American student denied the findings of two Harvard professors about the need to save
Material posted: Publication date: 19-04-2013

Student at the University of Massachusetts has denied the findings of two Harvard professors that the high level of debt sharply slower economic growth. It is around this idea are built all the austerity programs in the US and Europe in recent years. Now the proponents of draconian measures may lose their most powerful argument.

Harvard Professor Kenneth Rogoff and Carmen Reinhart published his work "Growth in a time of debt" in 2010. In it they studied the economic history of the 20 leading developed countries in the 1946-2009 years, and came to the conclusion that overcoming a mark in national debt 90% of GDP leads to a sharp slowdown of economic growth — an average to -0.1% of GDP. This conclusion is then actively used to convince politicians and the public of the necessity of austerity through higher taxes and cuts in government spending. For example, in the EU it appealed to the European Commissioner Michel Barnier, in the USA, the head of the budget Committee of the US Congress, Republican Paul Ryan. However, verification studies Harvard professors showed that high public debt affects growth rates is not as dramatic. "The average rate of real growth of GDP in countries where public debt exceeds 90% of GDP, actually is 2.2%, not -0.1 per cent", — concluded the University of Massachusetts student Thomas Herndon and professors Michael ash and Robert Pollin in his work, "does high public debt systematically reduces economic growth: a Critique of Reinhart and Rogoff".

It all started with a quest given to Herndon in the course of econometrics. Use as a base for his calculations, he decided the work of Rogoff and Reinhart, Professor ash had recommended him for the "direct approach". However, his own calculations did not converge with data from two luminaries of the modern economy. He even asked them what working versions of the Excel spreadsheet, based on which they wrote their work, but their verification has shown that public debt exceeding 90% of GDP leads to slowdown of average GDP growth from 3.2% to 2.2%.

According to the team from the University of Massachusetts, the reason their Harvard colleagues came to their conclusion, the selective use of data, errors in calculation formulas and tables "non-standard" interpretation of outcome data.

Rogoff and Reinhart are initially stated that "just received this draft comment, and will study it in working order", and later admitted only the fact of an error in calculation formulas. "However, we do not believe that this unfortunate mistake somehow dramatically changes the Central message of our (initial study) and subsequent work," they said in an official statement, rejecting all other claims.

Criticism of two Harvard economists their colleagues from Massachusetts has already led to debate in the scientific community. "As far as increased unemployment due to arithmetic errors, Reinhart and Rogoff?" — asks the head of the Center for economic and policy research Dean Baker. "If facts meant anything to the debate around economic policy, it would be an occasion for serious review of plans to reduce the budget deficit, which are brought to life in the U.S. and around the world," he concluded. Experts note that the differences of the two groups of researchers emphasize once again that the possibilities of carrying out experiments or broad comparisons in macroeconomics are limited. "We're watching how the "sausage" of macroeconomics. It does not cause appetite. Decisions about how we handle the data, leads to completely different results", — noted in his column editorial Director of Harvard Business Review's Justin Fox. The experts insist that the need of the economy is not in question. "To reduce the budget deficit and the national debt really need, the only question is how fast and at what cost. And the answer will be different depending on each country", — said RBC daily economist Capital Economics Ben may.

A blow to the arguments of supporters of a sharp and high-speed saving was struck on the eve of the annual meetings of the IMF and the world Bank on 19-21 April, where, as expected, many Euro area countries will make concessions on cutting government spending and raising taxes. It is noteworthy that in 2001-2003, Rogoff was the chief economist of the IMF, known draconian terms of their assistance. However, since last fall, the Fund changed its position and now encourages US not to overdo it with the budget sequestration. IMF experts then found that every dollar saved reduces GDP by 0.5 $ as was supposed earlier, and 1.7 million. On Tuesday IMF chief economist Olivier Blanchard warned the UK that it was "playing with fire", too go overboard in cutting costs.


Andrey Kotov


Tags: assessment , economy , crisis