Professors that immediately decide that the student is wrong, and must be convinced otherwise.
The spreadsheet financial analysis that provided the expected results and therefore never checked for errors.
A single study that gave economists, and clearly an awful lot of politicians, the confirmation they needed to strengthen their resolve in the face of opposition.
A single study that gave economists, and clearly an awful lot of politicians, the confirmation they needed to strengthen their resolve in the face of opposition.
Confirmation bias, at least in the politicians' cases, it just provided them with extra confidence to proceed with their agenda. Well, it may have also lent them some legitimacy.
I'm too much of a layperson in statistics and economics to tell, at this early in the morning without coffee, how much of this is eloquent backtracking BS:
> So do where does this leave matters on debt and growth? Do Herndon et al. get dramatically different results on the relatively short post war sample they focus on? Not really. They, too, find lower growth associated with periods when debt is over 90% (they find 0-30 debt/GDP , 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; over 90, 2.2%. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt. They ignore the fact that these results are close to what we get in our Table 1 of our AER paper they critique, and not far from the median results in Figure 2 despite its coding error. And they are not very different from what we report in our 2012 Journal of Economic Perspectives paper with Vincent Reinhart—where the average is 2.4% for high debt versus 3.5% for below 90%
Related question: From what I understand, all the study is doing is that it's saying on an average countries with high debt / GDP have a slightly negative growth rate. But isn't that just one data point and not a justification for austerity itself?
Note the phrase "associated" in the excerpt:
"They, too, find lower growth associated with periods when debt is over 90%"
This episode emphasizes that the original study found no causality; one would expect a country with low growth to need to rely more on debt and less on tax revenues to fund government, especially if expenditures were planned based on a higher-growth scenario.
So what is the alternative to lowering "consistently high public debt"? Monetize it? Default on it?
Debt in itself is not a problem if the growth rate is the same or decreasing as a proportion of the economy. At the current rate, some obligations would have to be forfeited, either to the direct creditors, or to those promised social services. Strangling the economy further with high taxes only makes the problem worse.
I think most of the damage from so-called "austerity" has been decisions taken with little warning and at the very last possible moment.
I'm Portuguese, and the amount of people here that think that "if the financial crisis in the US didn't happen we wouldn't have a problem" is mind-boggling.
Because apparently having your debt rise from 50% to 70% of GDP in 7 years without recessions or crisis (2000-2007) [1] and running a budget deficit that never went below 3% [2] isn't a sign of a problem...
Portugal entered the euro, and a couple of decades of economic stagnation while companies switch from producing cheap labor shoes to high value added goods was to be expected. Portugal did surprisingly well up until 2007, with small but consistent GDP growth and was clearly on the road to being a more evolved economy. 2007 saw a growth of 2.4%, by all measures good for an economy in transition.
During the transition, some debt accumulation would be tolerable. Levels up to 120% were, prior to Reinhardt Rogoff considered acceptable.
As such, the view that the timing of the financial crisis was particularly unfortunate for Portugal is, in my view, entirely correct.
> During the transition, some debt accumulation would be tolerable. Levels up to 120% were, prior to Reinhardt Rogoff considered acceptable.
I may be rusty on my Keynesian Economics professor's lessons, but shouldn't you reduce government deficits in expansion times, so that you can safely let the stabilizers kick in if you enter a recession?
> As such, the view that the timing of the financial crisis was particularly unfortunate for Portugal is, in my view, entirely correct.
Of course it was unfortunate, because the country (both public and private sector) were incredibly leveraged. Which is completely different than saying that it was the cause.
Pleases note that the banking system is Portugal didn't suffer as much as the Spanish or Irish, e.g. In fact, the banks that were nationalized in Portugal were the result of deliberate fraud (Ponzi-like schemes), not just irresponsible behavior.
> I may be rusty on my Keynesian Economics professor's lessons, but shouldn't you reduce government deficits in expansion times, so that you can safely let the stabilizers kick in if you enter a recession?
Exactly my point. There was no expansion in the '00 decade, so debt growth was ok.
> Of course it was unfortunate, because the country (both public and private sector) were incredibly leveraged. Which is completely different than saying that it was the cause.
But the cause is also not a high debt level. Portugal was caught in a fragile state when a much wider crisis exploded.
Your chart is not the right one to observe the economy conversion success. This one is: http://i.imgur.com/ltAX8fe.png
(it's the same data, viewed as YoY variation)
During the financial crisis, irrespective of our level of public debt, the bond rates were actually such, that people were basically PAYING the federal government to borrow money.
Instead, we had politicians on an austerity tear, and ranting about how we needed to reduce the national debt. We could have borrowed a big chunk of money, earned the interest off of it, and then just turned around and paid back the principle.
