politics. The paper claimed there’s a correlation between levels of public debt and the rate of economic growth, and set a mark of 90% public debt to GDP above which economic growth would sag exceedingly. This study now meets with fierce critisism by the fellow economists Thomas Herndon, Michael Ash, and Robert Pollin from University of Massachusetts Amherst. But it’s far from a battle of egghead titans on the field of intricate mathematical formulas. No, according to the new paper by the Amherst economists the findings of Reinhardt and Rogoff, they say “have served as an intellectual bulwark in support of austerity politics,” are simply messed up by “errors (…) including spreadsheet errors, omission of available data, weighting, and transcription.” Of course Reinhardt-Rogoff are defending their position.
So now with main street, IMF and the ivory tower faltering, are Wolfgang Schäuble and George Osborne the only die hard fans left of austerity politics? We will see how that plays out at the G20 meeting later this week in Washington where, as reports say, the european delegates (i.e. Germany) will push for an international commitment to a debt level below 90% of GDP. A plan that the USA is said to reject and Japan (now at 245,4% debt/GDP) is only laughing at.
Damn, Clippy, why!?! 1
Update: FT’s The World blog has put together the essential reading list about Reinhardt/Rogoff.