NEWS How the austerity coin flipped
American graduate student’s work stuns economists after he picks apart key research by Harvard University profs
Grad student Thomas Herndon is a wanted man.
European media outlets are after him. He’s been profiled by New York magazine, the Washington Post and featured on MSNBC. New York Times Nobel Prize-winning economist Paul Krugman is singing his praises and Stephen Colbert referred to him as the “grad student who had fiscal conservatives’ panties in an economic bunch.”
Herndon became an instant celebrity in the nerdy world of global economics almost overnight when he found some whopping errors in a paper that is often referenced as the “bible” for austerity. His findings are causing influential thinkers, conservative politicians and bankers to rethink harsh economic policies imposed on some of Europe’s most indebted and struggling states.
With all the attention, Herndon can barely get his homework done.
“The media response has been tremendous, and a tad overwhelming. It’s been hard to get all my work done for the semester,” Herndon said in an email.
The 28-year-old University of Massachusetts Amherst student turned the world of global finance on its head last month when he published an academic paper, along with professors Bob Pollin and Michael Ash, ripping a giant hole through one of the top pro-austerity arguments championed by two Harvard University professors, Carmen Reinhart and Kenneth Rogoff.
While studying the data used by Reinhart and Rogoff, Herndon kept discovering mistakes. He repeatedly told Pollin, his professor, that he was having trouble with the assignment and he couldn’t seem to replicate the findings. Herndon thought there could be some big errors in the Harvard work.
“You know, I’ve heard this before from students. It is fairly common,” laughed Pollin from his UMass office in Amherst. “But he kept coming back with the same answer. Eventually, we believed him.”
What the U Mass team found stunned them. They uncovered coding errors, “selective exclusion” of data — including figures from Canada that showed the country had both high debt and high growth levels from 1946 to 1950 — and a problematic weighting of statistics that led to “serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies.” Their paper has set off shock waves. To say that the theories contained in Reinhart and Rogoff’s “Growth in a Time of Debt” were a pillar of the global austerity policy push would be an understatement. Essentially, they
“The media response has been tremendous, and a tad overwhelming.
THOMAS HERNDON GRADUATE STUDENT
outlined that once a country’s debt reaches 90 per cent of its gross domestic product, long-term growth is unsustainable and dips negative. To remedy that, pro-austerity believers say a country must slash its deficit by imposing deep cuts to government spending in order to achieve job growth.
Austerity policies are currently used in the United Kingdom, Greece, Spain, Portugal and Italy. Each of those economies suffered immense blows after the financial meltdown in 2008.
And, in each of those countries, it is fair to say that austerity has not been a blazing success — witness the violent riots in Athens with youth unemployment hovering at 50 per cent; excessive macroeconomic imbalances in Spain; and the slashing of council government budgets in Britain that are cutting so deep, even the bishops are pleading for mercy.
George Osborne, the U.K.’s finance minister, has championed Rogoff and Reinhart’s theories, even including them in major speeches. Paul Ryan, the U.S. Congressman and 2012 vice-presidential candidate, leaned on the Harvard work for his Path to Prosperity budget.
Pollin confessed he had no idea exactly how influential the Reinhart and Rogoff work was until Mike Konczal of the non-profit Roosevelt Institute blogged about the UMass critique on April 16. The issue exploded online.
Since then, Reinhart and Rogoff have shot back, writing rebuttals in both the New York Times and London’s Financial Times.
The UMass crew may not have sought the brouhaha, but they now find themselves in the spotlight of one of this century’s most important economic arguments.
Herndon is taking it all in stride. “I am very honoured to be able to contribute to the discussion about controversial austerity policies, and to help renew the debate.”
The more seasoned Pollin is a little more pragmatic.
Yes, Rogoff and Reinhart presented their initial findings in a clear and concise way and should be commended for that, he said.
“The problem is when you do that, you have to be right. But their research didn’t hold up. It collapsed. This is just a bad paper.”