If Republicans actually believed in running the Government like a business (they don't, but they say it), it's almost criminal that we didn't take advantage of the opportunity.
One of the reasons rates have remained so low is because the Federal Reserve has bought over 3 Trillion in debt including just shy of 2 Trillion dollars of the US Governments debt. If debt isn't a problem then why is the Federal Reserve continuing to buy US Treasuries which has the effect of suppressing interest rates.
Yes they say it, but the opposing party opposes it. The Democrats most certainly do not wish to run the government as business but as more of a piggy bank that someone else fills each night. Therefore, even if the Republicans wanted to do such a thing they likely cannot.
But, as you say, they haven't been very serious about such an idea for quite a while.
That's a pretty unsophisticated understanding of liberal and/or Democratic politics and policies.
The broader point is that nobody actually wants to run the Government like a business (nor is that necessarily a good idea in aggregate). But even at the points where it makes sense for the government to behave in a business-like manner (and there are some), we do not and cannot get our shit together to do so.
Isn't monetizing it exactly what we're seeing today? Looks an awful lot like a currency-war to me. Everyone is trying to debase their currency and export their way to prosperity. The US accuses China, and vice versa (QE 1,2,3, etc). Japan just promised to effectively double their monetary base last week. What is the alternative to lowering debt? I don't know but all this printing will surely cause money to flow to otherwise less productive parts of the economy won't it? If anyone could make some sense out of this, I'm listening.
The real problem is by the time a county has big debts there so used to deficit spending defaulting = austerity. The US borrowed enough money to avoid a significant economic melt down. Long term avoiding pain from borrowing is not sustainable be cause you always want lower taxes and faster growth.
For austerity to work before your forced into it you need a multi decade commitment to gradual spending reductions or significant external stimuli. The US could for example cut military spending by 75% today and still be just as safe. The problem is simply flooding the job market with such people. However cut 3% a year and you have few short or long term problems as people naturally leave jobs and you just avoid highering. Increase the retirement age slowly and the personal impact is minor, cut benefits directly and you destroy lives.
PS: Also slowly cutting back government like that withought reducing taxes reduces short term economic growth. The advantage is keeping a good credit raiting and avoiding default but it's still painful.
It only really takes a few years. We went through "painful" austerity in Canada. Both at the federal level and provincial level. This left everyone hating the federal finance minister and the premier of the province. In the end, the environment was cleaner, the debt problem was tackled, and everyone had a job. (when you compare the late 90's to the early 90's)
Was Canadian austerity like European austerity? Or was it a cut from (making up numbers here) 2x European social services to 1.5, vs Europe's 1x cut to 0.5x?
Austerity is something the government should be practicing in the good times, instead of blowing everything on profligate rubbish. That way when the downturn comes, you're not already saddled with masses of debt and a vast public system that depends upon it.
IMHO, of course, I am am not an economist. Not that they seem to agree on much either.
yep, sustainability is not just for the biosphere, it's for the econosphere too. It's great to provide big benefits to everyone, but then when things turn down, we get the mess we are in today.
Impressive that his two professors took 1 whole month to finally believe him, even though the article gives the impression that the error was obvious (a bad formula).
I suspect that without their co-authorship people wouldn't have read it. I'm not in the academic field but isn't it a signal that they back his work enough to put their name (and reputation) to it?
Is it good for your career to get high impact factor for a paper that admits that your most famous work was a fraud that destroyed the economy of several nations?
The solution is for authors to routinely publish the datasets behind their research.
Unlikely though, for the same reason that Herndon didn't contact Reinhart and Rogoff about the error. Academics are even more interested in getting attention than they are in getting to the truth.
Which is why this episode is more likely to discourage publication of data than encourage it.
> Academics are even more interested in getting attention than they are in getting to the truth.
untrue and insulting
> Which is why this episode is more likely to discourage publication of data than encourage it.
Why would you expect this? It seems more likely that data and the software used to produce results will have to be open sourced and verifiable in the future.
"I checked my e-mail, and saw that I had received a reply from Carmen Reinhart," he says. "She said she didn't have time to look into my query, but that here was the data, and I should feel free to publish whatever results I found."
I think it is about time to create an open and standardized publishing model for academic papers, which also includes the datasets and the code used for all calculations.
The grad student didn't "shake" the global austerity movement. He merely pointed out a minor error in a formula that didn't significantly affect the outcomes of the model. This isn't big news.
