The true meaning(lessness) of the Reinhart-Rogoff debacle

by Jerome Roos on April 29, 2013

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Sadly, economic policy is guided by neither facts nor ideas — it is guided by power. Ending austerity will require more than Excel spreadsheets alone.

It has not been a good couple of weeks for the conservative class warriors of the global austerity project. First, new data revealed that austerity measures in Portugal — long a neoliberal poster child for EU/IMF-imposed reforms — are failing to deliver; then the IMF got into a fight with the British government, complaining that UK austerity measures are hurting the economy; later a former IMF official warned that Europe’s austerity measures are untenable, while the head of the world’s biggest hedge fund attacked the EU and UK for their austerity drive, arguing that “you have to spend money”.

On the same day, the head of the European Commission declared that austerity had reached a political limit in Europe; a day later the Spanish government announced that it will ease its austerity push; a day after that, Italy’s freshly-designated center-left Prime Minister immediately called for an easing of austerity; right as new data showed that austerity-induced unemployment has now surpassed Great Depression-era levels in Southern Europe. And all the while, German Chancellor Angela Merkel — the undisputed standard-bearer of the European austerity movement — finds herself under increasing political pressure to just relax and stop hurting everyone else around her.

No surprise, then, that the Financial Times is now forced to conclude that “the Eurozone anti-austerity camp is on the rise”, while its lead economics commentator Martin Wolf laments that “tens of millions are now suffering unnecessarily” as a result of failed austerity measures. It’s what the Left has been saying for years – not just since the start of the European debt crisis three years ago, but ever since the Great Depression; through the “lost decade” of the 1980s debt crisis in Latin America, the IMF-imposed tragedies in East-Asia in the late 1990s, the austerity-induced financial meltdown and record default in Argentina in late 2001, and virtually every single crisis that occurred in between.

But it was in the midst of all of this that a major bombshell hit the academic debate on austerity: the Great Reinhart-Rogoff Excel Spreadsheet Debacle. In case you didn’t hear about this yet: just a week-and-a-half ago, a 28-year-old graduate student at UMass-Amherst published a paper with two of his supervisors that basically destroyed the last-remaining academic “credibility” of the global austerity movement. In their myth-busting publication, Herndon, Ash and Pollin (HAP) show that a widely cited 2010 paper by Harvard economists Reinhart and Rogoff — which claimed that a debt load above 90% of GDP significantly slows down growth — was in fact based on faulty data, skewered weighting and a sloppy Excel spreadsheet error. Fixing these “mistakes”, HAP showed how the seemingly strong correlation between high indebtedness and slow growth virtually evaporates.

Why is this relevant, you may wonder? Well, as Nobel Prize-winning economist Paul Krugman has rightly pointed out, the Reinhart-Rogoff paper “was surely the most influential economic analysis of recent years.” It was cited by key law- and policymakers on both sides of the Atlantic, including US House Budget Committee Chairman and former Vice-Presidential candidate Paul Ryan; EU Economic and Monetary Affairs Commissioner Olli Rehn; and the President of the Bundesbank, Jens Weidmann, who is known as one of Germany’s leading austerity hawks. The Reinhart-Rogoff paper was, in short, the number one piece of “factual evidence” for the already shaky neoliberal proposition that “a high debt load is necessarily bad” and “austerity necessarily good”.

Of course we already knew that this was nonsense. The idea of an “expansionary fiscal contraction” is an academic fairy tale at best and an Orwellian justification for an unabashed market fundamentalist class project at worst. When an economy is in free fall and private investors rush for the exit, the worst thing a government could possibly do is to slam on the brakes and retract the only remaining source of investment in the economy. Ever since Keynes’ contributions after the Great Depression, this is as much as a self-evidence. But the real question we should be asking is not whether austerity makes sense for the official purposes declared by its adherents, but whether it makes sense for the adherents themselves. In other words, we shouldn’t be asking whether austerity contributes to growth (we’ve known for decades that it doesn’t); what we should really be asking is whether austerity contributes to the interests of those who promote it.

