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The Intellectual Foundations of Austerity destroyed

by Frank Schnittger Fri Apr 26th, 2013 at 03:26:16 AM EST


Ken Rogoff in Davos

Reinhart and Rogoff wrote the single most influential economic paper supporting the Austerity policies introduced by Governments around the world. Now a paper by some graduate students reduces their findings to rubble - saying they were caused by some elementary arithmetic coding errors in Excel, the selective exclusion of available data, and some highly questionable averaging methods. Is this what "thought leadership" in the western world is reduced to?

Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff - WP322.pdf

Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff  by Thomas Herndon, Michael Ash, and Robert Pollin. April 15, 2013.

Abstract

We replicate Reinhart and Rogoff (2010a and 2010b) and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP grow that public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower. We also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth

front-paged by afew


Reinhart and Rogoff then admitted their arithmetical error, but sought to argue their core conclusion remained valid. Here Hernden debunks this claim as well.
Herndon Responds To Reinhart Rogoff - Business Insider

Indeed, in the most recent period of 2000-2009, which in almost all cases will be the most relevant set of experiences with respect to current policy debates, average GDP growth when public debt is above 90 percent of GDP is higher than when the public debt/GDP ratio  is between 60 and 90 percent.    The findings in our paper are clearly not consistent with the notion that we consistently observe a sharp fall-off in economic growth when the public debt/GDP ratio exceeds 90 percent.   As for the misconceptions concerning causality, I encourage people to read the contribution by my professor Arin Dube. His treatment of the topic is highly readable and offers strong evidence that causality runs from slow growth to high debt.

There is not one word in our paper which suggests that a high level of government indebtedness is never a problem.  It would be absurd to think that governments never have to worry about their level of indebtedness.  The aim of our paper was much more narrowly focused.  We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth. The implication for policy is that, under particular circumstances, public debt can play a key role in overcoming a recession. The current historical moment, with historically high rates of mass unemployment in both the U.S. and Europe   and with interest rates on U.S. Treasury bonds at historic lows,   is precisely the set of circumstances under which we would expect public borrowing to have large positive effects, with comparably fewer costs. Moreover, it is precisely the set of circumstances under which we expect austerity to have substantial negative effects. 

Thus not only is high debt (over 90% GDP) not necessarily correlated with low growth rates, but what causality there may be is actually the opposite of what Reinhart and Rogoff claimed: Slow growth causes high debt, not the other way around. But hey, when you are fighting a class war, any weapons will do: even weapons created by demonstrably bad arithmetic, selective exclusion of available data that doesn't support your conclusions, and highly questionable averaging techniques. Reinhart and Rogoff are to the economic case for austerity policies what weapons of mass destruction were to the casus belli for war with Iraq: a convenient excuse. And by the time people find out it was all a sham the austerity war has been fought and won by the 1% global elite. Everyone else has been further impoverished.

Of course the elite apologists now argue that Reinhart and Rogoff weren't really that important after all. Here's Krugman in response: Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

Robert Samuelson tries to minimize the significance of the Reinhart-Rogoff affair; and that, I realized, offers an interesting window into why, in fact, the affair matters so much.

Samuelson starts by excusing R-R on the grounds that the economic crisis predates their blooper:

The Reinhart/Rogoff paper was published in January 2010, more than a year after Lehman Brothersí failure and the onset of the financial crisis. At that point, all the ingredients of Europeís debt crisis (housing bubbles in Spain and Ireland, huge budget deficits in Greece, weak banks throughout the continent) were also in place.

But while R-R obviously had nothing to do with the start of the crisis, the question is how they played into the response. For the remarkable thing about this ongoing slump isnít so much that we had a financial crisis as the fact that we responded to it, not by applying what macroeconomists thought they had learned, but by repeating all the policy errors of the 1930s.

Display:
But all those errors in dealing with the problems of 2008 onwards were already set in stone before the RR mess came into existence.

It may well have played a part with increasing the confirmation bias already in existence that the moral scolds were correct in applying austerity, but nothing would have changed if it had never existed.

Rather, this debacle is useful in that its timing comes as people are beginning to question the effectiveness of austerity, and so this serves to become the poster boy for the intellectual fraud underpinning austerity. But it was never needed to impose it

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Apr 25th, 2013 at 01:18:20 PM EST
Obama was still able to get stimulus legislation through congress in 2009. That changed subsequently and we had the fiscal cliff, sequester, and repeated battles over the debt ceiling. Part of the reason the political climate changed - in the US - is the R-R findings - see video below.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Apr 25th, 2013 at 01:23:05 PM EST
[ Parent ]
triggers all sorts of terrible things



Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Apr 25th, 2013 at 01:19:44 PM EST
Is there nothing that douchebag can't get wrong?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Apr 25th, 2013 at 03:54:27 PM EST
[ Parent ]
He gets one thing "right": gives "intellectual" support to the financial elite. Which, of course, will have many advantages for himself.

