By John Weeks.

A working paper of the Political Economy Research Institute at the University of Massachusetts, Amherst, quite thoroughly discredits one of major academic justifications for austerity programs in the United States and elsewhere. The three PERI researchers, Thomas Herndon, Michael Ash and Robert Pollin, achieve this discrediting by demonstrating that the authors of the austerity article are seriously arithmetically-challenged, and especially at sea when calculating averages (see the interview with Herndon and Ash a few days ago, http://therealnews.com/web4/members_only.html).

Faithful to the mainstream economics predilection against government and all its works, in 2010 Carmen Reinhart and Kenneth Rogoff (R&R) published in the flagship American Economic Review an article with the title “Growth in the Time of Debt” (you can find it at http://online.wsj.com/public/resources/documents/AER0413.pdf, though the reward for wading through this less than Shakespearian text is not great, if indeed it is positive). In this “peer reviewed” contribution to economic pseudo-science they reached the inevitable mainstream conclusion that if a country’s public debt exceeds a specific ratio to GDP, a substantially negative impact on economic growth resulted. By amazing coincidence, that specific ratio happened to be spot-on the US ratio at the time the article sallied forth into the public domain.

We can imagine Rogoff saying to Reinhart (they sound like a vaudeville act), “Gosh, Carmen, our calculated ratio is the same as the real one!”, then rushing to warn one and all of the impending disaster. However, the calculations are wrong; i.e., wrong in the sense of 2 plus 2 equals five. The conclusions represent one or more of the following 1) careless and sloppy research, 2) wishful misrepresentation, and/or 3) conscious misrepresentation. My fifty years as an economist suggests to me a mixture of the three. Their calculation mistakes and conclusions from those mistakes constitute the expected outcome in a profession whose so-called empirical work involves “verifying” market myths, or what might be dubbed, “myth-representations”.

The most remarkable aspect of this entire sordid affair is certainly not the unprofessional sloppiness of the R&R article, nor that three less ideologically inclined researchers caught them in that sloppiness. The astounding aspect is that the big-time media noticed the critique (e.g., the New York Times). For achieving that media impact PERI warrants the thanks of every progressive (see the Real News interview with Pollin, where he discusses the media response).

Economists serving the welfare of the rich. From wikimedia.

The non-expert should realize that there is no political position so reactionary and anti-social that some (and usually many) mainstream economists will not grab on to it, run with it and claim to have empirically verified it. Almost every progressive economist has theoretically and/or empirically refuted some major aspect of the mainstream “neoclassical” paradigm, to no apparent effect. The neoclassical paradigm is a Hydra made from Teflon – a head grows back promptly after analytical decapitation, and no criticism sticks.

I can give three examples from my own work, none terribly important but typical of the Teflonistic nature of the mainstream. In the early 1990s the World Bank sought to justify the draconian austerity policies it imposed in Africa by alleging that they were responsible for a general recovery sweeping the sub-Saharan region. Another economist and I demonstrated that the evidence for recovery was zilch, and our research appeared in a (if not the) leading journal of development economics (World Development). If our paper had any impact I am not aware of it.

Undeterred by its previous forecasting fiasco, in 1994 the World Bank with considerable public relations issued a report claiming yet again that the sub-Saharan region was charging ahead as a result of the wise policies fostered by the bank and the International Monetary Fund (IMF). Definitive and irrefutable evidence of this growth success appeared in the statistical results that formed the center-point of the report.

At the end of the report were the raw data for those statistical results, perhaps slipped in by some left wing mole in the bank. Two other economists and I sought to reproduce the bank statistical results (published in the same journal as before). Not only did the data not demonstrate the success of bank and IMF austerity, that they showed the opposite, policy failure. To my knowledge the article did not result in a thorough (or even a mini-) house cleaning of the bank’s Africa department.

Finally (I could go on and on), in 2000 the World Bank released a soon-to-be-infamous working paper with the less than nuanced title, “Growth is Good for the Poor”. This paper claimed to demonstrate definitively (the bank is always definitive) that economic growth alone, without any redistributive interventions by governments, reduced poverty except in the rarest of cases. Three of us showed that the statistical results were unreliable to the point of nonsense.

Again, the edifice of the World Bank and IMF buildings in Washington showed no obvious cracks in consequence of our critique. I and myriad other progressive economist got the message. To use Ronald Reagan’s term, the mainstream of the profession did not give a rat’s kister whether or how many times its theory and statistics were refuted.

Neoclassical economics is a science. From wikimedia.

The examples I give, along with countless more that other progressives could relate plus the excellent PERI study, demonstrate a general conclusion. Despite its arrogant claims to technical expertise, the work of the neoclassical mainstream is theoretically unsound and empirically sloppy. The neoclassicals maintain their reputation by repetition not by performance. Neoclassicals would have us adhere to the rule of the Bellman in The Hunting of the Snark, “what I say three times is true”.

The successful peddling of bad economics results from the ideological hegemony of raw capitalist ideology, all the more hegemonic and raw under the current rule of finance. An article submitted to the American Economic Review demonstrating that the debt to GDP ratio has no significant impact on growth would be picked over in every detail. Should the guardians of neoclassical ideology find no calculation mistake, the authors would receive a rejection letter or email citing some theoretical objection activated specially for the purpose.

The PERI authors have done all Americans a great service. Relish it, and remember that their work represents not just the tip of the iceberg, but a microscopic crystal atop the tip of a glacier of progressive refutation of neoclassical nonsense.

John Weeks

John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.