Besides, to attack austerity as a "bad idea" is like attacking having a budget for your own home income and expenses. Individuals and families are well-acquainted with the reality that you cannot indefinitely spend more than you bring in. It's idiotic to assume that a government can simply suspend this assumption and not have any consequences. Perhaps a government has a bigger "credit card," but in the end all debts must be paid or defaulted on--just like in the real world you and I live in. It is absolutely essential for a countries long-term economic well-being to keep expenses within the neighborhood of revenue. Yet the far-left seems to persist with the belief that money literally grows on trees, and that surely there's enough to be able to afford every desirable program. They're totally out-of-touch with reality. So they poo-poo the "austerity" movement as just raining on their parade. Just like the Greeks who had the nerve as their country was going down the drain to strike, wave signs around, and complain when the Piper comes to claim his due.
Last point. What we're calling "austerity" really isn't. It's a political fabrication which, in the case of the US (and I suspect many countries), means that the politicians have agreed amongst themselves to merely not increase the rate of spending as much as they had initially planned on. This is what they call "savings" and "cutting the deficit." I think people living in the real world would agree that such a definition is ridiculous. How can you be cutting the deficit when you're merely reducing the rate of the GROWTH in spending, not actually reducing the amount of spending. Does that make sense? So if they had planned to increase spending by 7% across the board, they call it "cutting the deficit" if they decide to only increase spending by 3%. Let's be real. Under Obama's recently released budget the US will hit 24 TRILLION in debt in the next decade. That's nearly DOUBLE what we're at today. Where are these horrible, painful cuts that are supposed to be reducing the deficit? Exactly. They're all wrapped up in some political hyperbole that allows the politicians on the right and left to spar without actually doing anything to make our nation more solvent.
You would be surprised how many things that exist around you are based around faulty models based on incorrect data - that's the problem with higher dimensional fields like economics and finance - it's hard to separate cause and effect and extract principal signals for an arbitrary phenomena, without getting bogged down in correlation hell.
You have been warned - the further fields get from pure mathematics and isolated systems - the faultier they must become, and the harder they are to verify (although in this case - it was trivially easy - but then again IIRC the paper wasn't published in a peer-reviewed journal).
Hence, before accepting X new fact in higher dimensional fields - do your own verification first.
Also - who on earth thought austerity was ever a good idea?
If you can afford to borrow - and consumer spending is dead - bring it back. The US should load up on as much debt as possible - I'd love to get cash at a 1-2% interest rate - it's a freaking awesome deal.
who on earth thought austerity was ever a good idea?
Lots of sensible people.
The point of austerity is to stop spending money you don't have on stuff which does not clearly contribute to economic improvement. Every increase in debt must be balanced with a reasonable objective expectation that it will facilitate specific & significant increase in revenue greater than the debt and servicing thereof. If you've spent your paycheck, you buy rice & beans cooked at home instead of swiping the credit card on an expensive dinner out; if your car is out of gas, you borrow just enough to buy just enough get to work (or try walking/biking if at all sensible) instead of filling it up and heading out for an impromptu road trip.
National economics is of course complex and subtle, but the point is basic principles apply: if you don't have the money, don't borrow any unless not doing so will cost you much more, and unless you have a clear plan to pay it off. The Ryan plan (and plans of other austerity backers) is "stop spending money where it won't pay off", as in stop paying people to not work when they could, stop funding obscure/pointless/offensive projects/research/art which wastes money, stop hoping that prolific spending will change for the good.
Wealth is not durable. Spending $1,000,000 to create a $50,000/year job is stupid (and yes, there's a lot of that going on).
You make the common mistake of assuming macroeconomics is just microeconomics at scale. A national economy isn't just a really big household.
There has been no correlation between public debt ratios and the Great Recession or its recovery. The Recession was not triggered by high debts, it has not affected countries with higher debts more severely than countries with lower debts, and attempts to reduce debts since the Recession have resulted in slower growth and - oops - higher debts.
Hmmm, not true. Your simplistic statement falls short of the facts and research. Here's a quote from a very recent paper which refutes (in part) your statement:
"The results of this paper have two important policy implications. First, since the results indicate a positive effect of government investment and a negative effect of government consumption, a reallocation of resources from consumption expenditure to investment expenditure is likely to reduce the growth impeding effects of public spending. Second, as government investment crowds out private investment, US policymakers are faced with a difficult task of finding a combination of public and private investment that minimizes the crowding out effect of public investment. According to the 2009 CBO report [1], all components of government expenditure will continue to grow over time. Therefore, it is imperative to assess the growth effect of government spending, particularly, the effects of key components of government expenditure on growth because the impacts of different types of government expenditure are not the same."