When we ask this question, a different world suddenly emerges. Now austerity is no longer just a “dangerous idea” destroying the lives of millions; and it no longer follows that austerity can simply be replaced with a more “sensible” idea (like monetary and fiscal stimulus) through the rigorous provision of factual evidence by leading experts possessing PhDs and other fancy titles. Rather, austerity becomes a profoundly ideological class project. It is one thing to note that “austerity has failed” in its stated objective of raising growth and solving the debt problem; it is quite another to observe that it has actually succeeded quite spectacularly in its real objective of serving the narrow interests of the top 1% at the expense of almost everyone else. In this respect, it is safe to say that austerity was never supposed to raise growth in the first place: it was meant to discipline labor all along, making the average population pay for a devastating financial crisis that was caused by the rampant speculation of a tiny financial oligarchy.

Let me take a step back here and describe — at the risk of great over-simplification — three different theories that dominate the debate in political economy. The first theory, held by many orthodox economists and rational choice theorists in political science, would argue that facts and evidence play a crucial role in shaping policy. Simply put, rational and self-interested government actors always represent some clearly-defined national interest, and changing analyses of the facts can help them to re-assess this national interest and redirect policy accordingly. This is the so-called “technocratic” position taken by Reinhart and Rogoff in a pathetic attempt to defend themselves in the New York Times, complaining that “our critics have politicized the issue”, as if their own position in the austerity debate is somehow a completely objective and “non-political” assessment of the true national interest of heavily indebted countries.

A second theory, adhered to mostly by Keynesian economists and constructivist scholars in sociology and political science, argues that not facts but ideas – defined as socially constructed understandings of what social reality is and should be like — guide policy. Most Keynesians and constructivists accept the “fact” that different policymakers may hold different ideas on how to solve a particular problem. These scholars, inspired by Max Weber’s thesis that ideas are the “switchmen” of history, therefore focus on the role of ideas in constituting social reality and bringing about important changes in economic policy. This constructivist view, recently expressed in an important new book on austerity by Mark Blyth, reflects Keynes’ dictum that:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

The third theory, arising out of Marx’s critique of political economy and critical theory more generally, argues that ideas are nice and dandy, but ultimately rather inconsequential if you do not have the power to implement them. For these scholars, ideas can have quite an important influence on political outcomes when “the field is open”, so to speak; but in times of either hegemonic consolidation or outright political repression, even manifestly false ideas can reign supreme as long as they are backed up by the right combination of political institutions, socio-economic structures, ideological preconceptions, and — ultimately — military might. These different forms of power help to strengthen prevailing orthodoxies while disciplining any potential dissent. In this view, then, facts and ideas are ultimately secondary to the broader pattern of class struggle in which they are wielded as weapons.

Which of these three theories is the most credible — and which of them best describes the politics of austerity? The answer should be self-evident by now. Thirty years of austerity measures, from Mexico in 1982 to Greece in 2013, should be more than enough evidence that dangerously misguided ideas — as long as they are backed up with sufficient political and economic power — can long survive their thorough discrediting in the face of obvious facts. After a “lost decade” of IMF-imposed austerity, the Mexican economy in 1989 was still 11% smaller than it was at the start of the Latin American debt crisis in 1982; after the IMF paid a visit to East-Asia during its financial crisis of 1997-’98, it took Thailand and Indonesia seven and eight years, respectively, to regain their average income levels of 1996; and today, three years after the EU and IMF first “bailed out” Greece and imposed their tragic austerity measures, the Greek economy is a shocking 20 percent smaller than it was at the start of the crisis.

We knew all these things. Yet our politicians continued to impose the same disastrous austerity measures — over, and over, and over again. In a public debate at the European University Institute last year, I scolded German Finance Minister Wolfgang Schäuble for knowing all of this: he knows Greece is collapsing; he knows austerity is making it worse; he knows that even the IMF now formally admits this; he knows the bottomless pit is not Greece but the banks; he knows there is no way Greece will ever recover under the German austerity diktat; yet Schäuble and the global elite continue to impose the same austerity measures — over, and over, and over again. If facts or ideas truly mattered in policymaking, you would think we would have come up with some better ideas by now. But the sad truth, as always, is that the facts matter only if you have the power to impose your version of them onto the others.