Regarding this R/R thing: the same. The ongoing asset/power stripping away from the middle classes to the top requires some kind of authority source. It so happens that R/R was the available crap at the moment.

In the past authority came from religion, now comes from science. R/R served that purpose for the time needed. Now there will be the need to replace it.

Surely there will be a lap dog in the fields of religion economics (or in the Ferguson case, history) that will provide a "precise", "rigorous", "mathematically proven", "intellectually irrefutable" case the current power clique.

by cagatacos on Fri Apr 26th, 2013 at 04:36:26 AM EST
[ Parent ]
"science" (with quotes.) As in having the appearance, trappings or accoutrements of.
Otherwise agree.

-----
sapere aude
by Number 6 on Fri Apr 26th, 2013 at 08:20:01 AM EST
[ Parent ]
Cargo Cult Science.

The Euro will outlivebury us all --- Jean-Claude Juncker
by Migeru (migeru at eurotrib dot com) on Fri Apr 26th, 2013 at 08:33:29 AM EST
[ Parent ]
Worth re-reading.

Had forgot these gems:
"... the truth will come out."
".. you must not fool yourself - and you are the easiest person to fool."

Was hoping this would be the one with the rats. Thank you.

-----
sapere aude

by Number 6 on Fri Apr 26th, 2013 at 10:39:07 AM EST
[ Parent ]
Without quotes.

This is a systemic problem in science.

It is quite amazing that, for such an important finding, only now replication was attempted.

Now imagine for 99.99% of papers in all areas of science (which are less influential than this one - and thus less replicated). How many Excel errors? This assuming Excel spreadsheets will will be ORDERS OF MAGNITUDE LESS PRONE TO BUGS than say, a small program/script.

All those epidemiological models, genetics, climate, ... [This talking about those I have very close experience]

Quoting an epidemiology professor for a world-wide renowned university: "We are specialists, we do not do bugs"

Gonna drink another glass of wine: Its my way to get sober in this line of work...

by cagatacos on Fri Apr 26th, 2013 at 04:01:05 PM EST
[ Parent ]
It is quite amazing that, for such an important finding, only now replication was attempted.
It's worse than that:
When we couldn't make sense of their results, Yeva wrote to them to get the data. After all, their book touted their contribution to good research by proclaiming they were accumulating all this data for the good of humanity. They ignored our request. I have heard from several other researchers that Rogoff and Reinhart also ignored their repeated requests for the data.
(Randy Wray) But that lack of transparency is also par for the course in science...

The Euro will outlivebury us all --- Jean-Claude Juncker
by Migeru (migeru at eurotrib dot com) on Fri Apr 26th, 2013 at 04:26:22 PM EST
[ Parent ]
In science, serious fuckups get caught not in replication so much as when more models are built on top of the previous model and fail to perform as expected. (It is highly improbable that the later-generation model would have bugs in the implementation that lead to the same output errors.)

The problem in economics is that economists are kinda bad at the whole "checking your models' performance against reality" thing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 09:02:26 PM EST
[ Parent ]
... it is a major problem that important public policy decisions are made based on single papers/pilot studies/experiments (the current Danish teacher lockout may turn out to be an example of precisely this).

Papers are to the scientific literature what anecdotes are to data.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 09:08:11 PM EST
[ Parent ]
If you are lucky...

In some cases people are happy to bring to the table different models, that do not have to be compatible.

For instance, my perspective on malaria treatment (which is the related to the spread of drug resistance) might lead to a (totally) different model from someone that is worried with counting deaths (I do not even look at humans in my models ;) ).

Different models might lead to totally different conclusions. And this is OK: different perspectives often lead to totally different models and totally different results. It is a matter of POLICY to opt from those models and make an informed choice.

This is, of course, the theory. The practice is that many (all?) models have not been verified by second parties and can be totally bonkers from a technical perspective.

And this is before we get into the politics of the thing. An example:

The top scientist in my field (the "pope"), is the editor of the most prestigious journal for the subject. We will never accept papers that go astray from his line (even if the reviewers are positive), furthermore when dwelling in my sub-area (models of spread of drug resistance) he will cajoule collaborators to get to design the models that give the results that he wants.

You can imagine how highly cynical I have become...

by cagatacos on Sat Apr 27th, 2013 at 07:36:12 AM EST
[ Parent ]
Gonna drink another glass of wine: Its my way to get sober in this line of work...

