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    The collapse of the United Left Alliance
    suggests the Left’s future is beyond
    passive electoralism

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    Austerity abú

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    12 — villageJune – July 2013sINCe publication of the working paper by Thomas Herndon, Michael ash and robert Pollin (HaP), ostensibly subverting the 2010 paper by Carmen reinhart and Kenneth rogof (rr), the Irish left has, like a small boy who has been told that glucose is good for him, been sugar-high with renewed anti-austerity zeal. according to the Neo-Keynesianistas, the article by reinhart and rogof ‘Growth in a Time of debt’ published in the American Economic Reviewin May 2010, provided the intellectual foundation for the argument that austerity is necessary for countries with public debt in excess of, or near, 90% of GdP. and, they implore, the article has now been demolished by the HaP critique. In the immediate aftermath of the HaP publication, both new and tradi-tional media were saturated with ‘austerity is dead’ missives from indignant leftists of all shades. The HaP paper’s student co-author became an over-night celebrity.alas, the HaP critique of the reinhart and rogof study grossly exagger-ated the extent of the errors perpetrated by reinhart and rogof. The tidal wave of anti-austerity rhetoric unleashed since the HaP publication has vastly distorted the nature of the original study and ignored the large body of academic research on the relationship between public expenditure, eco-nomic growth and public debt.It is alleged, frst, that the authors identifed a glaring and undeniable error in the spreadsheet calculation for one of the six main rr fndings. This error, unfortunate as it might be, is insignifcant to the core conclu-sions. Correcting for this error changes the impact of debt on growth by just three tenths of a percent – within the statistical margins of error. In other words, economically, the error was barely signifcant, even to the particu-lar conclusion. a 0.3% swing in growth for an ‘austerity-hit’ economy like, say Ireland or spain, is negligible. Between 1980 and 2012, the standard deviation in real growth in the peripheral euro area states averaged more than nine times the magnitude of the excel error discovered by HaP.second, the authors have claimed that the methodology used in the rr paper in computing three of the six core reported results was fawed. In fact, the major discrepancy between the HaP and rr papers is as to which aver-ages matter when it comes to summarising countries’ experiences across periods of crises.The signifcance of this error can be best understood in terms of a prac-tical example, provided by James Hamilton of the university of California, san diego. Between 1945 and 2009 – the period covered by both papers – the us experienced debt-to-GdP ratio in excess of 90% in only four years. In con-trast, Greece was in a similar predicament for 19 years. To compare the two countries’ experiences, one has to deal with the averages across time (four years versus19 years) and across countries (the us is structurally robust and much larger; Greece is weaker and smaller). The periods matter: if the us experienced four years of high debt when the global economy was growing slowly, some of the us slowdown would be attributable to global conditions and not to debt overhang. In contrast, if Greece experienced 19 years of debt overhang amidst, say, a robust global expansion, then more of the impact of excessive debt levels can be attributed to internal condi-tions in Greece. and so on: variations in exchange rates, interest rates, and infation all matter.HaP assume that the correct way to deal with all these diferences is to ignore them completely. Thus, under HaP, the expected growth rate for Greece under debt overhang (in excess of 90% of GdP) conditions is exactly the same as it would be in the us. More than that, HaP assumptions also The need for austerity in economies with debt overhangs like Ireland’s has not been disproved by the recent studyGURDGIEVCONSTANTINAusterity abúShouldn’t go awaydespite all the hoopla about the Hap study, it confrms the main argument set out in the rr paper, namely that breaching 90% debt/GDP is associated with signifcantly slower rates of growth. predictably, the Neo-Keynesianistas ignore this“ 13imply that growth volatility around the mean is identical in the us and Greece, despite the fact that smaller economies tend to be much more vol-atile than larger ones, and that volatility in growth changes over time and across countries. The upshot of the HaP assumption is that the Greek debt overhang is weighted as if it was almost fve times more signifcant than the us’.In contrast, rr assume that diferences across economies and time do matter, and therefore that we should consider separately the average growth rates in the us from those in Greece. The table opposite summarises the diferences.Note that unlike rr, HaP fails to report median results, which are (a) not as diferent from the HaP mean-based results as rr’s own mean-based results, and (b) were always clearly stated by rr to be the preferred results. The omission of the median fndings by HaP is a major one. The diference between the median and average growth rates reported by rr is indeed very sizeable in the case of the countries with debt overhang. This statistically skews the data and suggests that in addition to being associated with lower growth rates, high debt/GdP ratios are also associated with greater risk or volatility in growth. despite all the hoopla about the HaP study, it confrms the main argu-ment set out in the rr paper, namely that breaching 90% debt/GdP is associated with signifcantly slower rates of growth. Predictably the Neo-Keynesianistas ignore this. uncomfortably for them, the analysis by rr is broadly and even numerically close to other studies by the two authors which were based on diferent data and models, as well as to papers from BIs (Cecchetti, Mohanty and Zampolli paper from 2011), eCB (Checherita and rother, 2010 paper), the IMF (the World Economic Outlook, 2012), and a number of other studies. all of these papers have clearly confrmed that higher debt levels in post-war advanced economies are associated with lower levels of economic growth.The

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