A number of commentators have been discussing the use made of the now debunked Reinhart-Rogoff findings by EU economics commissioner Olli Rehn. (Wolfgang Munchau is in good form.) He repeatedly referred in speeches and publications to a 90% rule that, we now know if we didn’t already, is humbug.
It is worth looking a little more deeply at a letter he wrote to euro area finance ministers in February of this year. It contains a typical reference:
recall that public debt in the EU has risen from about 60% of GDP before the crisis to around 90% of GDP. And it is widely acknowledged, based on serious academic research, that when public debt levels rise above 90% they tend to have a negative impact on economic dynamism, which translates into low growth for many years.That is why consistent and carefully calibrated fiscal consolidation remains necessary in Europe.
So even though Rehn himself clearly sees that the crisis (low growth) clearly caused the public debt to rise, the latter must not be allowed to rise further, even if that costs growth in the short term, because debt is at a threshold beyond which nasty longer term effects are all but certain.
What I find interesting, though, and this has escaped other commentators, is to see this quote in the context of the rest of the letter. It is the (in)famous “discussing the size of the multiplier is not helpful” piece. Findings were in the public domain, from the IMF no less, that did not accord with the Commissioner’s priors: fiscal multipliers cannot be substantially higher than we have always said they are. He therefore set his staff on the issue, leading to a detailed (but in my view still woefully inadequate) attempt to debunk the findings. Spot the difference? When even flimsy work legitimises a politically opportune course of action, not only is no attempt made to assess its claimed merits, it is trumpeted as “serious academic research” whose findings is “widely acknowledged”.