And further calibrate your bullshit detector, I presume.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 27th, 2013 at 09:56:16 AM EST
[ Parent ]
Economics is science only in its own mind.  Every scholarly publication in the field is a variation on The Journal of Irreproducible Results.
by rifek on Wed May 8th, 2013 at 09:56:20 PM EST
[ Parent ]
The one thing he's gotten right is the investment account he's built from his intellectual prostitution.
by rifek on Wed May 8th, 2013 at 09:53:36 PM EST
[ Parent ]
The end of austerity: the start of opportunity? | David McWilliams
But even in the face of reality, the proponents of austerity had to come up with a faux theory as to why austerity was necessary. The main plank of this was research by two economists from Harvard, Ken Rogoff and Carmen Reinhardt, who came up with research saying that historical data indicates that when debt-to-GDP ratios rise over 90pc, the economy of the country falls. This was taken as gospel until last week when other economists looking at the same data proved that Rogoff and Reinhardt had made some elementary statistical mistakes and there was precious little evidence to indicate that a certain national debt figure triggered economic Armageddon.


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Apr 25th, 2013 at 01:30:45 PM EST
Actually, I think the story that R-R was important to the setting of policy (as opposed to the justification of policy) is an apology for the elites.

Policy makers had already decided that austerity - largely code for reducing the power of the working class by cutting benefits, becoming more competitive etc, etc (also the same policy as when times are good) - was the policy to follow. R-R was a useful media tool to justify that. They weren't mislead by theory.

by Colman (colman at eurotrib.com) on Thu Apr 25th, 2013 at 01:58:23 PM EST
To amplify: there has been no particular change in the policy advocated by the serious people since ET has started: "reform" and "austerity" are all about reducing labour power and increasing the proportion of the pie that goes to those who control the capital. (As opposed to those who own it, which is a whole other kettle of sharks). Same thing every time. In the name of competitiveness, free markets and the greater good.
by Colman (colman at eurotrib.com) on Thu Apr 25th, 2013 at 02:11:20 PM EST
[ Parent ]
"reform" and "austerity" are all about reducing labour power and increasing the proportion of the pie that goes to those who control the capital. (As opposed to those who own it, which is a whole other kettle of sharks).Same thing every time. In the name of competitiveness, free markets and the greater good.

I've been thinking for a while that there's a point to be made on the validity of this argument, which reveals a great deal about the nature of "redistribution" in modern economies.  It goes something like this:  If the problem is excessive labor power draining investment capital, then this should be reflected in an absence of uninvested capital.  After all if the idea is that this is a supply side issue, then there must be proof that there is an absence of supply, e.g. investment capital.

Yet, the fact is that companies have massive amounts of cash on hand.  Look at Apple $145 billion cash on hand with a market cap of $384 billion. It's substantially more complex than this, however in a nutshell, the problem isn't supply, it's demand.  That is to say that there is plenty of capital available for investment, it's just that investors are sitting it out because of investment opportunities brought on by reduced consumer spending. In short they have their argument bass ackwards.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Apr 25th, 2013 at 04:05:22 PM EST
[ Parent ]
Well, ignoring the specific example of Apple which has a pile of other factors mixed in, of course they have their argument backwards. They have all their arguments backwards, long-term. But when the longest  time frame anyone cares about is two years, that's what you get.
by Colman (colman at eurotrib.com) on Thu Apr 25th, 2013 at 04:37:51 PM EST
[ Parent ]
But when the longest  time frame anyone cares about is two years, that's what you get.

So what drives this short term mentality, then?  I'd say that it's financial markets which see profit in rapid changes in stock valuation, and in the derivatives trade.

Here's an idea.  First, target the derivatives market and flash trading through a financial transactions tax and greater regulation of derivatives. Second, change the tax treatment of dividends and capital gains, so that the former is tax more leniently than the latter.  

That way, firms will have an incentive to focus on long term ability to produce a profit, aka yield a divided, rather than trying to pump share prices.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Apr 25th, 2013 at 05:44:17 PM EST
[ Parent ]
...change the tax treatment of dividends and capital gains, so that the former is tax more leniently than the latter.  

Institutions hold ~60% of Apple.  If the taxation on dividends is lowered it would increase the flow of money from the Real Economy, e.g., Apple, to the financial sector, e.g., Mutual Funds.  Apple has $145 billion, give a little take a little, sitting around that they could use to fund basic research at (roughly) the same level as the US government for 24 years.  

I'm not saying this is something they absolutely have to do but, IMO, this would be a better use of the money than essentially throwing it away.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Apr 26th, 2013 at 12:48:26 PM EST
[ Parent ]
As long as share buybacks are legal and taxed only at the low capital gains rate, nothing prevents Apple from pissing that money away anyway.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 01:23:34 PM EST
[ Parent ]
True.

(and accurate, as well!  :-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Apr 26th, 2013 at 01:36:34 PM EST
[ Parent ]
If the taxation on dividends is lowered it would increase the flow of money from the Real Economy, e.g., Apple, to the financial sector, e.g., Mutual Funds.

Disagree strongly here. First, basic research is almost always a state run affair because companies can't stomach the uncertain returns. Freeman makes this point rather strongly in his Economics of Industrial Innovation. The role of companies is in commercialization.

The irony here is the entrepreneur worships that goes on in the tech sector and others which rely upon inputs of raw science is that they are utterly dependent upon the state because in the absence of fresh inputs of basic research, they wither and die.  Despite the worship of the market, the fact of the matter is that these the products created by these industries emerge not to supply market demand, but in order to create it.

