I am afraid anyone thinking that the new Amerhurst research marks the end of the austerity debate and policy push will be sadly disappointed. The latest research and the controversy around it do not falsify the argument of those who support austerity. In fact they support its overall conclusion while disputing the maginitude of the link between certain levels of debt and economic growth.
The original Rogoff and Reinhurt research was (originally) noteworthy for its conclusion and timing and most importantly the benchmark of debt at 90% of GDP which they argued was the point at which growth dropped off markedly. This was used by the pro-austerity lobby to promote the policies that have been adopted by parties of all political persuasion across Europe. It is noteworthy now because the error that has been discovered relates not to the overall message (which the new research actually confirms albeit less forcefully) but the specific impact of debt passing throught the 90% benchmark. Once the data is cleaned, the fall off in growth is no where near as severe as predicted by R&R, but it does still fall off.
So the wide lobby supporting the current measures will continue their policies pointing out the research still supports the underlying thesis. In doing so, they will continue to gloss over the fact that their current frameworks cannot deal with the crisis in front of us and the relationship between key economic variables is currently very different from those that they predict/use in their models. Given that the political and economic elite continue to favour a tight fiscal/loose monetary policy mix they will have to gloss over the fact that their and others research is currently highlighting that the negative impact of tight monetary policy is greater than they predict (the fiscal multiplier) and the positive impact of loose monetary policy is less than they predict (the money multiplier/broken banking system). Hmmm….
In the meantime, we shall all suffer the consequences of the wrong diagnosis and consequently the wrong solutions. No wonder the IMF is now on version 3 of what Osborne should be doing!
If only it was a simple as an ideological thing rather than economics, or should we say dodgy economics? Then it would be easy – just vote the Tories out. But then you look across Europe and see that the hypothesis that this is an ideological drive rather than an economic one is quickly falsified.