It turns out that there is no slump in economic output once
government debt rises above 90% of GDP – the case for austerity has been blown
apart! That is the conclusion of people who have joined the attack on a widely
cited piece of research by Carmen Reinhart and Kenneth Rogoff, from the
economics editor of the Financial Times, the head of PIMCO, one of the
world’s largest investment funds, and many others.
Reinhart and Rogoff’s thesis was that higher government
debt, above a trigger level of 90%, would produce much lower growth, so that
more government spending to escape recession would backfire.[1]
A recent academic paper showed that, among other things, they had miscalculated
some of the numbers underpinning the result.[2]
The authors admit the miscalculation error, but argue that their broad
conclusions remain valid. What should we make of this policy spat?
A debate over econometrics, of all things, has risen to such
prominence because austerity is under way in many countries. Opponents of these
policies want to show it is unnecessary: there is an alternative; a
Thatcherite ‘no alternative’ should have been buried with the rusting Iron Lady
last week.
But consider an issue of principle. What if the data,
properly assessed, had indeed shown that more government spending – leading, at
least in the short-term, to more government debt – was bad for growth? After
all, other studies, not simply Reinhart and Rogoff’s, have made the point that
high levels of all kinds of debt are associated with weaker growth.[3]
Does that mean that austerity can now be an acceptable policy? This indicates
the narrow terms of such a debate; one that takes for granted that what is good
for the health of the capitalist economy is good for humanity, give or take a
bit of redistribution. Not surprisingly, none of the opponents to Reinhart and
Rogoff argued that capitalism is a reactionary system whose imperatives should
be rejected.
It is difficult to express quite how stupid the usual debate
is when the capitalist system is faced with its most serious economic crisis.
However, what underlies the common critical view of capitalist policy is not
concern with the depredations visited upon the victims of imperialism, but the
growing realisation that the cost of the system is now also to be borne by
(most of) the inhabitants of the imperialist powers.
The problem they face is that the rationale for government
spending cuts as part of a policy to reduce debt and restore conditions of
profitable accumulation does make some sense. After all, more or less
everything else has already been tried in the major capitalist powers, and to
no lasting effect. We have seen a dramatic rise in government spending,
including taking on the liabilities of a blown out financial system that was
the main source of the previous ‘prosperity’, close-to-zero interest rates at
which banks can borrow from the central bank and extraordinary measures of
‘quantitative easing’, including the latest gambit from the Bank of Japan.
To presume that austerity is being introduced as a mistaken
policy measure ignores the unwelcome fact that there are basically no
alternative policies left. Yes, austerity will bring economic pain and
destruction, and (hopefully) political turmoil too, but that is the nature of
the beast. Unless that nature is understood, the beast will not be overcome.
The most that advocating ‘alternative policies’ rather than a wholehearted
opposition will do is delay the beast’s bloody meal of its opponents from
breakfast until lunchtime.
Tony Norfield, 22 April 2013
[1] Carmen
Reinhart and Kenneth Rogoff, ‘Growth in a Time of Debt’, NBER Working Paper
15639, January 2010.
[2] See the
assessment from the Financial Times, at http://www.ft.com/cms/s/0/1c3bae3c-a6ce-11e2-95b1-00144feabdc0.html#axzz2QXyv5qPi
[3] See Stephen
G Cecchetti et al, ‘The Real Effects of Debt’, August 2011, on the BIS website
at http://www.bis.org/publ/othp16.htm
Also see the articles on this blog: ‘Debt and Austerity’, 8 August 2011 and
‘Capitalist Crisis, Keynesian Delusions’, 5 September 2011.
Agree 100%!
ReplyDeleteMichael Roberts