Paul Krugman: Other Austerity Bloopers


While the Reinhart-Rogoff fiasco is fresh in our minds, it’s worth recalling the other paper that swept through the ranks of the VSPs, briefly becoming orthodoxy, what everyone knew, until people took a hard look at the data. Remember Alesina and Ardagna? That was the paper that supposedly showed that spending cuts were actually expansionary, because of Confidence (TM). It was so influential that Peter Coy at BusinessWeek wrote,

Alberto Alesina is a new favourite among fiscal hawks…This is Alesina’s hour. In April (2010) in Madrid, he told the European Union’s economic and finance ministers that “large, credible and decisive” spending cuts to rescue budget deficits have frequently been followed by economic growth. He was…influential enough to be cited in the official communiqué of the EU finance minister’s meeting

It was also cited by everyone from Paul Ryan to George Osborne, more or less reproduced verbatim in the ECB monthly report, paraphrased by Jean-Claude Trichet, and so on.

But the IMF took a hard look (pdf) at the alleged evidence, and found it wanting. A-A (beware of papers where both authors have the same initial?) used a statistical technique that was supposed to identify episodes of large fiscal contraction; but if you compared that estimate with actual policy changes, it bore very little relationship.

What seems to have been going on was that the statistical filter was picking up extraneous effects, often correlated with good economic developments. For example, a stock market boom would increase revenue, reducing the deficit; A-A would count this as a contractionary fiscal policy, and marvel at the expansion that followed.

Mike Konczal, who co-authored another careful critique, wrote

To be frank, when I dug into the Alesina and Ardagna paper and finally understood the work their 1.5% primary deficit reduction was doing I wandered around stunned for a day or two. I called a bunch of people I trusted on macroeconomics and tried to see if I was missing something; was our elite discourse, the Sensible People Stuff, really being driven by this?

The point, as with Reinhart-Rogoff, was that the paper told austerity-minded people what they wanted to hear, and they seized on its message without carefully examining the underlying research.

Now, A-A didn’t crash-land the way R-R did, because it didn’t contain anything as easily ridiculed as the Excel error. Instead, it was damaged by the IMF study, and thereafter got gradually discredited as the disastrous results of austerity in Europe became apparent. So there wasn’t a sudden moment of realizing that the emperor wore no clothes. Nonetheless, the underlying story, of dubious research put on a pedestal because it was what the VSPs wanted, was the same.

Other Austerity Bloopers –

This entry was posted in Austerity, Macroeconomics, NYT, Paul Krugman. Bookmark the permalink.

2 Responses to Paul Krugman: Other Austerity Bloopers

  1. Pingback: The 1 Percent’s Solution – Paul Krugman – « Dr Alf's Blog

  2. Pingback: Austerity is hurting – but is it working? – « Dr Alf's Blog

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