Over the weekend, The New York Review of Books published a long article written by Paul Krugman on how the case for austerity fell apart. It's a long read, but well worth the time. Here are the opening paragraphs:
In normal times, an arithmetic mistake in an economics paper would be
a complete nonevent as far as the wider world was concerned. But in
April 2013, the discovery of such a mistake—actually, a coding error in a
spreadsheet, coupled with several other flaws in the analysis—not only
became the talk of the economics profession, but made headlines. Looking
back, we might even conclude that it changed the course of policy.
Because the paper in question, “Growth in a Time of Debt,” by the
Harvard economists Carmen Reinhart and Kenneth Rogoff, had acquired
touchstone status in the debate over economic policy. Ever since the
paper was first circulated, austerians—advocates of fiscal austerity, of
immediate sharp cuts in government spending—had cited its alleged
findings to defend their position and attack their critics. Again and
again, suggestions that, as John Maynard Keynes once argued, “the boom,
not the slump, is the right time for austerity”—that cuts should wait
until economies were stronger—were met with declarations that Reinhart
and Rogoff had shown that waiting would be disastrous, that economies
fall off a cliff once government debt exceeds 90 percent of GDP.
Reinhart-Rogoff may have had more immediate influence on public debate
than any previous paper in the history of economics. The 90 percent
claim was cited as the decisive argument for austerity by figures
ranging from Paul Ryan, the former vice-presidential candidate who
chairs the House budget committee, to Olli Rehn, the top economic
official at the European Commission, to the editorial board of The Washington Post.
So the revelation that the supposed 90 percent threshold was an
artifact of programming mistakes, data omissions, and peculiar
statistical techniques suddenly made a remarkable number of prominent
people look foolish.
The real mystery, however, was why
Reinhart-Rogoff was ever taken seriously, let alone canonized, in the
first place. Right from the beginning, critics raised strong concerns
about the paper’s methodology and conclusions, concerns that should have
been enough to give everyone pause. Moreover, Reinhart-Rogoff was
actually the second example of a paper seized on as decisive evidence in
favor of austerity economics, only to fall apart on careful scrutiny.
Much the same thing happened, albeit less spectacularly, after
austerians became infatuated with a paper by Alberto Alesina and Silvia
Ardagna purporting to show that slashing government spending would have
little adverse impact on economic growth and might even be expansionary.
Surely that experience should have inspired some caution.