Austerity measures: Research Findings and their validity

December 11, 2013 | Posted by bobbysrinivasan << back to blog

A recent study was made by two eminent Harvard University economists. Carmen Reinhart and Kenneth Ragott regarding the relationship between budget debt and future economic growth. Their 2012 study concluded that economic growth in a country is likely to stagnate once the rates of a government’s debt exceeded a threshold 90 percent. Later it was found that the professors accidently omitted some relevant data in reaching this result. Questions were also raised with respect to how they weighted observations and which data they used.
Many countries have taken the results of the study seriously and introduced strong austerity measures. These countries strongly believed that they must bring down the government budget deficits as quickly as possible. There is however some academicians who challenged the conclusion by calling in the usefulness of such statistical research with incomplete data set. Some researcher took pains to revisit the data, methodology and analysis to check as to whether there is universal validity in their conclusion.
Henceforth no important policy conclusion should be based on a single statistical result. Policy judgment should be made only after enough evidence is found by repeated experiments (replication) and with different sets of data drawn from different countries. One of the recent experiences in the US is the decline in the value of house prices. Earlier studies before the sub-prime crisis always concluded that real estate prices will continue to go up and investing in a house is a definite hedge against inflation. The sub-prime problem of 2008 destroyed this myth. Trillions of dollars disappeared from the real estate value and the personal net worth of Americans dropped significantly.
Finally, the question of austerity measures even though relevant, because nobody should spend the money that they don’t have, should be viewed with a great deal of caution. The current Euro zone countries policies of austerity measures have caused enormous hardship to the lives of their citizens especially in Greece and Spain.

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