Skip to Content

Any other business

Reinhart and Rogoff's faulty spreadsheet doesn't destroy the case for austerity

27 April 2013

9:00 AM

27 April 2013

9:00 AM

Economists should always leave themselves a margin for error. When challenged that free-market policies on both sides of the Atlantic in the 1980s led straight from boom to bust, Milton Friedman argued that problems arose not when politicians applied his prescriptions too dogmatically, but because they only ever did so half-heartedly. John Maynard Keynes, the high priest of big government, changed his mind ‘when the facts change’ and was so magisterially flexible that he was able to express ‘deeply moved agreement’ with the moral stance of The Road to Serfdom, Friedrich Hayek’s sermon against the tyranny of the over-powerful state. The Harvard professors Kenneth Rogoff and Carmen Reinhart, by contrast, made the fatal mistake of offering a theory reducible by politicians to a soundbite that was also an unambiguous equation: countries whose debt-to-GDP ratio rises above 90 per cent suffer significantly slower growth.

Britain’s latest debt figures, announced on Tuesday, were not quite as dire as markets expected and Ed Balls hoped, bringing relief to the embattled and downgraded Chancellor Osborne with a slim reduction in the budget deficit for the year just ended. ‘Net debt’ to GDP stands at 75 per cent — but ‘gross debt’ (counting a wider set of liabilities) hit the 90 per cent mark last Christmas — and we’ve had another winter without growth. QED for Rogoff-Reinhart, you might think, but rivals at the University of Massachusetts have demonstrated that the duo made elementary ‘coding errors’ in their workings (omitting conflicting data from several countries) that render their findings unsound.

Politicians who quoted them are as embarrassed as the Harvard panjandrums themselves, the Guardian asks ‘How much unemployment did Reinhart and Rogoff’s arithmetic mistake cause?’ and the anti-austerity bandwagon gathers momentum with timely shoves from IMF economist Olivier Blanchard, European Commission president José Manuel Barroso, and leading bond fund manager Bill Gross of Pimco — whose message to ‘the UK and almost all of Europe’ is that ‘you’ve got to spend money’ to produce real growth.

Mr Gross’s contribution is certainly an example of how to avoid the Rogoff-Reinhart trap by keeping pronouncements quotable but safely in the sphere of broad generalisation. But we can all play that game, and this argument is far from over. Let’s agree, first, that the debt-to-GDP focus has turned out to be a bit of a red herring; high debt may lead to low growth or it may be the other way round, and the relationship varies according to the differing structures and histories of national economies.


More importantly, of course governments must be prepared to impose pain to stop public debt rising out of control — to avert a distorting burden of debt-service costs and the ‘squeezing out’ of the private sector which is the real engine of growth; to create headroom for debt to rise again when there’s a cyclical imperative for it to do so; and in the shorter term, to head off critical loss of market confidence.

And of course there may be a point at which the application of fiscal austerity becomes counterproductive to recovery as well as damaging to social fabric, but the best indicator of that is the level of unemployment — which, despite a recent jump, remains below 8 per cent in the UK compared with 12 per cent across the eurozone and 26 per cent in Greece and Spain. It is a marginal indicator in favour of the Osborne approach rather than against. That’s my simple summary, ladies and gentlemen, and I hope it wins me a chair at a great American university.

The Richer List

I have a suggestion for Philip Beresford and his Sunday Times ‘Rich List’ team, to refresh their annual research exercise now that it has passed its 25th birthday. They already include a subsidiary ‘Giving List’ of philanthropists ranked by ‘proportion of total wealth donated or pledged to charity’. But how about re-ordering the entire parade of our 1,000 wealthiest residents (who needed £75 million to qualify this year) according to their ‘total contribution to the British economy’? Readers are welcome to submit their own formulae, but mine would be calculated by adding up how much each Rich-Lister paid during the year in all forms of UK tax and charitable gifts, plus the salaries attaching to UK jobs he or she has created, plus or minus the gains or losses of fellow UK investors in the ventures concerned.

‘Non-doms’ clearly start at a disadvantage in this reckoning, but redeem themselves by creating wealth for others — which is the supposed justification for their status anyway. Even if we add in ‘fees paid to UK lawyers, accountants, estate agents, decorators, PR spivs and security firms’ as a further element of the trickledown effect, it’s a safe guess that the top five would no longer sound as exotic as Usmanov, Blavatnik, Hinduja, Mittal and Abramovich.

Meanwhile, I’m compiling the more exclusive Any Other Business Rich List, and you’ll swiftly spot how it works. I’ve excluded Richard ‘Richie’ Rich Jr, the richest kid in the world, on the basis that he’s a comic-book character, and Californian rapper Richie Rich on the basis that he has done jail time and writes appalling lyrics. But I’m including Marc Rich, the Swiss-domiciled commodities trader and former US tax fugitive (until Bill Clinton pardoned him) who is said to be worth $2.5 billion, and of course Rich Ricci, the racehorse-owning former sidekick of Bob Diamond who has just left Barclays having cashed in an £18 million share bonus to add to the fortune the bank had already awarded him.

Again, readers may like to submit other names, but the most admirable one I can find is Yorkshire-based retail entrepreneur Julian Richer, who’s worth £115 million, gives 15 per cent of his profits to charity, is described as having ‘perfected the art of staff motivation’, and plays in his own jazz band. Surely that’s what being rich is all about.


Show comments
Close