The danger is that the discrediting of hasty austerity could undermine the case for fiscal responsibility in the long run, writes Pisani-Ferry for Project Syndicate.
The Reinhart/Rogoff paper[1] appeared to provide the perfect argument in support of rapid consolidation, which is why it was cited intensively in policy discussions. Austerity, it was argued, was needed to stem the rise in the debt ratio and safeguard long-term growth.
To be sure, retrenchment could entail some short-term costs; but the longer-term benefits would be much bigger. Even though Reinhart and Rogoff themselves did not draw that conclusion explicitly in their paper, many drew it for them. It was so tempting for a minister or a senior technocrat to explain that consolidation had to start immediately, because the 90 per cent threshold was approaching, that most of them did not resist it.
Heavy reliance on what turns out to be disputed evidence now leaves the fiscal hawks in a weak position, to say the least, vis-à-vis their opponents. This is especially true in Europe. Having promised that rapid consolidation would be good for growth, and having delivered recession, the European Union has disappointed its citizens. Adjustment fatigue is setting in, and governments risk losing support if they go much further in their consolidation efforts.
The danger is that the discrediting of hasty austerity could undermine the case for fiscal responsibility in the long run. If so, financial markets could conclude that public-debt sustainability is in serious danger – a perception that could have highly adverse effects on financing conditions. In the end, growth would indeed suffer, ironically proving Reinhart and Rogoff right.
This episode once again underscores the importance of intellectual rigour. Of course, that is not always an easy credo by which to abide. Researchers are tempted by persuasive results that can attract the interest of policymakers, who are tempted by a selective reading of the evidence that can provide them with ammunition in domestic and international debate. Submitting to either temptation, as the Reinhart/Rogoff episode has shown, is never advisable.
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[1] Growth in a Time of Debt - short 2010 paper in which Reinhart and Rogoff claimed that public debt starts to have a significantly detrimental effect on economic growth once it reaches 90 per cent of GDP
© Project Syndicate
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