Reinhart and Rogoff: Austerity myth debunked

The UK has been downgraded again and total national debt has risen. Even by George Osborne’s own criteria, writes Eddie Ford, Plan A has been an abject failure

George Osborne has had a rotten week. OK, he was given a slight breather on April 24 when the Office for National Statistics said Britain - excluding some effects of bank bailouts and a one-off Royal Mail pension transfer - had managed last year to slice £300 million off public sector borrowing, now equivalent to 7.37% of national output. However, the total national debt - or public sector net debt - actually rose to £1.186 trillion (about 75.4% of GDP).1 Maybe not so great. As Labour’s Chris Leslie waggishly remarked, “at this rate it will take 400 years to balance the books.”

No, Osborne has had a flurry of bad news - with perhaps more to come. Excruciatingly, the UK on April 19 was downgraded a notch from triple A to AA+ by the Fitch. According to this credit rating agency, the “fiscal space” for Britain to “absorb further adverse economic and financial shocks is no longer consistent” with a pristine credit rating. Further downgrading was possible, it stated, if the economy “failed to pick up” or debt “stayed higher for longer”. Making it a virtual certainty for anyone living in the real world.

Of course, in practical economic terms, the downgrade in and of itself is extremely unlikely to have any immediate or significant impact - conceivably none whatsoever. After all, Fitch is only saying what everyone already knew: that the economy has ground to a shuddering halt. Osborne himself admitted last month that growth this year would be half the level previously assumed and public debt would rise for several more years yet. Investors, not being total idiots, had long factored in such a development. Indeed, as our regular readers will recall, when Moody’s downgraded Britain in February, government bond yields actually fell fractionally - with investors, not unreasonably, taking the demotion as a verdict on the global economy as a whole. Therefore, they started looking fast for safe havens - one of them being, predictably enough, the UK.

After the downgrade, the treasury issued a bullish response - everything is under control and going to plan. Do not panic. Fitch’s decision, we heard, was a “stark reminder” that Britain cannot “run away” from its problems or refuse to deal with a “legacy of debt built up over a decade” - it is all Labour’s fault: that accusation is something else that could continue for the next 400 years.

The latest downgrading exposes Osborne’s breathtaking dishonesty. The man is intellectually and morally bankrupt. We were repeatedly told that the rationale for the austerity programme was to preserve the country’s precious “gold-plated” triple-A rating. Reckless Labour spending would endanger that vital status. Strangely enough though, following Moody’s downgrade we were suddenly informed that it did not matter a jot - it only proved, if anything, how the government must stick even more rigidly to Plan A. There is no alternative. But it was a different story altogether when Standard & Poor’s in April reaffirmed the UK’s triple-A status, albeit warning there was “at least a one-in-three chance” it would change its mind in the relatively near future. Osborne held this up as glittering proof that the plan was on track. Now he is telling us again to ignore agencies - who cares what Fitch has to say? I am the iron chancellor.

In other words, no matter what any credit agency says or does - downgrade or whatever - the government is always right. It can never be wrong. Logic of the madhouse. But what cannot be denied is that, even by his own criteria, Osborne’s economic strategy has been an abject failure.


Whilst he was getting flak from Fitch, Osborne also came under pressure from the International Monetary Fund - an enthusiastic backer of his so-called ‘deficit reduction strategy’ that is now casting doubts on its former protégé.

First the organisation’s chief economist, Olivier Blanchard, suggested that Osborne should “rethink” his economic plan - Plan A might not be up to the job. In fact, he said a bit more than that. He warned the chancellor that he would be “playing with fire” if he continued on his present course. Comments quickly echoed by Christine Lagarde, the IMF’s director general, who pointed out that UK growth was “not good” - though, of course, she did not want to “prejudge” the UK economy ahead of the IMF’s annual ‘article IV’ health check beginning next month. Having said that, the IMF’s backing for austerity had “never been unconditional”, we now learn. Rather, Lagarde explained, should you be in a situation where growth is “particularly low” - however mysterious that might be - then sensibly there should be “consideration to adjusting by way of slowing the pace”. Take your foot off the austerity throttle a bit. Boost demand.

What has clearly changed, she argued, is the “quality of the numbers”. Meaning, presumably, the fund’s half-yearly world economic outlook, which cut its prediction for UK growth to 0.7% in 2013 and 1.5% in 2014 - a 0.3% reduction in both years. Osborne said in the budget last month that he expected growth of 0.6% this year, rising to 1.8% in 2014. Output is still around 3% lower than it was when the recession began in the first quarter of 2008. With the next general election a mere two years away, this is not how things were meant to be. We should be enjoying the first green shoots of recovery. George Osborne should have a big smile on his face, despite Margaret Thatcher’s death.

Instead, he is nervously waiting for the official data on first-quarter GDP due on April 25. The general consensus among economists and commentators is that the UK will narrowly avoid an unprecedented triple-dip recession, showing a miserable ‘growth’ that will barely register statistically. For instance, a Reuters poll expects a minuscule 0.1% ‘upturn’ - heady days. Other predictions range from an 0.2% drop to a 0.3% increase - it gets no better than that.

Still, whether the UK officially slips into a triple-dip recession or not is essentially a trivial detail - political embarrassment aside for one moment - when confronted by the much bigger, and dismal, picture of an economy stuck in the doldrums: bumping painfully along the bottom, with no end in sight. Rather, there is every expectation - whether from Marxist or more perceptive bourgeois economists - that we will experience Japanese-style stagnation for at least a decade, probably longer.