Now on the issue of dividends, the issue that I would take is this.  Apple may be able to borrow once or twice to pay its dividends, but this isn't a sustainable long term strategy.  In the end, companies have to earn a profit in order to yield a dividend. That's the mechanism whereby we shift the time horizon at work in corporate boardrooms which has fueled the growth of the financial sector through speculation based on even minute changes in share prices in fractions of a second.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Apr 27th, 2013 at 11:38:18 AM EST
[ Parent ]
It's not lack of investment opportunity, it's systemic greed.

As Migeru memorably said once, the Country Club billionaire set spend all their time on the golf course comparing return on investment. There are a lot of conversations that go 'Oh, you only get 10%? I got 15%..."

And so on.

These people are utterly insulated from working reality, and either have no idea that getting a 10% return means impoverishing people who work, and raising unemployment for those who don't.

Because they also own the banks, and banks own governments, they get to set policy to increase their nominal returns still further.

Apart from a minority of venture capitalists who enjoy the whole startup soap opera thing - the thrills and spills, the long hours, the drama - most of the super-rich want as much cash for as little risk as possible.

And the rest are outright crooks and spivs. (q.v. oligarchs - British, Russian, US, German, etc.)

So I don't see much interest in investment in the traditional industry-building sense. It's more likely there are increasing piles of cash spinning around in ever-decreasing leveraged and shady circles, getting further and further away from genuine reality-based economic activity.

Oh - and I'm fairly sure there are a good few outright evil types who enjoy screwing and torturing the helpless poor.  (Often literally.)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Apr 25th, 2013 at 04:59:47 PM EST
[ Parent ]
It's not lack of investment opportunities, it's hoarding on a massive scale. Which is hugely deflationary. The whole point of Keynesian deficit spending and monetary expansion is to fight the effects of hoarding.

The Euro will outlivebury us all --- Jean-Claude Juncker
by Migeru (migeru at eurotrib dot com) on Thu Apr 25th, 2013 at 05:21:28 PM EST
[ Parent ]
I'd propose a longer chain at work here.  

Demand Destruction > Lack of profitable investment opportunities> Hoarding of cash.

The bottom line is the same though.  Something has to be done to increase aggregate demand.

The problem with a traditional Keynesian response is that economies are substantially more interconnected than in the past. Will the demand created by Keynesian deficit spending be concentrated in the national economy, or dissipated into the global economy.  There's a free rider problem if the demand created by deficit spending is satisfied through imports, because the national economy has specialized away from the sectors where deficit spending will create demand.

We need a more sophisticated version of Keynes that targets countercyclical spending to areas that will be supplied by the national economy.  Or, we need a coordinated international effort.  Politically speaking the former is considerably easier to muster than the latter.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Apr 25th, 2013 at 05:36:43 PM EST
[ Parent ]
We need a more sophisticated version of Keynes that targets countercyclical spending to areas that will be supplied by the national economy.  Or, we need a coordinated international effort.  Politically speaking the former is considerably easier to muster than the latter.
Easy: use deficit spending to finance non-tradeable goods and services. For instance, education and healthcare and infrastructure.

Not unlike the Civilian Conservation Corps, the National Works Administration and other New Deal programmes...

I mean, it's not rocket science, it's been done before.

The Euro will outlivebury us all --- Jean-Claude Juncker

by Migeru (migeru at eurotrib dot com) on Thu Apr 25th, 2013 at 06:02:20 PM EST
[ Parent ]
MFM:
Demand Destruction > Lack of profitable investment opportunities> Hoarding of cash.

The bottom line is the same though.  Something has to be done to increase aggregate demand.


Migeru:
Easy: use deficit spending to finance non-tradeable goods and services. For instance, education and healthcare and infrastructure.

More difficult but better: tax corporate cash in excess of 20& of yearly earnings by, say, 30%/year. If corporations have made such a mess of things that they are afraid to invest their earnings then the national government should spend it for them. I know, we would also have to have effective capital controls to do this, but that is a social good in and of itself.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 25th, 2013 at 10:01:12 PM EST
[ Parent ]
Why tax corporations? Create the fiat money and spend it. If this causes the corporations to spend their cash in order not to lose it to inflation "opportunity cost" so much the better. You then can stop creating and spending fiat money.

I have read one of the reasons American corporations have so much cash is that they are not taxed on subsidiary earnings until the earnings are repatriated to the parent. Thus, they have accumulated a huge amount of cash outside the US that they can't repatriate and can't use. Boo fucking hoo.

The Euro will outlivebury us all --- Jean-Claude Juncker

by Migeru (migeru at eurotrib dot com) on Fri Apr 26th, 2013 at 02:42:22 AM EST
[ Parent ]
Apparently Apple are going to borrow money to pay dividends to their shareholders rather than repatriate money.

