Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

The deficit hawks have no clothes

Taylor C. Snow/Collegian

The past two weeks made me immensely proud to be part of the University of Massachusetts economics department. I would never have believed it is possible to get the media’s attention by writing an academic paper, but my colleague Thomas Herndon proved it could be done.

He recently published a paper, co-authored with professors Michael Ash and Robert Pollin, that catapulted him to the front page of BBC News; got interviewed first by The Real News and then by CNN; had articles written about him in the New York Times, the Guardian, the Atlantic and too many other news sources to mention; inspired several blog posts by Paul Krugman; and got Herndon invited to the “Colbert Report” last Tuesday night.

So what’s all the fuss about? Well, two Harvard economists – Carmen Reinhart and Kenneth Rogoff – published a famous paper in 2010, which claimed that when a country’s debt-to-GDP ratio goes above 90 percent, the economy falls into steep decline. In other words, they claimed that when government debt goes beyond a certain level, terrible things happen.

This study was widely used by conservatives in both America and Europe to argue for cutting deficits and debts at all costs. Paul Ryan mentioned it during the presidential campaign last year, for example. In Europe, it was used to “prove” that it is necessary to impose brutal austerity on Greece (even at the cost of starving children), and it was the bedrock of the economic policy of the current British government.

However, it was completely wrong. And not due to some complicated point of economic theory, but because Reinhart and Rogoff made a mistake in their Excel spreadsheet. At one point they were supposed to take the sum of 20 cells, and they only took the sum of the first 15. Herndon found the mistake, then he and his professors set about writing a corrected version of the paper, doing the math right this time. And then, lo and behold, it turns out that the 90 percent threshold does not exist. In other words, there is no real difference between a 91 percent debt-to-GDP ratio and an 89 percent ratio. Nothing special happens at 90 percent, or at any other number. High debt does not affect the economy differently from low debt. Slow, steady increases in debt will not result in any dramatic changes to the economy.

Let’s use an analogy: suppose you are driving your car on a gentle downward slope, Reinhart and Rogoff said that, at one point, the road ends in a cliff, so it is absolutely necessary to stop the car before you get there. What Herndon found was that the cliff doesn’t exist. Instead, what we have is a gentle slope as far as the eye can see (and the eye can see about as far as a 200 percent debt-to-GDP ratio, which is the furthest that any country has reached in recent times).

This is not to say that accumulating national debt is completely harmless. It does have a small negative effect. That’s why there is still a slope in my analogy. You don’t want to keep borrowing forever. But there is no cliff and therefore you don’t have to slam on the brakes. You can drive as far down as necessary and then simply turn around when you feel ready. The best time to borrow is when you really, absolutely need the money, such as right now. The time to pay off the debt is when you’re doing really well and have plenty of money to spare, which is not now.

The bottom line is this: government debt is a long-term issue, not an immediate problem. There is no debt crisis.

The things that actually are immediate problems include: persistently high unemployment, especially among young people; the rising cost of health care; the rising cost of college, and the crushing burden of student debt; the housing crisis due to foreclosures; and, of course, the fact that the economy is just barely above stagnation.

All of these problems can be fixed with vigorous government intervention. An employment drive in the public sector would solve the problem of jobs, and some of the people hired in this way could be building cheap public housing. The cost of college would be reduced if the government invested in public education again. And if we introduced universal single-payer health care – following the Canadian or British models – we would lift the greatest financial burden on millions of Americans and also eliminate one of the leading sources of growing government debt (let us remember that programs like Medicare and Medicaid require the U.S. government to pay for private health care, and since private health care is getting so much more expensive, the government has to pay more every year).

Such active government intervention would boost aggregate demand – people with government jobs buy more things than people with no jobs, after all – and give the economy a much-needed boost. When people buy more, companies get to sell more, which means their businesses grow, which means they hire more people. This is the way in which a public employment drive can help restart the engine of the economy. The question remains: why aren’t we doing it?

The right-wing claimed that we couldn’t afford it; they claimed it was too dangerous to spend any more money, because that would require borrowing it, and this would bring us closer to that scary cliff at 90 percent debt-to-GDP ratio. Now that we know there is no cliff, do you think they will just admit they were wrong and stop pushing for tax cuts and spending cuts that hurt the economy and end up ruining people’s lives?

I’m not holding my breath. I don’t really believe that conservative politicians were victims of an honest mistake, fooled by a simple Excel error. They are getting billions of dollars from their friends on Wall Street and in corporate boardrooms, after all. Destroying public services and the social safety net in order to fatten the wallets of the 1 percent has been the whole point all along. The rich have declared class war on the rest of us, and they’re not about to let a little math get in their way. The stuff about the dangers of debt was just an excuse; I’m sure they’re already scrambling to find another.

But this time, everyone will be able to see what they’re doing. Everyone will be able to see that the “deficit hawks” don’t care about facts, and are only interested in pushing their small-government agenda (no matter if children have to starve in the process). They are actually even starting to admit it, more or less openly. And that alone is tremendous progress. At least their lies are finally exposed. One graduate student in economics at UMass may not have single-handedly stopped global austerity, but he did show that the deficit hawks have no clothes.


Mike Tudoreanu is a Collegian contributor. He can be reached at [email protected].


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  • K

    krisApr 29, 2013 at 9:52 pm

    Being tired of a radical inexperienced youth who writes the same article twice a week doesn’t make me a “right-winger”. I’m far from. Although I will say that Mihnea’s arguments have been fairly decent, I cannot say the same for the other socialist contributors (doherty and mcclintock). And N., you’ll have to excuse me for not jumping for joy at 2.2% and decreasing growth. No worries though you’ll never see a fully serious response from me because that just isn’t any fun.

  • N

    N.Apr 29, 2013 at 8:34 pm

    Kris, the fact that you comment on stuff you obviously haven’t read and don’t seem to follow the structure of logical arguments doesn’t make your ideologism any less tin-eared than Mike’s. This was all over the news recently; it wasn’t a typo, it was a big error that undermined their major claim. It doesn’t directly touch on your ideological allegiance to free markets; it’s a mathematical statements.
    And Mike, as a radical socialist agitator, how come you mostly only write about stuff that’s pretty abstract or remote from most UMass students’ and workers’ daily lives when there is plenty going on here that you could be talking about? The debt wall is back. How about that? Education is costing more and more and worth less and less. If that’s not a statement about the diminishing returns of capitalism I don’t know what is.

  • B

    BrianApr 29, 2013 at 7:03 pm

    …and here we go, the right-wingers are already showing us that they don’t care about facts! Take Kris here: (S)he just KNOWS that debt is EVIL, dammit, no matter if the only evidence for that claim just got blown to bits!

  • K

    KrisApr 29, 2013 at 8:55 am

    Argument: There was a typo in a paper. Therefore, 105% debt to GDP is a good thing.

    Good argument Mihnea. You are killing it.