Whoops, it was yet another ghastly month for austerity. Just as we were getting over the news that the International Monetary Fund had queried the wisdom of Britain’s painfully ambitious fiscal correction plan, we got the second successive downgrade of our national creditworthiness – this time from Fitch, who agreed with Moody’s February assessment that we were going too far with the belt-tightening.

Then there was that little awkward report from the Organisation for Economic Co-operation and Development, which downgraded our national growth projection for 2013 on the grounds that our recovery was being choked off by a lack of consumer appetite. (To his credit, Chancellor George Osborne had fought back against this with a renewed attempt to get banks lending again. And the home-buyers’ funding announced in the Budget had also cheered up the construction industry – so often one of the mainsprings of growth in past decades.)

No Need for A Guillotine (Yet)

But this time, the arguments for a gentler sort of austerity came from abroad. In France, the struggling government of François Hollande got a sort of nod from Germany for its request to be given an extra year to bring its budget deficit into the 3% target zone. Indeed, it got two extra years from the European Commission. Thus prompting Finance minister Pierre Moscovici to claim, perhaps a little prematurely, that it was okay to proclaim the end of the country’s misguided experiment with austerity.

“Austerity is finished,” the minister declared. “This is one of the most decisive turns in the history of the EU project since the start of the euro….We’re seeing the end of the austerity dogma. It’s a victory of the French point of view.” Germany groaned and protested at the misrepresentation, but the stable door was already open and the horse was halfway across the paddock.

Anyone Got A Calculator?

But all that was as nothing compared with the rumpus that had kicked off a couple of weeks earlier, when it was disclosed that a simple error in an Excel spreadsheet drawn up by two prominent economists back in 2010 had grotesquely misrepresented the case for austerity. And that the world’s economic thinkers had been on the wrong track ever since.

Well, that was how the papers put it. What had actually happened was that an American college student had been checking the numbers in a January 2010 report from Kenneth Rogoff, a former head of research at the International Monetary Fund, and Harvard Professor Carmen Reinhart. Neither of whom was exactly a lightweight in academic circles. And that he’d noticed that a key row of figures hadn’t added up.

That row of figures mattered because it underlay Rogoff and Reinhart’s contention that bad things always happened whenever a country’s national debt exceeded 90% of gross domestic product. And that the international community should therefore do everything in its power to stop any country from breaching that threshold.

R&R’s thesis had turned into a hugely influential book called This Time is Different, in which they described how soaring private debt would lead first to financial crises, then deep recessions, weak recoveries and rising public debts as well. And the rest, as they say, is history. You’re living the consequences of that assertion right now.

Yet, as we’ve said, the whole thing rested on a mathematical fallacy. By the time the poor puzzled American student had corrected Rogoff and Reinhart’s Excel sum, by reinstating five heavily-indebted countries that they’d accidentally left out, you found that an average “0.1% decline” in national growth that they’d described turned into a 2.2% average increase instead.

There was, in fact, almost no difference between heavily indebted countries and moderately indebted ones. And the authors’ celebrated case for austerity had completely lost its trousers.

And the Moral?

What are we mere mortals supposed to make of this? Firstly, that even the finest economic brains need to check their maths from time to time.

And secondly, that some of the crowing and jeering may be premature. There isn’t much doubt that Japan’s recovery, for instance, has been delayed over the last two decades by its vast government debt, which is now around 230% of GDP.

But even here, there’s a smidgeon of uncertainty, because Tokyo’s current (and highly successful) recovery programme is built around a wall of quantitative easing which – you guessed it – will expand that 230% deficit even further. Heck, is there nothing you can rely on any more?

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