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April 17, 2013

Paper Cited as Support for Austerity Is Wrong, Researchers Find
    by Robert Kropp

A 2010 academic paper warning of the consequences of high debt was cited by Representative Paul Ryan and others as justification for austerity measures, but a new analysis of the paper's findings reveals that mistakes undermine its conclusions.

SocialFunds.com -- On most mornings, before I get down to writing my article, I peruse the excellent 3 Quarks Daily blog for its insights into philosophy and literature. Rarely does the site provide me with material for my writings for SocialFunds.com, but along with its entertainment value it does remind me of the importance of writing well.

This morning, however, a post by Mike Konczal of the Roosevelt Institute caught the attention of this writer on topics of sustainability and corporate social responsibility. In his post, Konczal reports that an academic paper published in 2010, and widely cited by such proponents of austerity measures as Representative Paul Ryan, contains a number of serious errors that undermine its conclusions.

In testimony before the Senate Budget Committee in 2010, co-author Carmen Reinhart stated, "Across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. Above 90 percent, median growth rates fall one percent, and average growth falls considerably more."

"Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact," Konczal writes of the paper's conclusions.

According to The New York Times, "Prominent politicians including Olli Rehn of the European Commission and Representative Paul D. Ryan, the chairman of the House Budget Committee cited it as a reason to try to impose major budget cuts."

In the US, calls for austerity have gained the support of campaigns like Fix the Debt, which calls for an increase in benefits for corporations and the wealthy while cutting programs that help the poor and middle class. Eighty corporate CEOs, including several beneficiaries of the taxpayer bailout during the fiscal crisis, have joined the campaign.

According to an analysis by the Institute for Policy Studies, the Fix the Debt campaign "is pushing for less spending on earned-benefit programs, such as Social Security and Medicare, while promoting a rash of corporate tax breaks as part of what they call 'pro-growth tax reform.'"

A study analyzing the findings of Reinhart and co-author Kenneth Rugoff is causing a storm in economic circles. Written by economists at the University of Massachusetts, it finds "that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period."

In fact, the authors of the new study write, "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent" as claimed by Reinhart and Rugoff.

"In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure," Dean Baker of the Center for Economic and Policy Research wrote. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."

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