When the numbers don’t add up…
26.04.13
Last week I wrote about the emerging evidence on the consequences for public health of fiscal austerity in Europe. As difficult as it has been to measure changes in health, evidence is now emerging that cutbacks in public budgets are having a worrying impact.
But I can’t help also commenting on important developments in the overall debate on European economic growth that have come to light in recent days. Part of the reason for the depth and speed of fiscal austerity in Europe has been the belief that tackling high levels of public debt must be the first priority for economic policymakers. In a seminal paper from 2010 eminent economists Ken Rogoff and Carmen Reinhart argue that public debt in excess of 90% of GDP is associated with a significant slow down in growth. The paper has been enormously influential and has strengthened the hand of those who believe the only way of bringing Europe back to prosperity is to rein in debt as quickly as possible.
For many other economists, there has always been a problem with this logic. For a start, correlation does not imply causality and it’s quite possible that the result reported by Rogoff and Reinhart may imply the opposite to what was suggested – i.e. poor growth could be the cause of high debt and not the other way round. Then there’s the question of whether or not austerity was the right policy response to high debt in Southern Europe (and whether it has worked). Few economists would argue that reducing debt is not desirable. But there is a serious debate about the timing and speed of debt reduction, particularly during a recession. De Grawe and Ji recently caused a stir with a brilliant paper showing in very simple terms that European austerity has been counterproductive. Their analysis demonstrated that debt as a proportion of GDP in countries with austerity got worse not better. Eurostat data, released this week, has also confirmed this to be the case for most of the so-called bail-out countries. This has all led to a fairly heated debate between, among others, Nobel Prize-winning economist Paul Krugman and the Commission.
Last week the critics of austerity were able to add more fuel to the fire thanks to an economist at the University of Massachusetts who, in trying to replicate Rogoff and Reinhart’s analysis, found a number of issues including basic errors in their arithmetic. In particular, the result about the effects on growth of public debt exceeding 90% of GDP was found to be exaggerated. So at least part of the weight behind the era of cutbacks has been based on a coding error in Excel… Really?
Of course, one working paper has not led to the proponents of austerity falling on their swords just yet. Rogoff and Reinhart themselves have acknowledged the technical mistakes but remain convinced on their core argument that high debt is bad for growth. But the voice of those that question the wisdom of current policy is getting louder. Even European President José Manuel Barroso acknowledged on Monday that policies of cutting back public deficits risk losing political and social support, even though he maintains that those policies are fundamentally right. The debate will doubtless rage on….
So why, I hear you ask, is someone who works for the pharmaceutical industry commenting about this esoteric debate among economists? There are two reasons. First, the question of austerity matters to all of us because the consequences are not only felt in the balance sheets of government finance ministries but also in the lives of real people, whether because, for example, they are the victims of unemployment or, as discussed last week, they are patients who are less able to access to adequate health services.
The second reason is that we at EFPIA think the debate on how to generate growth in Europe needs to change fundamentally. There is some good work out there advising European policymakers what they need to do. A very good paper by the Bruegel think tank, for example, offers sound advice to construct a comprehensive approach covering productivity, deleveraging, strengthening the banking sector and addressing distorted relative prices. These are all important issues – and probably ought to be top of the Commission’s agenda. But we also think a complementary agenda needs to be developed about healthcare and its broader economic role. Proper healthcare has a profound effect on productivity and therefore economic growth. Keeping people in work, reducing absenteeism (1) (and making them more productive when they are at work) have all been issues documented in the healthcare literature. But although the positive effects of good health has been an important tool for economic policy in the developing world it has been largely neglected in the west. There is increasing evidence to suggest that policymakers in developed economies need to think again. According to the Commission, the number of people over 65 in Europe is projected to growth by 75% between 2010 and 2060. The more we can do to keep people in the workplace for as long as possible – and out of expensive care homes and hospitals – the stronger foundation we will have for a sustainable economy.
Over the next weeks and months, I will be writing more about these issues and EFPIA will be publishing the evidence that we believe should compel policymakers to start thinking more about how a healthy Europe can be a productive and prosperous Europe. Watch this space….
Richard Torbett – EFPIA Chief Economist
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[1]
J. Sachs (2001) ‘Macroeconomics and Health: Investing in Health for Economic Development’, J. D. Sachs ed., WHO 2001
W.D. Lynch et al (2009) “Effect of antihypertensive medication adherence among employees with hypertension” American Journal of Managed Care
Musich S, Hook D, Baaner S, Edington DW (2006) ‘The association of two productivity measures with health risks and medical conditions in an Australian employee population’, , Am J Health Promot. 2006 May-Jun;20(5):353-63.