Of course, if they repatriated it and paid tax on it, shareholders would sue them for not managing their cash properly. The system may just be fucked up.

by Colman (colman at eurotrib.com) on Fri Apr 26th, 2013 at 02:57:15 AM EST
[ Parent ]
may?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 26th, 2013 at 12:21:03 PM EST
[ Parent ]
Colmanian litotes.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 27th, 2013 at 07:29:29 AM EST
[ Parent ]
Afewian oxymoron?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Apr 27th, 2013 at 07:48:12 AM EST
[ Parent ]
Well, R&R have proved to be Occimorons after all.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Sat Apr 27th, 2013 at 10:39:10 AM EST
[ Parent ]
Create the fiat money and spend it.

This is certainly a simpler solution. There is no need to deal with the intractable problems of 'globalization' and it both revives the economy substantially while providing desperately needed social services to those hurting the most. But it does not deal with the impunity of the corporations, which is important, given the power they wield in the world.

A true solution requires that finance and the corporations effectively be brought back under the rule of law. That has to mean more than just the ability of those corporations and the financial sector to change the law to legalize any behavior they want and to capture the government so as to veto any prosecution they dislike. Right now the can and do criminalize any effective effort to attack their power.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 26th, 2013 at 12:37:31 PM EST
[ Parent ]
Easy: use deficit spending to finance non-tradeable goods and services. For instance, education and healthcare and infrastructure.
Not unlike the Civilian Conservation Corps, the National Works Administration and other New Deal programmes...

Not so easy.  Article II of the WTO Agreement on Government Procurement means that this can't be done as before.

Government procurement can not be limited to the national economy.  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Apr 26th, 2013 at 05:57:36 AM EST
[ Parent ]
Article III I should say.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Apr 26th, 2013 at 05:57:51 AM EST
[ Parent ]
And I suppose there's a reason to care what GATT rules say?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 06:09:47 AM EST
[ Parent ]
Yes.

This means that stimulus plans can't be targeted specifically to national industry, creating the a significant free rider problem.

Why would a nation go deeply into debt for stimulus when they can't be sure that it will actually stimulate their economy?

And why would other countries no simply benefit from the stimulus efforts of other countries instead of mounting their own?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Apr 26th, 2013 at 06:51:36 AM EST
[ Parent ]
This means that stimulus plans can't be targeted specifically to national industry, creating the a significant free rider problem.

First, this is what a managed floating currency does for you.

Second, WTO rules don't create those problems unless they are enforced. And short of anchoring an aircraft carrier in the Bay of Biscay, there's bugger all that can be done to enforce them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 06:54:24 AM EST
[ Parent ]
I actually do take the opposite view. The major structural problem is the WTO. It is a bit like the elephant in the room that nobody recognizes.

The WTO and the view of globalization it enforces is precisely what is causing much of grief (e.g. manufacturing base going elsewhere).

And, while it cannot be enforced in an extreme case, it has been the main driver of the destruction of the middle classes (global labour arbitrage) and the rise of the global uber-wealthy.

It is also politically supported by the financial elites while staying completely invisible in the political discourse.

Yes, there might be a day where it will be ignored. But until then it is THE BIGGEST problem in my view.

Between the EU and the WTO, I would prefer the EU even in its worst days.

by cagatacos on Fri Apr 26th, 2013 at 07:45:46 AM EST
[ Parent ]
No problem for the UK: just withdraw temporarily....
by gk (gk (gk quattro due due sette @gmail.com)) on Fri Apr 26th, 2013 at 06:14:46 AM EST
[ Parent ]
After all, human rights have a "best before date" like any consumer good.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Apr 27th, 2013 at 07:50:15 AM EST
[ Parent ]
This is the mirror image of the first argument I presented in The Politics of Competitive Austerity and Class War where competitive devaluations were being replaced by (more damaging) competitive deflations in a fixed exchange rate currency area to try to reduce the cost base and improve competitiveness and where some of the costs of deflation are exported to trading partners whose exports are also damaged.

From a national perspective, reflationary policies can be inefficient if they just suck in exports from abroad and don't therefor help domestic industry. One Irish economist famous described car scrappage schemes (to help the Irish motor trade retail sector) as being about as sensible as Gucci handbag scrappage schemes in terms of the increased economic activity they stimulated in Ireland.

So ironically, we actually need the EU to promote coordinated stimulatory or reflationary policies which are efficient in terms of the EU as a whole in terms of generating jobs within the EU - the precise opposite of what the EU has been doing - which has been to enforce deflation wherever possible. It makes sense for the German Government to resist reflationary policies if the intent and effect is largely to help peripheral economies, but why is the EU also singing from the same hymn sheet?

It was Gandhi who said that "an eye for an eye just makes everyone blind". Effectively, austerity policies have achieved just that.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 02:20:02 PM EST
[ Parent ]
We need a more sophisticated version of Keynes than the Samuelson-Krugman version based on Hicks' IS/LM... such as, for instance, the original version of Keynes.

