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On Whose Research is the Case for Austerity Mistakenly Based?

Several of my colleagues on the Harvard Faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators. Economists Carmen Reinhart and Ken Rogoff have received an unbelievable amount of press attention (although they were already famous – or, more precisely, because they were already famous), ever since they were discovered by three researchers at the University of Massachusetts Amherst to have made a spreadsheet error in the first of two papers that examined the statistical relationship between debt and growth. They quickly conceded their error.

Then historian Niall Ferguson, also of Harvard and even more famous, received much flack when -- asked to comment on Keynes’ famous phrase “In the long run we are all dead” -- he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.” There is more to be said about each of the two cases.  (i) Reinhart and Rogoff’s 2010 estimates had already been superseded by a subsequent 2012 paper of theirs written along with Carmen’s husband, Vincent, which used a more extensive data set where the error does not appear. (ii) “Some of Ferguson’s best friends are gay.” Keynes was actually bi-sexual; and (iii) he tried to have children. And so forth. Most of this has already been said many times by now. Apparently people are even more fascinated by Harvard than they are about macroeconomic theory.

But what does this all have to do with the debate between austerians and stimulators? Nothing, other than that the battle lines of the austerians have been wavering lately under the continuing onslaught of facts (most notably the recessions in Europe and Japan’s recent conversion to stimulus), and the stimulators find the missteps of Reinhart-Rogoff and Ferguson to be convenient stones to throw into the attack as well. But they are barking up the wrong tree. Sorry; they are throwing the wrong stones.

The Reinhart-Rogoff controversy is not in fact relevant to the question whether governments should expand or contract at a given point in time. The basic finding in their papers continues to hold up (that subsequent growth tends to be lower among countries with debt/GDP ratios above 90% than below 90%), but neither that finding nor their policy advice was designed so as to support the proposition that a recession is a good time to undertake fiscal contraction. The Ferguson controversy is even less relevant, because the phrase “in the long run we are all dead” was neither about fiscal policy when Keynes wrote it nor an argument against deferred gratification. Nor was Keynes in favor of uninhibited fiscal stimulus regardless of economic conditions; he argued, rather, “the boom, not the slump, is the right time for austerity at the Treasury.” Fix the hole in the roof when the sun is shining, not when it is raining.