George Osborne and other austerians refuse to back downby Tom Streithorst / April 25, 2013 / Leave a comment
George Osborne has dodged a bullet, but not by much. Although he barely avoided a triple-dip recession, no one can claim his stewardship of the economy has been a success. He promised us that pain would bring prosperity, but after almost three years of fiscal discipline British real GDP per capita is lower than when the Tories took office. Austerity has been a disaster and at long last, more and more of its acolytes are admitting it. The president of the European Community recognises that the political will for public sector cost-cutting is exhausted, the IMF now suggests the chancellor find a plan B, and an investigation into the data reveals one of the intellectual underpinnings of austerity to be the result of arithmetic and coding errors.
In 2010, Carmen Reinhart and Kenneth Rogoff, the authors of a magisterial study of financial crises going back to 12th-century China, determined that, on average, growth becomes negative whenever government debt levels rise above 90 per cent of GDP. Conservative politicians from the Bundesbank to 11 Downing Street cheered this data point as it justified the policies they advocated. At the time, like now, they were under attack from Keynesian economists who argued that in a downturn, austerity is precisely the wrong medicine. Unfortunately for Osborne et al, a recently published study by academics at the University of Massachusetts shows that Reinhart and Rogoff got their math wrong. The revised average growth rate is a positive 2.2 per cent. The economics blogosphere is agog.
Reinhart and Rogoff admit their mistake but they pooh-pooh its significance. So do most austerians. When asked for his reaction, prominent Republican economist Douglas Holtz-Eakin replied, “There’s nothing about this that will change my view of the universe.” He added, “The sun still rises in the east. It sets in the west. And a lot of debt is still bad.” Even though austerity has failed to promote growth in Britain, Spain, Ireland, Portugal, or Greece, it still has avid supporters.
In part that is because austerity makes intuitive sense. If I owe more than I earn, the last thing I should do is borrow and spend even more. But what is logical for you and me…