By itself, the Excel error in the R&R paper was more symbolic than anything else. But by demonstrating that maybe its math shouldn't be taken as gospel after all, it gave new urgency to broader questions about the 90 percent rule. The day after the UMass study was published, economist Dean Baker of the labor-funded Center for Economic and Policy Research pointed out that although Reinhart and Rogoff showed countries growing more slowly when debt passed 90 percent, it was a very gradual slowdown, not some kind of cliff. What's more, the paper's data showed growth slowing down even more sharply when debt increased from 0 to 30 percent. No economist in the world believed that a debt level of only 30 percent had a serious impact on growth. But if the R&R data produced one nonsensical conclusion, could any of their other conclusions be trusted?
We missed a once-in-a-generation chance ot fix our decaying infrastructure—on the cheap.
And even if their data were right, there had long been a more fundamental question about their analysis. Maybe it wasn't high debt that caused slow growth in the first place; maybe it was the reverse. Sure enough, UMass economist Arindrajit Dube ran some tests on the R&R data and concluded that it showed strong signs of "reverse causality": Low growth predicted high debt levels, not the other way around. Miles Kimball and Yichuan Wang of the University of Michigan took an even deeper dive, and their conclusion was similar: High debt levels didn't seem to have an independent effect on growth rates. "Done carefully," they wrote, "debt is not damning. Debt is just debt."
None of this means that countries can simply pile on as much debt as they want. Kimball and Wang, for example, warned that "unless the borrowed money is spent in ways that foster economic growth in a big way, paying it back or paying interest on it forever will mean future pain in the form of higher taxes or lower spending." In other words, if borrowed money is spent wisely—for example, on roads or electric grids—then it will promote future growth, which makes paying down the debt manageable. If it's not, high debt might indeed cause future pain.
But that's a mere caveat. Within reason, what these new studies tell us is that increased national debt simply isn't likely to cause growth to slow down. In fact, it might be just the opposite. Increasing the debt in a situation like the one we face now might, by spurring a faster recovery, produce lower debt in the long run.
And that's not all. A prolonged weak economy obviously causes pain in the present—people out of work, wages stagnant, houses foreclosed—but it can also cause permanent damage in the future. Like a cancer that metastasizes when left untreated, unemployment can turn into a vicious cycle for millions of people when it drags on for more than a year or two; because they've been out of work for so long, nobody wants to hire them and they end up out of the labor force for good. This is one way in which cyclical unemployment—the normal kind that goes away when an economy recovers—can turn into permanent, structural unemployment.
In some cases it can be even worse. Thanks to massive austerity forced on Spain by the European Union, the unemployment rate there stands at 27 percent. That's higher than what the United States suffered even in the depths of the Great Recession. Nearly 10 percent of the country has been without work for more than two years. And among the young, the unemployment rate is 57 percent.
Let that sink in for a minute. More than half of the young people in Spain are out of work. The figures are just as bad in Greece, and only modestly less catastrophic in Ireland, Italy, and Portugal. Countries have succumbed to armed revolution—and dragged the world into crisis—for less.
So what has austerity cost us in the United States? The full price is hard to calculate, but the Congressional Budget Office figures that sequestration alone has cut GDP growth by about 0.8 percentage points. Since sequestration accounts for less than half of total belt-tightening over the past couple of years, a rough guess suggests that our austerity binge has cut economic growth by something like 2 percentage points—about half the total growth we might normally expect following a recession. Ironically, this means that we have indeed suffered the halving of economic growth that Reinhart and Rogoff estimated we'd get from running up the national debt above 90 percent. But we got it from not running up the debt.
The chart above illustrates what austerity has done to the economy. Normally, recessions show up as tiny downward blips from the growth trend of "potential" GDP—the size of the economy when it's operating at full capacity. These blips are quickly erased as the economy returns to its long-term trend. But this time around, our rebound has been agonizingly slow. The CBO now estimates that we won't return to full capacity until about 2017.