Source: http://www.hindawi.com/journals/econ/2012/383812/
Did you catch that? Government consumption (which is, I would argue, the vast majority of government spending these days and more and more each year) impedes growth; Government INVESTMENT (and not the pseudo-investment that Obama is famous to talking about) enhances growth, but empirically also crowds out private investment.
And yes, while it's much larger and more complex, a national economy really kinda sorta IS a really big household. It still faces very real constraints and consequences. It is not God.
Could you lay out the casual mechanism that this study is claiming, and how they make the distinction between govt consumption and investment?
I'd also like to see an empirical example of the crowding out thesis. The idea that public deficits bid up borrowing rates and reduce private sector borrowing opportunities has been pretty thoroughly debunked.
It's actually not sensible to assume that basic principles apply to things that are complex and subtle.
For example, a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly. Simple, basic, and completely wrong - see for example today's airplanes.
This is not to say that the opponents of austerity must have it all figured out, but rather that history has not been kind to ideas of the form "this complex system must surely follow certain common sense principles".
a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly
Do you have any source for this, or are you making it up? For many centuries, the state of the art in metallurgy was not sufficient for making watercraft, much less aircraft. However this did not stop people using the available technology to make such flying things as arrows.
The idea that the US is running out of money or spending money it doesn't have is a non sequitor. The USG is monetary sovereign that issues it's own currency, and therefore has infinite ability to spend in dollars. Really, it's not even accurate to say the government "has" or "doesn't have" any money. We have an institutional arrangement whereby we cover all spending in excess of taxation by debt issuance, but that is just that--an particular institutional arrangement. The constraint is only inflation--is the USG spending in excess of what the economy's productive capacity can absorb? All available evidence suggests no.
Not to say that waste, corruption, poor capital allocation, etc aren't all legitimate problems. But that's not the question at hand.
I'm not. The private sector generates wealth. One purpose of the government is to facilitate that wealth creation by running deficits to ensure there is sufficient demand for what our productive output supplies (due to growing capacity, income leakages from savings and trade deficits, distributional inequalities, etc)
You mean aside from the essentially unserious nature of his fiscal proposals, which promise to balance the budget by cutting both spending and revenue in such a way that the numbers don't come anywhere close to adding up?
I'm familiar with the Laffer curve, but I'm not sure what point you're trying to make. Under every incarnation of the Laffer curve that has even a passing acquaintance with empirical data, the Ryan tax cuts will sharply cut overall government revenue. That's because the US is already far to the left of the revenue peak. (Indeed, it was already to the left of the peak during the Reagan tax cuts, which also failed to increase government revenue. There's a reason even George H. W. Bush called it "voodoo economics".)
There is no plausible mechanism by which any versions of the Ryan plan we've seen can actually balance the books. It's nothing more than a generous gift to the country's most affluent taxpayers couched in hand-wavy ideological nonsense.
IF that job last longer than 20 years and the salary increases at least in pace with inflation, then why is that so stupid? It's no stupider than a home mortgage lender spending $1,000,000 to create a $5,000/month 30-year mortgage...
The salary increases don't have to keep pace with inflation... they need to keep pace with the interest rate on the $1M which is generally going to be higher than the inflation rate.
Regardless, that's an interesting perspective. My follow up would be "do you think the government is well-informed and future-thinking enough to pick the jobs with 20+ year lifespans?"
Personally, I don't think anyone is. Ten years ago, Microsoft was nearly unbeatable, Google hadn't IPO'd, Facebook didn't exist, and Apple was still a bit player. Ten years from now, who knows what it will look like.
(Granted, that's one field.. but outside of tech, the home construction market was the other boom.)
Yeah, the thing about investing in job creation is that there is so much churn in the job market--not just in terms of employment rate, but in terms of the jobs themselves being created and destroyed, as we figure out how to use technology to automate them.
And I'd like to point out that just because that hypothetical job being created pays $50,000 per year, doesn't mean it only contributes that amount of value to the economy.
But you certainly wouldn't want to bet on any job that is repetitive (or "concave" to use a michaelochurch-ism) being around longer than a few years, because that work will be distilled into a software program and handed off to a machine sooner or later. It only makes sense to invest in creating jobs that involve creative, "convex" work, which has a smaller chance at a bigger payoff in terms of value creation.
If the interest rate on the $1M is 2% then each year the "cost" of the $50,000/yr job is $20,000. So even if we don't factor in inflation (which would certainly change these calculations), it would take more than 33 years to "pay off" the $1M. You'd have to have someone work well over 33 years at $50,000 to recoup much return on your initial investment of $1M. Besides which, as you pointed out, a lot can happen in 33 years...how many jobs remain today that were around 33 years ago? Some of them, certainly, but many of the current crop of high paying jobs have been created in the last 10-20 years by innovation occurring organically in the private sector.
