Debt Cuts, "Excel"sior!

The battle between deficit spending versus debt austerity economics has been at the forefront of the last 2 elections. In 2010, the Tea Party movement originated largely out of a fear of excessive government spending and in 2012, the Republicans ran on a platform of reducing spending and government through austerity measures. Eurozone countries such as Greece, Italy, Cyprus and Spain have all fallen under the grip of an austerity driven school of economic thought. The main tenant of this push has been a simple idea that when debt reaches 90% of nominal GDP, growth slows or retracts.

The key proponents of this idea, Harvard economists Carmen Reinhart and Kenneth Rogoff, authored an influential paper which helped shaped this agenda titled Growth in a Time of Debt. (http://www.nber.org/papers/w15639) This paper compiled data from countries at varying debt to GDP ratios to draw a conclusion that when debt eclipsed 90% of GDP, average growth rates of these economies dropped to -.1%. This is the landmark work, the pièce de résistance, which has been cited by everyone from Olli Rhen to Paul Ryan. This was THE SOURCE. It was also wrong.

Thanks to a combination of sloppy excel coding, insufficient or questionably absent data, and a strange weighting system which counted countries with disparate years of information and data as equal during calculations, a team of economists from the University of Massachusetts Amherst have shown that the main thesis of the paper was incorrect. If you rework Reinhart and Rogoff’s data with the correct weighting and coding, not forgetting to include countries such as New Zealand and Canada (who have shown that you can still maintain growth even with high debt rations) the conclusion is turned on its head. Growth doesn’t decline by -.1%, it actually increases by 2.2%.

As much fun as reading through sparring graduate level economics papers is, Stephen Colbert has a great piece on why exactly this is so damning to the conclusions many on the right had been using for the last 2 years. (http://www.colbertnation.com/the-colbert-report-videos/425748/april-23-2013/austerity-s-spreadsheet-error) Austerity, love or hate it, had been winning the war of public opinion. The Eurozone has all but adopted it as status-quo, Washington created its own version with the Sequester, and Paul Krugman had been crying himself to sleep over the crushed dreams of Keynesians everywhere. With this new information now come to light, where do we go from here?

Cutting economic spending isn’t the way to go anymore. It hasn’t worked and now we know why. Too much debt is a bad thing. At some point you hit a ceiling where you cannot continue to function and it’s important to remember that. But cutting everything up to, and including, the kitchen sink, has not worked for Greece, Italy or Spain and there is no reason to think that it is magically going to start doing so here. Indeed, even the fabled Reinhart and Rogoff themselves came out last week in the Financial Times saying that “borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.” (http://www.ft.com/cms/s/0/cca28c2e-b1a4-11e2-9315-00144feabdc0.html#axzz2S8urEvAg)

The first objective of our fiscal policy needs to be creating the jobs and infrastructure necessary to maintain and facilitate long-term economic growth. Investing in education and transportation is vital to insuring productivity as the economic recovery continues. Austerity cannot continue to be the straw man that allows Republicans to cut programs and spending “for the sake of the debt”. If it does, we really will end up like Greece and Spain, but not for the reasons they think.

Reprinted from 5th District State Sen. Curt Thompson's (D-Tucker) blog. Thompson represents parts of unincorporated Duluth, Norcross, Tucker, and Lawrenceville. Also, check the senator out on Facebook and Twitter.