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Austerity model based on flawed data analyses?

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Austerity model based on flawed data analyses?

Postby Talisker » Sat Apr 20, 2013 10:34 pm

The austerity model that insists that public debt must be reduced to encourage growth of GDP has very recently been shown to be based on flawed data analyses. Apparently those who impose austerity justify this policy referencing a study published in 2010 by two Harvard professors, Reinhart and Rogoff. Their work claims that countries whose debt exceeds 90 percent of their annual GDP experience slower growth than countries with lower debt loads, and this has become a highly influential economic paper much used by politicians. However, a PhD student, Thomas Herndon, recently reevaluated Reinhart and Rogoff's data set, finding fundamental omissions and errors which influence the relationship between public debt and GDP growth, basically debunking their conclusions that austerity is necessary for growth in economies with high debt.

Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff
Thomas Herndon | Michael Ash | Robert Pollin | 4/15/2013
Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff 's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth. ... ation/566/

Here's the story about the PhD student and how he exposed the errors in Reinhart and Rogoff's earlier work. ... ement.html

It will be interesting to see if other studies will show that austerity is a flawed economic model, and whether politicians will take note in addressing the current debt-ridden economic situation in Europe and elsewhere or stick with the current dogma.
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