Thursday, April 18, 2013

Flaws Found in Study Favored by Backers of Austerity

Wall Street Journal
April 18, 2013

European officials are standing behind their policy medicine of austerity as a cure for Europe's economic ailments, despite a new paper that has undermined a study frequently brandished as a reason why governments must cut their budget deficits now.

The original study, by the U.S. economists Carmen Reinhart and Kenneth Rogoff, says that high government debt levels—specifically, debt that is over 90% of annual economic output—hurt economic growth.

Officials from the European Commission, the European Central Bank and elsewhere in the region have cited the 2010 study to support their argument that spending cuts and tax increases are needed even as the European economy contracts and unemployment hovers at a record high.

But a study published this week by three economists at the University of Massachusetts says the Reinhart-Rogoff findings contain basic errors, including one involving their spreadsheets that omitted five countries from the result.

Correcting for these errors largely causes the Reinhart-Rogoff finding to disappear, according to the new study by the economists Thomas Herndon, Michael Ash and Robert Pollin.


Read the Paper

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