Last week, Thomas Herndon, a PhD student at the University of Massachusetts at Amherst, discovered a huge flaw in a highly influential paper by the economists Carmen Reinhart and Kenneth Rogoff. The article claimed to demonstrate that countries with high debt-to-GDP ratios experience slower economic growth, and was widely cited in support of austerity policies by politicians around the globe.
As Herndon discovered, Reinhart and Rogoff had made a basic error in their Excel database, which undercut their conclusion about high debt and low growth. This has emboldened critics of the paper, including Paul Krugman, who have long claimed that the paper failed to convincingly demonstrate causality and looks long on ideology and short on social science.
The Reinhart/Rogoff paper was a key component of the argument advanced by so-called “austerians”—those who advocate deep public cuts in response to the recession caused by the 2008 financial crisis. The case for public austerity now seems very much in doubt; not only is the underlying rationale flawed, but austerity – from Canada to the UK and beyond – has failed to generate significant economic growth. The International Monetary Fund is now cautioning countries away from strict austerity policies.
With a provincial budget just around the corner, it is worth reflecting on the austerity agenda at work in Ontario. If austerity is based on shaky social science, and has failed to generate meaningful real-world growth, why should Ontario continue to embrace its policies? What we need now is public investment in the things we know promote growth, such as higher education. Austerity has failed; let’s try a more hopeful and productive vision.