This is again assuming that the person who fills that $50k/year job contributes exactly $50k/year in value to the economy.
And at some point, when you are talking about investing public funds to create jobs in a period of high unemployment, you need to think of it in terms of subtracting the cost of that person's potential unemployment benefits, medicaid, and other costs that an unemployed person imposes on the public.
So, it's kind of complicated to do a full cost/benefit analysis of this.
Yeah, this is all convex, creative/research work with a small chance of a huge payoff in terms of value creation. Companies focused on quarterly earnings won't invest in this sort of R&D type work anymore, so the government has to.
This is a great comment. Thank you for leaving it. Very well thought out and concise.
This is one of the biggest problems I have with Obama (and politicians in general): they apply the word "investment" to things that aren't "investments." Have they ever acquainted themselves with the definition of the word? Because the definition of the word is like you said, something which is expected to yield a return. It isn't an "investment" if you're just pouring money into a pit and burning it. Or giving it to people. Or creating or sustaining $50,000/year jobs at the expense of $1,000,000. But "investment" sounds good. So politicians bandy it about. All they're doing is spending.
In the case of economics it seems there might also be large conflicts of interest at play. The 2010 documentary, "Inside Job" http://en.wikipedia.org/wiki/Inside_Job_(film) about the economic crises talks about how several prominent academic economists are essentially paid to author studies that amount to not much more than puff pieces supporting a political view point of a political party or corporation.
On another note, given that the Fed has been "quantitatively easing" (seems to be a polite term for printing money) since the financial crisis and currently holds over 3 Trillion in government and mortgage debt those actions have to be keeping interest rates lower than they otherwise might be. It's kind of burying the lead to say interest rates are super low we should borrow a bunch of money when they are being intentionally kept that way through government action.
As far as the rates that the feds have to pay to borrow money -- that's set by the market. They can issue bonds at 0.25% and people will buy them, therefore the interest rate is that low. It's not like they're forcing people to buy. The feds aren't setting the price for that interest rate -- well, they are, but what people are willing to pay is actually what sets the price.
Quantitative easing actually should, in theory, lead to inflation and higher interest rates. It's basically printing money. I think you have it confused with counter-cyclical fed reserve short-term lending rates which, by virtue of being very low, induce banks to lend money at only a little higher.
It'd be one thing if "people" were buying the debt they're issuing as you suggest. But a lot of the Treasury debt is being purchased by the Fed. So they're keeping it all in-house. Can you say, corruption? It's an artificially low rate which few people in their right mind would pay. Which is why the only taker is another arm of the government. Currently the Federal Reserve holds $1.825 TRILLION of US debt (Treasury Securities). I.e., the Fed owns more US debt than anyone else. China holds $1.22 Trillion, Japan hold $1.097 Trillion.
http://research.stlouisfed.org/fred2/series/TREAST?cid=32218http://www.treasury.gov/resource-center/data-chart-center/ti...
If you look at the data, QE announcements and expectations have caused interest rates to rise, probably due to implied inflation.
It's alarming how people think low rates -> loose money. This has never been true in the history of central banking. Nobody would suppose Japan has loose money, or that the 70s had tight money.
Is there a way to quantify QE in personal finance terms?
Like, can I saw "QE is an X% inflation" for some X, so I can apply that to my personal understanding of the purchasing power of my savings once people try spending their inflated dollars and send ripple through the economy?
> Also - who on earth thought austerity was ever a good idea?
David Cameron, Angela Merkel and Paul Ryan to name just three prominent politicians.
Additionally EU central bank policy has been geared almost solely around this principle. This is why after identifying that the Greek, Cypriot and Spanish economies were the victim of cheating, malfeasance and incompetence, all of the rescue plans involved pretty severe cuts to social welfare programs and government services.
Remember, ALL Cypriots had to take a haircut on their savings in banks greater than 100k euros. International finance scammers fucked the Cypriot economy, and then the pro-austerity EU forced all Cypriots to choke down the bailout.
Well it DOES send a message to these countries for the future. Wouldn't be surprised if the ECB --supranational and quite independent from day-to-day voter-pleasing politics-- had a longer range view.
They do demonstrate to the world now two things:
(A) the core tenets / stability principles backing the original EUR currency idea and philosophy are not sacrificied to the current temporary economic mismanagement of one individual nation state that chose to participate in the currency, knowing fully well broad / long-range philosophy of ECB. No quick fixes, no "reckless printing" (at least not without limit or getting the country to change its ways).
