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Economists Embarrassed, Austerity a Much Less Credible Policy

Ryan FY2013 Budget

Paul Ryan’s Budget Proposal for FY2013 cites the now-tainted conclusion from the study to argue for austerity.

(Review) Researchers at the University of Massachusetts Amherst failed to replicate the results of a 2010 study that was widely cited to support the policy of austerity, where government budgets are slashed in an attempt to improve economic performance through reducing levels of government debt. The researchers at Amherst informed the authors of the 2010 study – 2 internationally famous economists who are both currently at Harvard, and were passed the original analysis of the data from the study in Excel. The researchers at Amherst thereupon uncovered an error in the spreadsheet, that when corrected, produced results that no longer supported a widely touted conclusion from the 2010 study that government debt at or above 90% of a country’s GDP is a trigger for very bad future economic performance.

The conclusion from the 2010 study about a 90% threshold level for debt had been used by politicians and bureaucrats, especially in Europe, to support policies of reducing government spending in a time of recession or partial recovery from recession. With the 2010 study now openly ridiculed by the press and in the so-called “blogosphere”, the policy of austerity lies on even shakier ground, as countries that pursue it routinely report unemployment rates above 25%. The International Monetary Fund, one of the parties to subjecting countries which receive its aid to a policy of austerity, is doubly embarrassed, because one of the writers of the 2010 study was once their chief economist.

In our information age, when decision making is required ever more to be data-driven, these kinds of errors are becoming commonplace – both in business and in politics. It is increasingly difficult to dissuade someone from concluding that the pressure to present analysis confirming a preconception is contributing to commission of these errors.

This embarrassment in the field of economics has the potential to spill over into politics and to affect workers here in WNY. US politicians at all levels of government who harp on government deficit spending in bad economic times were using this now-tainted conclusion from the 2010 study to support their politics – Representative Paul Ryan (R-WI) for one.

Workers and their families in WNY should hold their elected representatives accountable by voting for candidates who do not base their policy proposals on conclusions that derive from very flawed analysis. The policy of austerity – of cutting government spending during a period of weak economic performance, is not the kind of policy that will bring about recovery. Just the opposite, in fact, as a quick glance at the euro area shows. Labor might give politicians who support austerity the electoral equivalent of a bum’s rush at the next polling.

(From time to time, WNY-WJ will publish a review of some trend in other media outlets, in order to inform its readers how this trend might affect them. This content is just such a review.)

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