Austerity Measures Harmful to Economic Growth, With or Without Coding Errors

On April 15, 2012, researchers at the Political Economy Research Institute published a paper that found that the Reinhart and Rogoff's influential paper Growth in the Time of Debt contained faulty research methods, including coding errors. Despite initial concerns about causation in their research - high public debt could be the consequence and not the cause of slow growth - this paper has informed austerity measures in the United States and Europe.

Before the knowledge of coding errors came to light, SCEPA research revealed that cutting government spending in a crisis comes with serious risks. SCEPA research found empirical evidence that reducing deficits will inhibit economic activity in the short-run, and may lead to higher debt-to-GDP ratios in the medium-run. SCEPA has also hosted a number of events on austerity politics and economics held in late 2011, "Do Budget Cuts Lead to Growth" SCEPA also held a second panel discussion on this theme "What the US Should Learn From Austerity's Fallout in Europe and Latin America" (April 17, 2012). The continued crisis in Europe demonstrates the realization of these risks.

In addition, SCEPA research also reminds us that the increase in U.S. fiscal deficits and U.S. government debt after the recession was not only the result of the fiscal stimulus program. Due to the operation of automatic stabilizers, the severe downturn in economic activity substantially reduced government revenues and increased spending, contributing to a higher fiscal deficit

Submit to FacebookSubmit to Twitter