Introduction
Following the 2008 global financial crisis, many economists embraced the notion that governments could freely borrow without long-term consequences. However, post-pandemic inflation and rising interest rates have debunked this narrative, revealing the dangerous illusion of anti-austerity economics.
The Rise of Anti-Austerity Populism
To understand the populist backlash against free trade and other pillars of orthodox economics—a movement skillfully exploited by then-US President Donald Trump for his political ambitions—one must look back at the anti-austerity movement that followed the 2008 financial crisis.
Post-crisis, anti-austerity advocates argued that government budgetary restraint was not an economic necessity but a malicious intellectual construct restricting social transfers and spending. They believed governments, especially in advanced economies, could borrow almost indefinitely with minimal long-term costs.
During the 2010s, as interest rates (especially for long-term public debt) fell to historic lows, the anti-austerity argument seemed not only politically advantageous but also intellectually compelling. Even as the US government’s debt-to-GDP ratio rose nearly 40% following the 2008 crisis, many economists questioned what reasons existed not to issue more debt.
The response was that much of the debt had relatively short maturities, leaving the US highly exposed to rising interest rates. Post-COVID-19 pandemic, as interest rates returned to more normal levels, the cost of servicing US debt doubled and continues to rise as older bonds mature and need refinancing at higher rates. Although many politicians may not yet grasp the implications, the adverse effects of excessive debt and higher interest rates are already materializing.
European Challenges
The shift in Europe is equally surprising. German Chancellor Friedrich Merz openly declared that the welfare state (in its current form) is no longer sustainable. European countries face slow growth and aging populations, now facing the added burden of increasing defense spending—a necessary but perhaps unwelcome expenditure for anti-austerity advocates.
Historically, most debt and inflation crises occurred when governments capable of meeting their obligations opted for inflation or default. When investors and the general public perceive a government’s willingness to resort to such heterodox measures, confidence can evaporate well before debt appears excessive, leaving authorities with limited room for maneuver.
Though there is no precise debt-to-GDP level at which debt becomes unsustainable due to numerous variables and uncertainties, excessive debt poses a genuine risk to advanced economies: loss of fiscal flexibility. Excessive debt can make governments hesitant to implement stimulus measures in response to financial crises, pandemics, or deep recessions. Moreover, history demonstrates that countries with high debt-to-income ratios (holding dominant currencies, wealth, and institutional strength) tend to exhibit slower long-term growth compared to similar economies with lower debt levels.
Criticism and Reality
Economists Kenneth Rogoff and Carmen Reinhart faced harsh criticism for an informal 2010 conference paper examining the well-documented link between high public debt and slower growth based on their 2009 book, “This Time Is Different.” Criticism intensified in 2013 when three anti-austerity economists claimed the paper was riddled with errors, and after corrections, showed little evidence that excessive debt limited economic growth.
The criticism largely relied on selective quotations and misinterpretations. Their paper contained a single error, but no more. Recognizing the need for governments to pay attention to borrowing does not equate to advocating austerity in all cases. Sometimes, as Rogoff argued in 2008, a tax increase or slight inflation might be the lesser evil.
The complete, official version of their 2012 article, based on a broader dataset, contains no errors and reaches nearly identical conclusions (a fact the anti-austerity camp still fails to acknowledge). Since then, numerous rigorous studies have repeatedly linked excessive debt to slower growth. Although debate persists among economists regarding causal mechanisms, the evidence is irrefutable.
Much of the confusion stems from equating debt with deficits. While deficits are an effective and essential tool during crises, inherited high debt levels typically act as a drag on growth and reduce governments’ room for maneuver.
In recent years, the anti-austerity movement has lost momentum and intellectual credibility, largely due to post-pandemic inflation but primarily because real interest rates seem to have normalized. The outcome has exposed the “free lunch” logic underlying anti-austerity economics as the dangerous illusion it always was.
About the Author
Kenneth Rogoff, former chief economist at the International Monetary Fund, is a professor of Economics and Public Policy at Harvard, winner of the 2011 Deutsche Bank Prize in Financial Economics, co-author (with Carmen Reinhart) of “This Time Is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2011), and author of “Our Dollar, Your Problem” (Yale University Press, 2025).
Copyright
Copyright: Project Syndicate, 1995 – 2025
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