Great Leap Forward

Expansionary Austerity: Reinhart&Rogoff and the Neolibs

I just did another interview on Reinhart&Rogoff and the magic, disappearing, 90% debt ratio, centered on the Neoliberal belief in “expansionary austerity”. You can see the original here:

Here is the text of the newest interview:

Q: Around two years ago, you pointed to an economic error in R & R paper. You said (*See link at bottom) that correlation doesn’t imply causality. What do you think today in the face of the new debate on coding error triggered by a book review?

Answer: Yes, I co-authored a critique with Yeva Nersisyan that pointed to three major errors. (See here: First, the notion that one can simply aggregate across 800 years of data (from a variety of sources) and countries with very different monetary and fiscal policy arrangements to obtain a debt ratio threshold beyond which growth slows is highly questionable. Why should we believe the experience of a weak feudal government operating with a gold standard sheds light on a modern sovereign government that issues its own floating currency? The short answer is that we should not.

Second, the authors did not provide clear details that would allow one to separate governments that issued debt in foreign currency versus those that only issued debt in their own currency. They did not indicate which were on gold standards or had pegged exchange rates. In our view, that matters critically. A sovereign government that issues its own currency cannot be forced into involuntary default on debt denominated in that currency; it can always make payments in its own currency—a point recognized even by Alan Greenspan. On the other hand, countries that peg to gold or foreign currencies are often forced to abandon the peg, which is a technical default. And governments that issue debt in foreign currency are often forced into default. R&R simply lumped all this together because they apparently do not understand that these arrangements matter.

Third, we suspected that their results were driven by a few outliers. Further, you would need a lot more information to determine the cause and effect relation: does slow growth lead to rising debt ratios, or does high debt lead to slow growth? For example, it is quite clear that Japan’s high debt ratio today has resulted from decades of slow growth (its debt ratio was not high before it went into recession). For that reason, we wrote to them to get their data—to try to see which national experiences drove their results, and to check for “reverse causation”. They did not respond to our request.

And now we know there was a fourth problem with their results: the data they used actually did not support their results. They excluded data that conflicted with the results they reported. In other words, the results are erroneous: they have no evidence that high debt ratios lead to lower growth; the magic number—90% debt ratio—was wrong all along.

Q: Why did so many economists and politicians believe in the first place in expansionary austerity which is causing human suffering without an end in Europe today?

A: They wanted to believe it. It fit with their neoliberal ideology. Of course, this happens all the time. They should now be embarrassed. There is no such thing as expansion through fiscal austerity. It has never worked; there is no evidence to support the theory. I do believe that in some cases countries can still grow IN SPITE OF fiscal austerity. But they do not grow BECAUSE OF fiscal austerity. And, finally, R&R have not shown that high debt ratios by sovereign governments that issue debt in their own currency lead to fiscal crises. There isn’t evidence in support of this neoliberal belief, and everyone should be skeptical of the claims of deficit hysterians.

Q: What is the single most effective tool to support aggregate demand and tackle the mass unemployment in a depressed economy?

A: As Yeva and I argued in another piece (, in a depressed economy, you need fiscal expansion. By that I do not necessarily mean “priming the pump”—generalized spending. I think it is much better to aim the spending where it is most needed, and that usually means more jobs. Hence, I favor spending directly on job creation.

Here’s the problem. You do need fiscal policy space to engage in stimulus. Countries with their own floating currency have that space, so they can always choose to spend more to stimulate demand. Countries that peg to gold or other currencies may not have the space. And unfortunately, European countries that dropped their own currencies in order to adopt the foreign Euro currency do not individually have the policy space. So for the EMU, the fiscal expansion can only come from the center. And that is the big problem that has not been resolved. To make matters worse, the Troika still believes in expansionary austerity—a non sequitur. And so they will continue to impose austerity and suffering on the population.






6 Responses to “Expansionary Austerity: Reinhart&Rogoff and the Neolibs”

jonf34April 22nd, 2013 at 9:22 pm

It still boggles my mind to imagine someone analyzing 800 years of debt and GDP. What nations? What department of the government compiled the GDP hundreds of years ago? How do they figure the growth rate? It goes on and on. This is utter nonsense. And yet these two fools are still defending their work. Moreover, the neoliberal world has bought into this austerity to the detriment of millions of people. Look at what is happening all over Europe the UK and right here. Make it stop.

L. Randall Wray L. Randall WrayApril 23rd, 2013 at 1:22 am

No, no magic number. Depends on many things. Higher inflation means you can handle higher debt ratio; lower interest rate means you can handle higher debt ratio; growing nominal wages means you can handle higher debt ratio; and of course it depends on whether the debtors are rich folk or poor folk. A tenured University prof can probably easily handle a debt ratio of 150%, or even 200%. I graduated under Prez Nixon with a lot of student debt, but thank goodness inflation was high! I got out of debt within about 10 years. Poor bastards today face high debt and no inflation. They might never work it off–permanent debt peonage.

TobinApril 23rd, 2013 at 7:33 am

Why not 31% or 29%? The numbers game…like the number 2012 when the world would have been destroyed…These are not serious things to discuss….

DismayedApril 28th, 2013 at 1:40 am

There are, unfortunately, other examples of economists creating nonsensical 'analysises' to support their world view. Robert Barro claimed to prove that there was no Keynesian multiplier. He accomplished that feat by including thee WWII period when the economy was operating beyond normal full capacity. That was a time when government spending had to squeeze out private consumption. Besides that, he ignored the fact that no one ever argued for stimulus spending when economies are booming. So I've concluded that Barro is either corrupt, or he's an idiot. Either way, I won't listen to him.

James CharlesApril 28th, 2013 at 9:24 am

"They wanted to believe it. It fit with their neoliberal ideology."

Their ‘analysis’ relies upon monetary policy, ‘supply side’ policies and the ‘new’ voodoo economics – the Barro/Ricardo equivalence proposition?

The loss in aggregate demand bought about by ‘austerity’ is supposed to be offset by increases in consumption and investment expenditures.
Of course, this appeals to certain sections that believe that a country’s resources are used more efficiently if allocated by the private sector.

It is the ineffectiveness of these ‘policies’ that has to be pointed out.
It is expansionary fiscal policy that is required eliminate any involuntary unemployment financed by 'borrowing' from the central bank?

Thanks to B. Mitchell.
“It was opportune that about that time the US Congress gave out large tax cuts (in August 1981) and this provided the first real world experiment possible of the Barro conjecture. The US was mired in recession and it was decided to introduce a stimulus. The tax cuts were legislated to be operational over 1982-84 to provide such a stimulus to aggregate demand.
Barro’s adherents, consistent with the Ricardian Equivalence models, all predicted there would be no change in consumption and saving should have risen to “pay for the future tax burden” which was implied by the rise in public debt at the time.
What happened? If you examine the US data you will see categorically that the personal saving rate fell between 1982-84 (from 7.5 per cent in 1981 to an average of 5.7 per cent in 1982-84).
In other words, Ricardian Equivalence models got it exactly wrong. There was no predictive capacity irrespective of the problem with the assumptions.”