Why Austerity Theory is the Economist's Atomic Bomb

Economic theories are powerful things, to be used and misused. Those who write economic theory and do economic policy need to be aware of the consequences of what they are doing.

ON August 6, 1945, America dropped an atomic bomb on Hiroshima, instantly killing 70,000–80,000 people and injuring another 70,000. The atomic bomb changed the world. President Truman promised a ‘rain of ruin’ would fall on America’s enemies if they didn’t surrender.

The chief architect of the atomic bomb project was a physicist, Robert Oppenheimer. Mr Oppenheimer had mixed feelings about his project. Initially, he was delighted that it worked at all.

Looking back, this relief is understandable. This was a world war in which millions had already died. The US leaders were sure Germany, Japan and Russia were also working on a nuclear bomb, so there was intense pressure to get the job done.

But after the bombings, Mr Oppenheimer expressed regret that the bomb had been used, citing a passage from Hindu holy book the ‘Bhagavad Gita’: “Now I am become Death, the Destroyer of Worlds.”

Others involved in the making of the atomic bomb saw it as a problem to solve, a part of the war effort.

While they were saddened by the deaths of tens of thousands of civilians, the scientists were justified in trying to find the answer to the question put to them by the politicians and generals. Their research was, to some extent at least, independent of what the research was used for.

It’s not atomic physics, but economic theories have the potential to alter the lives of millions of people.

The wrong theory, implemented as policy, can reduce the living standards of millions of people over time, and harm the development of generations of workers and their families. Take Zimbabwe, for example, where a hyperinflation has destroyed the nation’s wealth.

Or go back in time to the Meiji Restoration in Japan in 1868 when Japan modernised, opened up to trade, and eventually militarised itself by 1905.

The openness policy championed by the Meiji dynasty led to a huge increase in living standards for the Japanese people, and, not incidentally, led to the militarisation that would one day help push the Japanese into confrontations with other world powers.

Economic theories are powerful things, to be used and misused. Those who write economic theory and do economic policy need to be aware of the consequences of what they are doing.

Read last year’s budget documents. You’ll find Appendix F on the web. Appendix F is a thoughtful, careful analysis of the distributional consequences of austerity policies on the Irish people, showing exactly who has been hit by these policies, and by how much.

But at least those in power in Ireland are aware of the consequences of their actions.

Not so for other proponents of austerity, where their research is of the ‘fire and forget’ type, divorced from the potential impact of their research.

Economists who help satisfy the consensus view are often feted, whether they are right or wrong, and when they are wrong, they walk away unscathed. There is nothing wrong with being wrong: things change, and no one is perfect.

But when you’re wrong – or worse, when your work is being misused – I believe there’s an imperative to shout stop.

Another example: economists Carmen Reinhart and Ken Rogoff wrote a celebrated paper showing increasing government deficits harms growth: a country was likely to stagnate once its government debt-to-national output ratio exceeded 90pc.

Their finding implied deficit spending was bad, and because this fed a conservative need to reduce government spending through austerity, Mr Rogoff and Ms Reinhart’s paper was instantly adopted as gospel by the serious people in dark suits for this reason.

The paper was recently torn apart under serious scrutiny, but from 2010 to 2013, Mr Rogoff and Ms Reinhart made no attempt to modify their analysis or to chasten those who tried to use it for different means. Compare the Rogoff and Reinhart debacle with a recent example from Sweden, where one researcher, Jonas Himmelstrand, argued early childhood programmes increased the chances of mental health problems later on.

He cited a series of studies in his work. The author of one of the main studies was very quick to point out there was no substance whatsoever behind Mr Himmelstrand’s statement that a decline of mental health in young people in Sweden was related to daycare.

Eventually, those promulgating the notion of austerity as the only answer are going to be asked the same questions asked of the scientists on the project that birthed the atomic bomb: are you okay with how people have used your research?

Austerity is forcing millions to suffer needlessly. As unemployment rises and political realities force this to become a serious constraint on policy, austerity policies will be ditched. What will we have then?

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