This difference between actual GDP and potential GDP is called the "output gap," a bloodless term that represents a great deal of real-world pain. If we had spent more in order to close the output gap faster, it would have meant more jobs—perhaps as many as 3 million more—higher wages, healthier retirement accounts, and, ironically, a shrinking deficit thanks to higher tax revenues and lower spending on food stamps, Medicaid, and other programs for the poor.
Our obsession with austerity has hurt us in other ways, too. Interest rates, for example, have been at historic lows for the past four years. Until recently, in fact, real interest rates were actually negative, which means the federal government could have spent money and then paid back less than it borrowed in the first place. This was a once-in-a-generation opportunity to repair our decaying infrastructure at bargain rates: roads, bridges, airports, rail lines, local transit, electrical grids, gas pipelines, internet backbones, and much more.
And doing so would have been a twofer: These are all projects that employ workers now and contribute to higher economic growth in the future. We're still going to have to perform all this maintenance eventually, but we've missed our chance to do it on the cheap.
And that's not the worst of it. David Stuckler and Sanjay Basu, of Oxford University and Stanford, respectively, have studied austerity episodes both in the past and in other countries, and their conclusion is grim: "Recessions can hurt, but austerity kills." During the Great Depression, they found, states that implemented New Deal programs most quickly saw significant declines in infectious diseases, child mortality, and suicides. Their findings were similar for the periods following the fall of communism, the Asian financial crisis of 1998, and the current recession. In every case, austerity programs were literally life-threatening for the poor and unemployed.
The obvious question at this point is: Why? It's not as if we needed the skills of Nostradamus to predict the consequences of austerity. It's pretty much textbook economics. Surely Reinhart and Rogoff aren't entirely to blame for Washington's perplexing decision to ignore Econ 101 and instead commit America to a self-defeating war on the deficit?
Of course not. Their paper was, after all, just another paper. It could only have the impact it did if it told people something they wanted to hear in the first place. But again: Why?
This transports us from the realm of academic economics into the realm of political speculation. But we can certainly speculate. Among Republicans, one obvious explanation is that austerity provides a handy excuse for cutting social spending that they've never approved of in the first place. (And—though no one will admit this in polite company—they probably found it pretty easy to talk themselves into opposing anything that might have given President Obama a growing economy to campaign on in 2012.)
What else? John Maynard Keynes thought of the economy as a simple machine: When a car has trouble starting, we don't lecture it, we just fix the car. Likewise for the economy. But plenty of people find this unsatisfying. They think of economics as a morality tale: We've been on a binge, and now we need to pay the piper.
Other people rely on folk wisdom: Households have to tighten their belts when times are bad, so the government should too. Even Obama fell into that trap during his pivot to the deficit in 2010. But this is one of the most destructive bits of economic folklore ever to enter common circulation. The truth is exactly the opposite; the proper role of the federal government is to be countercyclical. When households and businesses are all cutting back at once, Congress needs to be the spender of last resort to keep the economy from falling even further into recession.
Adding even more momentum to these misconceptions is simple self-interest, since plenty of people have something to gain from austerity. Chief among them are creditors like banks and pension funds, which tend to be single-mindedly hostile to the risk of deficit-fueled inflation eating away at the value of their earnings, even if it means tolerating an extended recession. The finance industry also tends to like the political focus on austerity because it diverts attention from the market excesses that caused the banking crisis in the first place.
In other words, Reinhart and Rogoff were pushing on an open door. There were lots of powerful actors—Pete Peterson, Grover Norquist, the Washington Post editorial page—ready to leap at the chance to pretend that their pursuit of austerity was motivated not by politics or self-interest, but merely by a virtuous desire for economic growth. The 90 percent paper provided them that cover.
So have we learned our lesson from all this? Of course not. No further stimulus is even remotely on the table, either in the United States or in Europe, and Republicans are already promising another debt ceiling crisis unless Obama agrees to yet more spending cuts. The inmates took over the asylum three years ago, and they show no sign of leaving.
Austerity is working out fine for the 1 percent: Their jobs are safe, their investments are growing, and their taxes are low. But the rest of us are paying a high price in the form of slow growth, high unemployment, and stagnant wages for years to come. All things considered, we've been remarkably tolerant of our fate. The folks who run the world might do well to ponder how long that's going to last.