The Euro will outlivebury us all --- Jean-Claude Juncker
by Migeru (migeru at eurotrib dot com) on Thu Apr 25th, 2013 at 06:04:57 PM EST
[ Parent ]
Will the demand created by Keynesian deficit spending be concentrated in the national economy, or dissipated into the global economy.

This is what managed floating currency policy does for you: Ensure that you get to keep the demand you provide to the world economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 02:35:43 AM EST
[ Parent ]
Yep.  Because no sane company is going to invest in production in the face of crumbling demand.  Any CEO who did would be fired and immediately appointed head of PIMCO.

And I'd add: From a policy perspective, it seems to me that the fact that it's a demand-side issue should be a good thing, if we weren't all ruled by nutbags.

The argument is always made against Keynesianism that government intervention is too complex -- one can't expect Congress and the President, beholden to interests as they are, to properly craft intervention even if it is theoretically possible for good intervention to take place.

But asking the same parties to manage the intricacies of the tax code in service to supply management is apparently a-ok.  (Cue the LOLwut Pear.)

The strength of the ideas lies in their adaptability to the crudeness of political reality.  "Pull this lever."  That's it.  Sure, we'd love it if you built high-speed rail lines and new sewage treatment plants and all that great stuff.  But, really, just spend the damned money to put money in people's pockets.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Apr 25th, 2013 at 06:04:30 PM EST
[ Parent ]
True, but they were an important part of the sales pitch to the sheeple, generating the false fear that kept the masses supporting policies obviously against their own interest.
by rifek on Wed May 8th, 2013 at 09:59:39 PM EST
[ Parent ]
I'm sure many of you have seen PIMCO's El Erian's article: http://finance.fortune.cnn.com/2013/04/19/imf-mohamed-el-erian/

And Gabriel Sterne from the IMF:

http://www.exotix.co.uk/uploads/130419imfreformexotix.pdf

He essentially claims this is all a sop for certain well-heeled players who had their backsides exposed.

by Upstate NY on Thu Apr 25th, 2013 at 05:47:49 PM EST
The IMF needs to overcome its bipolar personality.

LOL, that's pretty rich coming from the CEO of PIMCO.

How's that US bond dump working out for ya, Mo?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Apr 26th, 2013 at 03:41:44 PM EST
[ Parent ]
PIMCO forecasts and reality are within shouting distance of each other only by coincidence.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 26th, 2013 at 09:03:06 PM EST
[ Parent ]
I had the Krugman piece bookmarked for use in a comment tonight! Thanks a lot, Frank. As to your question:
Is this what "thought leadership" in the western world is reduced to?

The process of 'leadership creation' seems to be one of finding some one or some group that is saying things that wealthy elites like and then seeing that they get a barrage of promotion via owned media and paid sycophants, followed quickly by adoption of those 'leadership thoughts' by rented politicians.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 25th, 2013 at 07:23:30 PM EST
From Herndon's answer to the "rebuttal":
"We know nothing whatsoever about their motives, and did not speculate on this at all in our paper."

I'm going to choose to hear "I couldn't possibly comment"

The baseball analogy actually drives home the level of "selective"ness and "unconventionality" very well.

-----
sapere aude

by Number 6 on Fri Apr 26th, 2013 at 08:16:16 AM EST
It is important for the chief debunker of R-R to appear completely objective, neutral, factual, scientific and even to understate their case just a little so they cannot be dismissed as partisan. You will note I didn't feel similarly constrained in my commentary!

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 09:17:13 AM EST
[ Parent ]
Although it must be embarrassing for Harvard Professors to have their data selection, statistics and arithmetic corrected by some grad students...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 09:19:22 AM EST
[ Parent ]
Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

OK, Reinhart and Rogoff have said their piece. I'd say that they're still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates - but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the "eek! 90 percent!" rhetoric that was used to justify sharp austerity right now. Sorry, guys, but with so much at stake you have a responsibility not just to put stuff out but to make crystal clear what you think it implies for policy.

What was new in this piece, however, was the creation of a straw man. R-R:

The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.

Who are these "some liberal economists"? As far as I know, none of their prominent critics have made that particular argument. It has always been about the effects of sustained low growth, for whatever reason, on debt ratios.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 09:26:32 AM EST
RR:
The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.

There IS another truth in this. Long lasting high-debt episodes are to be expected from policies favoring those with money to lend. But the problem now is that the successful pursuit of differential accumulation by wealthy elites, coupled with 'regulatory forbearance' courtesy of captured governments has led to a situation where we have Zero Interest Rate Policies with QE for the rich only. The lesson seems to be: Its OK to print money if the money only goes to the rich. But it should never be stated so crudely.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 26th, 2013 at 01:15:47 PM EST
[ Parent ]
I see Krugman is starting to catch up with my argument in The Politics of Competitive Austerity and Class War:

The 1 Percent's Solution - NYTimes.com

But it's not just a matter of emotion versus logic. You can't understand the influence of austerity doctrine without talking about class and inequality.

