Ideas@TheCentre
The end of austerity?
All over the Internet, Keynesians are crowing that austerity has been debunked and high levels of government debt are no longer a bad thing (to be fair, many of them believed that already).
In case you don’t follow economics blogs, let me catch you up quickly. In 2010, Reinhart and Rogoff (R&R) showed a correlation between negative growth and government debt above 90% of GDP. Last week Herndon, Ash and Pollin found a basic spreadsheet error (and other alleged problems) in R&R’s work showing the drop off in GDP was not nearly as steep.
And then the Internet exploded (in so far as mostly middle-aged male economists can explode). R&R have since responded defending their work (but not their coding error). They argue that there is still a negative correlation, and that growth at higher levels of debt is about half of what it is at lower levels of debt. This is supported by other research. There is some evidence that high debt causes lower growth, but like most economic evidence, it’s not clear cut.
Unfortunately, this will give greater licence to advocates of increased government deficits in high debt countries (read Europe and the United States).
Not that any of the problems with R&R’s research alters the fundamental point that some countries in Europe simply cannot borrow any more money, or that governments cannot indefinitely spend more than they earn.
It does not change the fact that a lot of government spending is wasteful, inefficient and poorly targeted – generating little or no benefit at all. Neither does it address the abject failure of Keynesian stimulus in the wake of the global financial crisis (especially in the United States where the economy is still struggling despite a deficit of more than $1 trillion a year).
The CIS’ TARGET30 campaign is not about imposing European-style austerity in Australia. It is about addressing inefficiencies in government spending (so you get more for your tax dollars) and preparing Australia for future challenges (so our economy doesn’t end up a basket case).
Higher government debts inevitably mean higher taxes in the future to repay those debts. Higher taxes mean lower growth. Saddling future generations with lower growth and higher taxes while they repay debts incurred to fund our short-term consumption is – to put it simply – wrong.
Simon Cowan is a Research Fellow at The Centre for Independent Studies.
