Niall Ferguson has two words for Paul Krugman: you’re wrong.
The Harvard University history professor and author of "The Great Degeneration: How Institutions Decay and Economies Die" and “Civilization: The West and the Rest” says Krugman’s pro-government spending thesis not only fails to address the core problems facing the U.S. and Europe today but also has dire consequences for individuals living in these economies.
“You can’t borrow trillions of dollars a year for the rest of time,” Ferguson says in an interview with The Daily Ticker at the Milken Institute Global Conference 2013. “Once a government gets to a very very high level of debt, the risk is very small increases in borrowing costs which create a vast ocean of red ink. So that risk is not negligible. Very large debts do not simply disappear by magic.”
Ferguson argues that Carmen Reinhart’s and Ken Rogoff’s conclusions about the relationship between high debt and low growth are still true. The two Harvard economists had to defend their seminal 2010 paper "Growth in a Time of Debt" after three University of Massachusetts academics “correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II,” according to Reinhart and Rogoff. (Lawmakers across the world cited their work as justification to institute austerity policies; they argued that economic growth slowed after a country's public debt equaled 90 percent of its GDP).
“The headlines have done a disservice to Ken Rogoff and Carmen Reinhart,” Ferguson notes. “It’s extremely implausible that governments with already high debt can improve their situation by making their debt even larger. High debt scenarios often end with inflation or default. They don’t end with a rapid increase in the growth rate. A minor error in the Rogoff and Reinhart paper does not refute the case that governments with excessively large public debt have to bring them under control.”
Moreover, Ferguson compares government accounting of public debt to one of the most famous – and hated – public companies that ever existed.
“If companies behaved like governments, they would essentially be Enron,” he says. “There is a fundamental problem with government accounting.”
Ferguson and Krugman have engaged in various public disputes over the role of government and President Obama’s economic policies. In his latest New York Times op-ed, Krugman appears to take a victory lap against his pro-austerity rivals. He writes that “the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was.”
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