Does this mean the Reinhart-Rogoff debacle and the ongoing discrediting of the austerity agenda is entirely meaningless? No, it doesn’t. Facts and ideas matter — but only insofar as they can be wielded as weapons in an ongoing class struggle. Now that the “facts” uncovered by Reinhart and Rogoff and the “dangerous ideas” promoted by the global austerity movement have been so thoroughly discredited, let us wield our weapons wisely — by recognizing the “fact” that we cannot rely on facts and ideas alone to change the world. As the Greek anti-austerity protesters who faced a bloody police crackdown on Syntagma Square in June 2011 know only all too well, after ideologically disarming the neoliberal hegemony that underpins today’s austerity drive, we will still have to confront the material power that backs it up. And that, unfortunately, will require a lot more than Excel spreadsheets alone.

A correction was made on April 30: Herndon is not a graduate student at the University of Maryland but at UMass-Amherst.

{ 7 comments… read them below or add one }

John Ward April 29, 2013 at 12:12

Nice analysis, but the reality is that this ‘debate’ has nothing to do with Right v Left, because that became irrelevant forty years ago.
It is 90% to do with efficacious governance, and 10% sheer common sense: you cannot increase the welfare bill, increase the tax burden, increase the level of unemployment AND increase consumption and output. The entire concept is daft from A to Z.
There are two problems Britain faces: crap export performance and over-population. They in turn are exacerbated by neglected agriculture and a pathetic manufacturing base.
The fight now isn’t Left v Right: it’s decent citizen v greedy controllers.


Ken April 30, 2013 at 18:52

It is my understanding that Herndon is a grad student at UMass-Amherst and not the U of Maryland as you stated in this article.


Jerome Roos April 30, 2013 at 20:32

Thanks, you’re right, I corrected it.


Michael Kenny May 1, 2013 at 18:10

Let’s not forget that Eurozone austerity measures were designed, not to “rescue” but to ward off an attack, using sovereign debt as a weapon, mounted by US hegemonists on Wall St. In that, it has been hugely successful but nobody ever saw austerity as permanent. It is thus unsurprising that most Eurozone governments, are now thinking of easing such measures. They have served their purpose well but continuing them much longer would be counterproductive. Let’s also not forget that the crisis is not a euro crisis or even an EU crisis. What is collapsing is the deregulated banking environment put in place in the US in the 1980s and rammed down the world’s throat by American economic power. Having failed to destroy the euro, the American elite are going to have to put their own house in order and the advantage of the fake “euro crisis” is that that, at very least< the countries that the Americans sneered at as "Piigs" have had to restructure their banking sector and are thus better prepared to weather the storm that the American collapse will bring with it.


Edward G. Nilges May 7, 2013 at 02:30

No, spreadsheets do matter, and I find it interesting that you confuse the names of two universities with what I regard as distinguished students like Herndon but with names that are not fancy and hence, recognizable. Today’s disempowered Left shares the current elite’s contempt for the work of ordinary people and fails to see, as did the Left of the 1930s, that they like Herndon can be actors in their own lives and on the grand scale.

We do need to predict mathematically and not ideologically the impact of policies whether left or right. In fact, the idea of better planning using “cybernetics” was in the 1920s..1960s a left project. Spreadsheets matter.


Jerome Roos May 7, 2013 at 03:03

It might be useful to read the article’s conclusion before commenting ;)

“Does this mean the Reinhart-Rogoff debacle and the ongoing discrediting of the austerity agenda is entirely meaningless? No, it doesn’t. Facts and ideas matter — but only insofar as they can be wielded as weapons in an ongoing class struggle.”

The Maryland/Massachusetts mix-up was simply a result of the fact that Reinhart used to teach at Maryland, so I had that name in mind while writing up the article — don’t read too much into it.


Edward G. Nilges July 22, 2013 at 07:06

ooooh facts and ideas matter … but only insofar as they can be used to whack people upside the head. If you believe that nonsense then there’ s no difference between you, and the worst of the right.


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