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask -- a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security -- that is, "entitlements" -- while the public at large actually wants to see spending on those programs rise.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 02:35:02 PM EST
Where I followed a link to a piece by R&R:

Debt, Growth and the Austerity Debate - NYTimes.com

The politically charged discussion, especially sharp in the past week or so, has falsely equated our finding of a negative association between debt and growth with an unambiguous call for austerity.

We agree that growth is an elusive goal at times of high debt. We know that cutting spending and raising taxes is tough in a slow-growth economy with persistent unemployment. Austerity seldom works without structural reforms -- for example, changes in taxes, regulations and labor market policies -- and if poorly designed, can disproportionately hit the poor and middle class. Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists.

In some cases, we have favored more radical proposals, including debt restructuring (a polite term for partial default) of public and private debts. Such restructurings helped deal with the debt buildup during World War I and the Depression. We have long favored write-downs of sovereign debt and senior bank debt in the European periphery (Greece, Portugal, Ireland, Spain) to unlock growth.

In the United States, we support reducing mortgage principal on homes that are underwater (where the mortgage is higher than the value of the home). We have also written about plausible solutions that involve moderately higher inflation and "financial repression" -- pushing down inflation-adjusted interest rates, which effectively amounts to a tax on bondholders. This strategy contributed to the significant debt reductions that followed World War II.

In short: many countries around the world have extraordinarily high public debts by historical standards, especially when medical and old-age support programs are taken into account. Resolving these debt burdens usually involves a transfer, often painful, from savers to borrowers. This time is no different, and the latest academic kerfuffle should not divert our attention from that fact.

Wheter they have been arguing for that, or they are now backing off from austerity is for others to find out (I don't care enough to go through their writings), but if this is a consistent position it is even more remarkable. Then their 90% rule has not been copied from them, but is a quite clever distortion. And if so, then the ways intellectual foundations are built are even more substanceless. The 1% does not even need pet academics, all they need are academics who will not yell (at least not loudly enough) if their findings are taken out of context.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Apr 26th, 2013 at 03:01:54 PM EST
[ Parent ]
I have added a picture of Rogoff at Davos to the top of the diary to illustrate the degree to which they basked in the glow of 1% adulation. Everything he says in your above quote is a distraction from their core problem: They made serious mistakes in their seminal paper which predicted a growth cliff at 90% debt and which resulted in them becoming media superstars as a result. All else is bluff and bluster.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 03:24:34 PM EST
[ Parent ]
They unambiguously called for austerity in their WSJ article and in their testimony to Congress. They are just trying to wriggle out of the consequences of their fraud.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Apr 27th, 2013 at 04:10:22 AM EST
[ Parent ]
Needs to be emphasised as well that it's not just about excel errors, they made data choices and calculations designed to prove the case for austerity - and damn the science.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Apr 27th, 2013 at 04:46:47 AM EST
[ Parent ]
But the somewhat unimportant excel error was quite decisive in the public arena - it made the whole controversy accessible to the press.
by IM on Sat Apr 27th, 2013 at 04:49:39 AM EST
[ Parent ]
Like, how hard is it to average a set of numbers in a table?

But even more seriously, they refused to release their data set to other researches who were having difficulty replicating their results.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Apr 27th, 2013 at 07:53:55 AM EST
[ Parent ]
We are talking about the press here. people who think Friedman at the NYT or Samuelson at the Wapo are competent to comment on economic matters. And these papers are only pars pro toto here.

So a nice thing like excel - something even people at neswpapers use - is heaven send. Just imagine they had used some other program to miscalculate.

by IM on Sat Apr 27th, 2013 at 08:18:54 AM EST
[ Parent ]
Yep. In terms of the mainstream media, Excel was the key.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 27th, 2013 at 08:52:37 AM EST
[ Parent ]
Like, how hard is it to average a set of numbers in a table?

This is the point I keep making.  Everybody in the press keeps saying, "Their analysis is flawed."  My response is, "What analysis?"  They didn't fucking do anything!  They took a bunch of time series data, lumped it into debt/GDP buckets and pretended as though it was panel data -- and then they just averaged it all out for each bucket!

There are high-school stats students who could call bullshit on this.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Apr 29th, 2013 at 10:06:01 AM EST
[ Parent ]
Well yes - they're propagandists who lie for cash and status.

Why is this a surprise, especially from 'respected academic economists'?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 29th, 2013 at 10:17:43 AM EST
[ Parent ]
Yeah, but the least they could've done is faked it better.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Apr 29th, 2013 at 10:38:21 AM EST
[ Parent ]
Why? The people who matter are not going to audit theit work...

The Euro will outlivebury us all --- Jean-Claude Juncker
by Migeru (migeru at eurotrib dot com) on Mon Apr 29th, 2013 at 10:49:35 AM EST
[ Parent ]
They're probably following some curve of maximal academic-whore utility, or something.

