European finance chiefs reiterated their faith in budget cuts after a challenge to academic research they had used to buttress their case.
The defense for austerity was made as policy makers gathered in Washington for the International Monetary Fund meetings days after Harvard University economists Carmen Reinhart and Kenneth Rogoff acknowledged that they had made a mistake in a 2010 paper. The economists said the error didn’t change the basic findings of the research that high public debts are associated with slowing growth.
“It’s being used as an excuse by those who are always opposed to make any attempts to control public spending or deal with public debt,” U.K. Chancellor of the Exchequer George Osborne told reporters today in Washington. “The contribution that Rogoff and Reinhart have made to our understanding of the impact of financial crises goes far beyond” one error in a spreadsheet.
While European Union Economic and Monetary Affairs Commissioner Olli Rehn said “we are not deciding our economic policy in Europe on the basis of one single study,” he told Bloomberg Television yesterday that the region “will have to continue fiscal consolidation because the debt levels have increased significantly.”
The paper, “Growth in a Time of Debt,” concluded that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth. The Harvard professors said they had inadvertently left some data out of their calculations in the study.
“It is sobering that such an error slipped into one of our papers,” they said in an April 17 e-mail. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper.”
The e-mail came in response to a study released on April 15 by a trio of economists from the University of Massachusetts at Amherst charging that the Reinhart-Rogoff work contained “serious errors that inaccurately represent the relationship between public debt and growth.”
In defending their work, Reinhart and Rogoff pointed out that the University of Massachusetts study also finds “lower growth associated with periods when debt is over 90 percent.”
The new study -- by Ph.D. candidate Thomas Herndon and professors Michael Ash and Robert Pollin -- said the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.
Rehn said as recently as April 9 that “serious empirical research” shows that public debt above 90 percent of GDP “acts as a permanent drag on growth.” Osborne has also met with Rogoff in the past.
Nobel laureate Paul Krugman wrote in the New York Times today that the affair showed austerity was “sold on false pretenses.” He still predicted “the usual suspects will find another dubious piece of economic analysis to canonize, and the depression will go on and on.”