Doubt cast on research supporting austerity
- 18 April 2013
- From the section Business
Doubts have been cast on research that has been crucial in supporting governments' austerity programmes.
Two Harvard economists found in 2010 that a country's output falls substantially as soon as its total public debt passes 90% of its annual output or gross domestic product (GDP).
But two other economists say they have found errors in the work which means the relationship "evaporates entirely".
The original researchers admitted mistakes but say their message stands.
Carmen Reinhart and Kenneth Rogoff, the economists behind the original research, said in a statement: "It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," but they added that the "central message" of their research was still valid.
The new study by Robert Polin, Michael Ash and Thomas Herndon from University of Massachusetts, which was made public this week, found coding errors in spreadsheets used in the 2010 study, which they said meant that growth did not fall as fast as was claimed when debt passed 90% of a country's gross domestic product (GDP).
Robert Polin told the BBC that between 2000 and 2010, the average rate of growth in countries with debt above 90% of GDP had actually been higher than it had been in countries with lower debt to GDP ratios.
"So their relationship, which they're saying is so fundamental for understanding policy - the relationship evaporates entirely," he told BBC Radio 4's Today programme.
Carmen Reinhart and Kenneth Rogoff's paper Growth in a time of debt looked at 20 advanced economies since 1945 and found that GDP growth had been between 3% and 4% when debt had been below 90% of GDP, but that the average had collapsed to -0.1% when debt had risen above 90%.
The new research says that growth only falls to an average of 2.2% when debt passes 90%.
The result is important because governments were encouraged by the original paper to take drastic steps, such as severe austerity measures, to avoid borrowing any more money once their borrowing reached 90% of annual output.
The authors of the new research argue that governments might have been better off borrowing more money to spend on trying to encourage economic growth and reduce the severity of the recessions their countries were facing.