Tuesday, May 7, 2013

No need for so much austerity

Back at the start of 2010 a couple economists, Professor Carmen Reinhart and former IMF member Ken Rogoff, published the paper, Growth in the Time of Debt. One of its key conclusions is that:
economic growth slows dramatically when the size of a country's debt rises above 90% of Gross Domestic Product, the overall size of the economy.
Naturally, the 1% were delighted with that finding. It justified forcing drastic cuts in gov't spending (where have I heard that before?). Never mind that such cuts forced austerity on the rest of us to our detriment (just ask a Greek). Cuts now would insure a more robust economy when the debt level dropped.

And the 1% is delighted because smaller gov't means lower tax rate for them (and fewer gov't officials nosing into their business). Besides, they aren't affected by austerity. They don't use gov't services -- public schools, public transit, public parks -- and resent having to pay taxes for them.

As part of his graduate studies at the University of Massachusetts Amherst, Thomas Herndon was given an assignment of replicating the results of a recent economics paper. He chose the big one by Reinhart-Rogoff. But there was a problem -- Herndon couldn't get his numbers to match. Naturally, he figured he goofed somewhere but neither he nor his professors could find the problem.

So Herndon wrote to the authors. They eventually gave him the spreadsheet they used for their calculations. And that's where Herndon found the error (actually more than one). Oops. Three years of legislated austerity based on a sloppy spreadsheet. This article explains it in more detail. And for you diehard researchers, Herndon's paper is here (I didn't read beyond the abstract).

So when a rich person says "We know what's good for you (because it is good for us)," be very skeptical. Especially since the media isn't.

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