Or I suppose it's possible they Really Believe - which may make them even more dangerous.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 29th, 2013 at 12:18:54 PM EST
[ Parent ]
No need to fake.
No need to double check he results because they fitted their pre-conception of reality.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 29th, 2013 at 02:40:39 PM EST
[ Parent ]
Well yes - they're propagandists who lie for cash and status.

That is why it made sense in the late 19th Century and early 20th Century for John D. Rockefeller, J.P. Morgan, et al. to endow major private universities so that they could hire the 'right' people to staff the economics departments, create Neo-Classical Economics and then proceed to anoint as 'serious' those graduates who professed views the donors found congenial. Little has changed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 29th, 2013 at 10:43:33 AM EST
[ Parent ]
Dean Baker comments:

>Reinhart and Rogoff Are Not Being Straight     

Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn.<

http://www.cepr.net/index.php/blogs/beat-the-press/reinhart-and-rogoff-are-not-being-straight?utm_so urce=feedburner&utm_medium=feed&utm_campaign=Feed:+beat_the_press+(Beat+the+Press)

by IM on Fri Apr 26th, 2013 at 03:22:42 PM EST
Meanwhile they got star treatment at Davos and on the media generally.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Apr 26th, 2013 at 03:26:48 PM EST
[ Parent ]
Yes and now they will be shunned!

Ha, ha.

The joke is on us.

by IM on Fri Apr 26th, 2013 at 03:33:51 PM EST
[ Parent ]
Interesting. Just read a transcript of an interview with Julian Assange in which he explained the complexity of offshore accounts as "the need to censor outrage."

I see RR as doing the same for political economics, hiding the behavior of the elites from the parasitized masses, so they won't rebel. Just like FDR's sops to the masses.

But it's getting harder to hide the realities of greed, innit?

Best to destroy trust in science preemptively.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Fri Apr 26th, 2013 at 10:33:01 PM EST
Yes folks the media failed on us. Again. But what's new? What's new is the fact that this is also the failure of the Peer Review process. Bad science like this should never published, but in all likelihood the reviewers either didn't read the article or didn't understood it. And even worse, we have supposedly top scientists using Excel as their working tool. This is Science that stinks of corruption.

You might find me At The Edge Of Time.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Sat Apr 27th, 2013 at 03:51:29 AM EST
It never was published. It started life as a conference proceeding and then became a working paper (itself an, uh, interesting career path for a supposedly reputable paper).

You can get any old shit published in conference proceedings.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 27th, 2013 at 03:58:23 AM EST
[ Parent ]
I agree with you in a general sense, however, as Jake says, this was not peer-reviewed. The problem is that peer-reviewed papers are used as a camouflage for these rather politically motivated other publications.

res humŗ m'ťs aliŤ
by Antoni Jaume on Sat Apr 27th, 2013 at 03:08:25 PM EST
[ Parent ]

Austerity is not the only answer to a debt problem
By Kenneth Rogoff and Carmen Reinhart
It is more complicated than that, write Kenneth Rogoff and Carmen Reinhart

The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is), then high debt is not a problem. Looking beyond the recent public debate about the literature on debt - we have already discussed our results on debt and growth in that context - the debate needs to be reconnected to the facts.

(...)

To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched - if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives.

Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. 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.

Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction. This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth.

(...)

Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained.

After all the whining and ad hominems (what's an "ultra-keynesian"?), they do come with one interesting idea:


governments must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US. For Europe, in particular, any reasonable endgame will require a large transfer from Germany to the periphery. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.

A lot of backpedalling to salvage their reputation...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed May 1st, 2013 at 05:34:10 PM EST
Jerome a Paris:
The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is), then high debt is not a problem.

As Krugman keeps saying, they keep building straw man arguments to try and make their critics look unreasonable. Even ultra-Keynesians - presumably a dig at Krugman - do not argue that high debt is never a problem: simply that it is not THE problem which must be addressed when you are in a liquidity trap. MMT may be a more legitimate target here.

It is also somewhat disingenuous to point to the difficulties peripheral Eurozone economies have with high debts when their problem is not necessarily the debt itself, but the fact that they can't print money to devalue and reflate their way out of recession.

None of these issues apply to the US economy where their ideas where most influential and which was the target audience for their policy prescriptions.

And let us not lose sight of the core fact: however "reasonable" they would like to seem now, they were WRONG, WORNG, WRONG with their core analysis when they had maximum influence, and a lot of damage has been done.  Their influence on future policy is likely to approach the zero bound, so what policies they prescribe now is irrelevant to the argument.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu May 2nd, 2013 at 04:43:59 AM EST
[ Parent ]
MMT'ers don't say that debt is never a problem. Just that sovereign debt is never any more or less important than any other form of government money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 2nd, 2013 at 06:50:22 PM EST
[ Parent ]


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