(B) Big savers are encouraged to rediscover "the old ways" of saving, preserving or investing wealth -- not to hold it in "the US(D) way" of a self-feeding ever-expanding intransparent web of future promises, counterobligations, speculation. Aka "your bank account" these days.
A small country such as Cyprus is ideal to send such a strong and lasting message. People in "bigger" countries get a strong signal to "rethink their ways". Everyone learns that EUR ways are different from the USD ways in some (important) respects. And should the world ever lose confidence in the USD and/or in markets driven largely by currency debasement, deficits, debts -- the world may well remember those "early stories of the young EUR".
"Also - who on earth thought austerity was ever a good idea?"
First of all, spending a lot of money only helps solve an aggregate demand problem. It's not clear that it is (or at least not entirely an aggregate demand problem). Economies can have many problems, some deep, some subtle, some ephemeral. Some problems are plausibly solved through spending, and some are not. Sometimes, people talk about economics as though they could apply Keynesian principles in Somalia and it would be a thriving economy in 5 years. It's not that simple.
Second of all, 1-2% interest sounds great, and like a good opportunity to do some infrastructure projects. However, we have to consider that the debt is not stable now. Given a trillion dollar deficit, that 1-2% money is going to be borrowed anyway. We don't necessarily want to borrow it now, because it could make it more expensive to borrow the money in the future that we already know we need to borrow.
Third, people don't necessarily trust economists. Economies are complex, and a bunch of smart people saying they have the answers is not convincing to many people. On its face, a statement like "borrowing and spending and consuming are good for the economy" sounds like something for nothing, and triggers skepticism more so than "saving and investing is good for the economy". Even if the principles are sound, people don't trust the implementation, which is sure to be twisted for political gain. A trillion dollars being spent brings people out of the woodwork to manipulate it to their advantage, perhaps sacrificing the country in the process.
Last, many people see that a lot of borrowing, spending, and consuming have been happening over the last decade or so; and we still have problems. It's only natural that people are considering a change of direction that involves less borrowing and spending and consuming.
A national currency being used as the international reserve and trade settlement currency affords the US quite a few unique perks, doesn't it? And has so for decades, indeed.
The USD being the international "yardstick" other currencies are measured in, "valued" against allows for a surprisingly large trade deficit. Why have inflation at home when you can just "export" your fresh paper for real goods the world over?
This is not lost to the rest of the world, but for the sake of the lesser evil they've played along as necessary. All the while creating a new supranational currency (EUR) and central banks the world over turning into net gold buyers.
I agree, the US should milk this situation for all it's worth while it lasts, which is incidentally exactly what they've been doing for the last few decades.
Global US debt is not a worry to them as it's denominated in the same currency that the US can "print" (to use the simplified wording here).
Austerity (delevering) is not a worry, they'll rather buy failing debts with more freshly produced notes --- this way, no one loses their "savings" in nominal terms, no cascading defaults etc.
Shouldn't this lead to (hyper)inflation? Not as fast as you might think --- if/as long as the rest of the world still takes them as viable reserves and for settling international trade..
I don't think the EUR is designed as a competitor or alternative "equivalent" to the USD. Rather, it is a "readily available" option --differing in a few substantial aspects (rather than outright mimic USD)-- for anyone, anywhere to consider at their own pace.
Even if "they" wanted to, they couldn't just, as in the past, once again "compel" the world to use their national currency for your reserves and trade-settling, then remove the backing, break promises and debase and inflate for 4 decades straight. No one would fall for it again, nor is it really desirable anyway for any productive (say, net-exporting) country.
This is what Austrian economists have been arguing forever. They base their models on simple assumptions. Trying to figure out how an economy works just by observing it's macro behavior is insane. There are so many factors, economic models change over time as market actors use them to make decisions, and the sample size is incredibly small (not many countries to look at) and biased (differences between countries are huge, differences in time within a country are huge too.) Economists of all types are terribly inaccurate at making predictions, even in the short term.
>Also - who on earth thought austerity was ever a good idea?
Who on Earth thought spending was ever a good idea?
>The US should load up on as much debt as possible
This is ludicrous. How on Earth would you pay it back? The only way you could justify such spending is if it created more wealth than the amount of debt and interest. Which depends entirely on where the money is spent. Just creating new roads and bridges may produce some value to the economy, but it's no where near enough to justify it (and in the end most of it would have to be taxed back of course, to pay for the debt and interest.)
Because obviously America needs zero improvements to its infrastructure. No high-speed rail, no electrical grid improvements, no roads or bridges, no fixing or improving the water system, no blue-sky scientific research, no teachers to hire to decrease class sizes.... NOTHING, YOU HEAR ME, NOTHING YOU STUPID LITTLE LIBERAL!