Other figures released last week showing rising unemployment and lower high street spending appear to confirm this economic pattern - yet more depressing news for Osborne. Official unemployment has risen by 70,000 in the three months to the end of February, taking the total number of unemployed to 2.56 million (up from 7.8% to 7.9%). Worryingly, 20,000 under-25-year-olds joined the jobless ranks, meaning that the number of young people out of work has now reached 979,000 - representing an unemployment rate of 21.1% for that group. Another alarming trend has been highlighted by a Fawcett Society survey, saying almost three times as many women as men have become long-term unemployed since 2010 and almost 1.5 million women could be unemployed by 2018 if the government continues in the same way - the main reason being that women have borne the brunt of cuts in the public-sector workforce. Furthermore, whilst consumer spending has actually picked up slightly in recent months, it will undoubtedly peter out if the gap between pay rises and inflation continues to erode disposable incomes. The steep decline in manufacturing and construction output this year only signals prolonged misery for workers, employed and unemployed - the distinction becoming a bit blurred with the rapid expansion of ‘zero hours’ contracts, irregular part-time work, pseudo-self-employment, chronic underemployment, etc.

If that was not enough, even the Bolshevik bishops are back - well, admittedly, the not very red archbishop of Canterbury, Justin Welby. He warned that Britain was in “some kind of depression” and - perhaps in his more secular capacity as a member of the parliamentary banking commission - sermonised about how banks needed to become more “moral” institutions with roots in their local communities. Fat chance. He charitably observed that bankers did not “come in with horns and a tail burning £50 notes to light large cigars” - they just unfortunately happened to “borrow short and lend long”. Funny, that. Welby has somehow failed to notice that the Bible makes very uncomplimentary remarks about moneylenders and so on.

When George Osborne became chancellor way back in 2010, just for a fleeting moment anything seemed possible - the fiscal promised land beckoned for the true believers. He pledged to eradicate Britain’s budget deficit by 2014-15, then revised the deadline to 2016-17 - though, apart from a few half-mad ideologues, there is hardly an economist alive who actually believes that latter target is any more realistic than the former. Osborne is becoming more absurd and isolated by the day.


Last week, quite wonderfully, also saw the debunking of a central myth promulgated by fiscal conservatives and hawks everywhere - not just the hapless Osborne. First published in American Economic Review - a supposedly peer-reviewed and prestigious academic journal dating back to 1911 - the seminal 2010 paper, ‘Growth in a time of debt’ by Carmen Reinhart and Kenneth Rogoff, looked at 20 advanced economies since 1945. Both former IMF employees, they argued that, when “gross external debt” reaches 90% or more of GDP, then a country’s average growth rate collapses to -0.1%. Conversely, when debt was below 90% of GDP, you had growth rates between 3% and 4%. Inevitably, this conclusion has been cited by everyone from the IMF, World Bank, European Central Bank and the Euro group to Angela Merkel and, of course, George Osborne to justify programmes of ‘fiscal consolidation’ and vicious austerity, creating human misery on an enormous scale.

There was only one problem with Reinhart’s and Rogoff’s paper - it was total bunk. Researchers from the University of Massachusetts at Amherst found a simple coding error that omitted several countries from a Microsoft Excel spreadsheet of historical data - a few rows left out of an equation to average the values in a column. Almost a schoolboy error. As a result of this statistical mistake in the original calculations, it is now abundantly clear that the 90% ‘debt cliff’ does not exist. Simply put, Reinhart and Rogoff confused cause and effect: countries have high debt levels because they have slow growth rather than having slow growth because they are heavily indebted. You surely do not have to be a genius to realise that.

In reality, the new research found that the countries with 90+% debt grew by about 2.2%. Yes, less than those with lower debt ratios, but hardly a spiralling collapse into the abyss. However, the data has an even more radical implication. One of the researchers, Robert Polin - founding co-director of the Political Economy Research Institute and a former economic spokesperson for Jerry Brown during his 1992 US presidential campaign2 - 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. The world turned upside-down. Highly embarrassed, Reinhart and Rogoff have publicly admitted they got their figures badly wrong. A total humiliation for the right. Its ‘proof’ of the need for austerity has gone up in a big puff of smoke.

Yet, even on the most basic empirical level, the Reinhart-Rogoff thesis was obvious nonsense. Think back to the 1950s, a time when Britain was massively in debt, mainly to the US - at one stage the national debt was well over 200%.3 Yet the UK was in the middle of a boom. There is no necessary correlation between debt and growth except in the dogmatic mind of the neoliberal. The world economy boom of that era was precisely predicated on huge borrowing by the state/government, and not because everybody had taken leave of their senses - as was later claimed, totally mendaciously, by the Thatcherites. If you grow then you can pay off your debts. Not really rocket science. Even better, if you have a bit of inflation - then, great, you can pay them off quicker. Get economies moving and the debt - all things being equal - will look after itself.

True, Britain’s debt-to-GDP ratio has more than doubled in the past five years and is now not that far away from the 90% ‘cliff’ - who knows, one final push by Osborne and he might get there. But it was the semi-collapse of the UK economy in 2008-09 as part of the world economic crisis triggered by the Lehman Brother’s disaster, followed by the most tepid of ‘recoveries’, that blew a devastating hole in government finances - not public borrowing. There is no iron economic law, or indeed any law, that says servicing the current debt levels need be prohibitively expensive - quite the reverse, with interest rates virtually at zero.

If they wanted to, the British, German and US governments could borrow vast sums of money for next to nothing - unlike you and me or the small business down the road. What prevents this occurring is simple - the naked class war politics of the bourgeoisie, determined to roll back the post-World War II gains of the working class.




1. http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt.

2. http://en.wikipedia.org/wiki/Jerry_Brown.

3. http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt.