George Osborne had a bad week last week - tears at Mrs Thatcher's funeral, chided by the IMF and then the discrediting of a key paper by Ken Rogoff and Carmen Rheinhart which he and others had used to justify austerity policies. Essentially Rogoff and Rheinhart's paper concludes that once a country's debt to GDP ratio gets above 90%, it's very hard to get economic growth. However an American student noticed recently that the Harvard ecnomomists' data set had missed out some countries near the top of the alphabet - a presumably accidental spreadsheet error.
As so often, what's really interesting is not so much the mistake itself - Rogoff and Rheinhart say it doesn't affect their overall conclusion - but the response to it. Anyone would think a coach and horses had been driven through Hayekian economics, and that George Osborne should be sitting inconsolable in a puddle of tears. Here is one David Graeber, for example, writing in the Guardian today - "The intellectual justification for austerity lies in ruins . . . There is now no definite proof that high levels of debt necessarily lead to recession . . . Reinhart and Rogoff's study was wrong".
This is pretty typical. But even if you put aside the hyperbole, Graeber is assuming that the argument against high debt to GDP ratios rests on Reinhart and Rogoff alone. It doesn't. It's not hard to see that the higher your borrowing, the greater percentage of your national wealth goes to servicing debt, the higher the taxes you need to finance the interest payments, and the less you have to spend on growth-generating investment. Whether a ratio of above 90% is the exact point at which it becomes impossible for growth doesn't much matter; the point is, the more debt you have, the harder growth becomes.
And then there's the risk that you might go bust. Graeber is sanguine about this. Why, he wants to know, is a country like Japan, with one of the highest debt-to-GDP ratios in the world, able to borrow at 1% on 10 year bonds? Because "everyone knows that in an emergency, the Japanese government could simply print the money", Graeber writes.
There are two things to say about this.
One is that Japan is a classic example of an economy with cripplingly high debts which isn't growing. Hasn't Graeber heard of the term "Lost Decade"? It was coined for Japan. The incoming Prime Minister, Mr Abe, has proposed a new massive programme of QE precisely to try and fix this problem.
Secondly, the idea that Japan (or the UK) can never go bust because it can print its own money is a fallacy, no matter how many times people repeat it. A government which tries to print its way to solvency soon discovers that investors holding foreign currency will demand ever greater interest payments to hedge against the risk that it will decline in value. Eventually the gilt markets will stop buying the currency altogether. And then what? QE in perpetuity? Printing money is not a panacea.
Countries that can do it are in a much better position than, for example, Spain or Greece, hamstrung by their Eurozone membership. But more flexibility doesn't mean they can kiss the back of their own head.
The Guardian describes Mr Graeber as "the author of The Democracy Project". His Wikipedia page is not quite so coy. He is apparently "an anthropologist and anarchist". Why the Graun thinks his views on Rogoff and Rheinhart are worth printing is beyond me. He knows even less about economics than I do.