Oh, I'm sorry, I thought I was supposed to sound like an Austrian "economist".
This is a pointless straw man argument. No one is claiming we should never invest in infrastructure. Some improvements in infrastructure have value certainly. It depends on the specific project. Spending for the sake of spending is ridiculous though.
Actually, the Austrians basically do advocate that the public sector should not exist, and should certainly not be constructing infrastructure, because if it was at all worthwhile, someone would make a private profit off it and do it that way!
No god but Capital, say the Austrians, and the Market is His Prophet.
You are confusing Austrian economics with anarcho-capitalism. Many anarcho-capitalists subscribe to Austrian economics, but certainly not all Austrians are anarcho-capitalists.
Your last sentence is frighteningly flawed. Because it suggests that the US is borrowing from other economies around the world at obscenely low rates. This is not true. Sure, we're borrowing a little bit from China as we've always done, but they're less and less interested in loaning us money (essentially).
So now what we have is a powder-keg with a fuse which has already been lit. We've started borrowing from OURSELVES. This is who we can make it look like we're only paying 1-2%. When you pay one hand from the other, you can say whatever you want about how much it's costing you.
The reason this is a profoundly bad idea is because essentially we're diluting the value of every dollar already out there floating around. As we print more money, and issue more IOUs in exchange for it, all we're doing is creating shadow-inflation by diminishing the value of each existing dollar. The only reason we're getting away with it so far is that the rest of the world is worse off (fiscally) than we are and so our dilution of the dollar is essentially a tax on everyone who comes into contact with dollars. This is essentially our way of extracting wealth not just from our own citizens, but from abroad.
If however dollars start being kicked to the curb abroad, then the shadow tax will begin being felt more acutely here in the form of inflation and suddenly higher prices.
Again, there is no free lunch. It's the single truest thing that economics has to say. Yet people somehow persist in believing that there MUST be one, if they could just figure out how to have their cake and eat it too.
Increasing the money supply is not in and of itself inflationary, nor does it logically imply a depreciating exchange rate. This is true no matter how many times Austrians and confused monetarists say so.
> higher dimensional fields like economics and finance
As I've gotten older, I've become -- through experience -- more cognizant of how this is the case also in medicine and other fields. And in many aspects of "hard science", as well.
There are a lot of people out there who want to believe certain things. Being a "scientist" doesn't seem -- in general, across the population of scientists -- to confer any great immunity to this.
On the one side, there are the "faith-ers". ("We just need the evidence. Or... I'll "extrapolate" to a conclusion.)
On the other side, the "deniers". (If it hasn't been explained/proven (in some cases, down to the level of quantum fluxuation), it can't possibly exist and I'm going to ignore any anecdote, supposition, or empirical evidence to the contrary.)
Both of these can drown out the actual, intelligence conversation around a topic. And they can grossly mis-inform a public that would be much better served by same.
If the public weren't so busy listening to the "extremists". Perhaps there is the rub.
>that's the problem with higher dimensional fields like economics and finance - it's hard to separate cause and effect and extract principal signals for an arbitrary phenomena, without getting bogged down in correlation hell.
While I agree with you about the difficulty of understanding complex systems, your post sounds despairing. Accepting the inherent difficulty is vital to better analysis, but isn't a reason to avoid actual analysis.
Note for example that you wonder why austerity was ever considered a good idea. How do you "know" that austerity is a bad idea without analysis. It's only been about 80 years that we've had a better understanding of how a single household's economic considerations are fundamentally different than an economy's solely as a result of scale.
The naive analysis from classical economics would draw a parallel between a decrease in GDP and a decrease in household income, whereby it is prudent to decrease your consumption. However, while a households income is an exogenous factor, GDP is a product of the economy itself. During a contraction, there is generally the same amount of labor, capital equipment and technology as before the inflection point, it simply isn't being utilized or employed at the same rate.
Today, informed policy debates may weigh the continued harm that comes from leaving underutilized people and capital idle, against the reduction in signalling for needed structural change that may result from stimulus. Just as an example, it is easy to argue that rescheduling bridge and road construction that will be needed later to a current period when labor is cheaper and equipment isn't being used elsewhere is prudent. Yet on the other hand, doing so may signal over-investment in construction careers and heavy equipment.
In the past, policy debate would have focused on balancing well-meaning charity of helping out people on hard times against austerity which was believed to be beneficial for the economy as a whole. How can you even begin to determine whether assumptions about belt-tightening being constructive are flawed without economic analysis?
