Reinhart, Rogoff: Austerity Is Not the Only Answer

Carmen Reinhart
Andrew Harrer | Bloomberg via Getty Images
Carmen Reinhart

Harvard economists Carmen Reinhart and Kenneth Rogoff have responded once again to the ongoing contentious debate over whether tough austerity measures are helpful or harmful to an economy, this time underlining their message that the debate is more nuanced than some would believe and policy makers have more tools available to them.

"The recent debate about the global economy has taken a distressingly simplistic turn," Reinhart and Rogoff said in an opinion piece in the Financial Times on Wednesday.

"No one should be arguing to stabilize debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is."

(Read More: Reinhart, Rogoff: We've Received Hate Mail)

Reinhart and Rogoff's 2010 academic paper "Growth in a Time of Debt" concluded that sovereign debt above a certain level inhibits economic growth. The research is frequently cited as one of the inspirations for austerity measures, with high-profile advocates including the European Commissioner for Economic and Monetary Affairs, Olli Rehn, citing it during key debates about euro zone budgetary tightening.

In April, their influential research on austerity was exposed as containing a mathematical error by an economics doctoral student and two professors at the University of Massachusetts. Reinhart and Rogoff have since replied three times to the latest research paper, accepting the error but rebutting allegations that the error stemmed from "selective exclusion" and explained that it didn't change the key theme of their research.

(Read More: Reinhart-Rogoff Error Sparks Austerity Debate)

The two economists have also said they have received "hate-filled" and "threatening" emails since the debate began to rage two weeks ago.

This latest response, with its main focus that austerity is not the only answer, may be seen as a climb down by some critics, but Reinhart and Rogoff stress that they have always stated that this was the case.

"Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis," they said in the Financial Times.

(Read More: Why the Fuss Over Reinhart and Rogoff Is Overblown)

"Ultra-Keynesians would go further and abandon any pretense of concern about longer-term debt throws caution to the wind on debt and, to quote Star Trek, pushes governments to 'go where no man has gone before'. The basic rationale is that low interest rates make borrowing a free lunch," they said in the paper.

Reinhart and Rogoff warned of the risk of a sudden rise in real interest rates, and said that if there is even the slightest possibility that a country's borrowing rate could rise significantly in the next decade, plans for an unlimited open-ended surge in debt should give one pause.

By's Matt Clinch; Follow him on Twitter @ mattclinch81