I think the lesson to be learned from this event is first the importance of more rigorous scrutiny of results, but more importantly to be distrustful of the type of politician who searches for studies to support their preconceived conclusions. A good portion of policy makers advocating austerity, have done so from a stance of dismissing the analysis that doesn't fit their ideology, rather than a scientific approach of starting with a hypothesis and assessing the available competing analysis in good faith.
As a graduate student, he'd just found serious problems in a famous economic study — the academic equivalent of a D-league basketball player dunking on LeBron James.
If you look at the winners of the Underhanded C Contest [1], the subtle and deniable "errors" that are hidden in innocuous looking pieces of code remind me a lot of the type of error that this spreadsheet sounds like it contains.
It's telling that now that their data is exposed as being incorrect, the original authors still are standing behind their conclusions.
Hasn't Paul Krugman been saying this for quite a while? Judging by the performance of the Irish and British economies since the implementation of austerity programs, it looks to be verifiable.
Best comment from the WSJ article (in which Reinhart and Rogoff admit their mistake): "The two profs are incompetent enough to now be hired by Fox “Business” network."
The paper came out in 2010, after much of the austerity debate had already crystallised, and got attention almost entirely in the US, which hasn't really implemented austerity. (No, the sequester really doesn't count.) Nor did the paper argue strongly in favour of austerity; the authors actually are pro-stimulus, and Rogoff in particular was very concerned over the effects of the Fiscal Cliff.
Actual austerity has mostly happened in Europe, where nobody really cared about the paper. The average German voter has no idea who Reinhart and Rogoff are, and he certainly doesn't care that some model showed that further loans to Greece might be correlated with somewhat lower Greek growth in the future; he's sick of the bailouts, thinks Greeks are congenitally lazy, and is afraid Germany won't get their loans back. In fact, what has actually happened in Greece is pretty much what Reinhart and Rogoff warned against! (Debt loads get too high, bond markets freak, growth craters. It's the most obvious explanation for the correlation Reinhart and Rogoff noted, and it's pretty much exactly what happened in Europe.)
Meanwhile, the actual spreadsheet errors changed their results from growth of -0.1% in high-debt countries to 0.2%; an inconsequential change. Nor is this surprising; the reason nobody looked too closely at the numbers is because they agree broadly with every other paper and model out there.
TL;DR: Reinhart and Rogoff caused austerity? Lolwut?
> Nor is this surprising; the reason nobody looked too closely at the numbers is because they agree broadly with every other paper and model out there.
The data Reinhart and Rogoff used hadn't been analysed together before so their work was original, and it got widely cited. The results failed to be reproducible, and now the analysis has been found to have multiple methodological errors, of which the spreadsheet error is just a minor component. Reinhart and Rogoff didn't cause austerity, but they published a high impact paper supporting austerity that has now been discredited. Also, it would be interesting to know how you get the impression that their results "agree broadly with every other paper and model out there".
I suspect it isn't hard to find papers that show a link between high debt levels and weak economic growth. Or do you think the consensus among economists is that no such relationship exists?
There's a difference between "papers" and "every other paper". Instead of a consensus, economists are split into camps over the question whether austerity harms or improves economic growth. There's been criticism of austerity even from the IMF, for instance. Discrediting Reinhart and Rogoff's paper (published without peer-review, by the way) in particular is important because they were the first to collect and analyse data from so many sources and their results couldn't be replicated and are now shown to be incorrect.
>The average German voter has no idea who Reinhart and Rogoff are
No average voter knows who Reinhart and Rogoff are, and no one is making any argument that they do, or that that matters.
>the actual spreadsheet errors changed their results from growth of -0.1% in high-debt countries to 0.2%; an inconsequential change.
So the 0.3% percent error was caused by incompetence at using a computer, and another 1.9% was caused by economic incompetence (equal weighting for all time periods) and deception (throwing away the first few years of data to create a convenient start date.) Is your defense that they were worse at economics than at Excel?
>the reason nobody looked too closely at the numbers is because they agree broadly with every other paper and model out there.
You've made this up. No one could reproduce their results.
Parent TL;DR: The paper didn't matter, because even though its purported evidence was wrongly conceived and badly executed, its conclusion is still right because it comports with what I have decided is common sense.
But it hasn't. Almost every country that has faced an economic crisis continued to increase their budget expenditures. The new austerity is in reducing the increases by a fraction, which isn't what's suggested at all.
> The entire economic approach of some countries has been based, or at least heavily influenced by, on a paper that no one had bothered actually checking.
Er, no. Reinhart and Rogoff's paper was published in 2010. The debate of keynesian stimulus vs. austerity vs. non-interventionism is much, much older than that.
BTW, this quote from the article is telling: "But because he was a lowly graduate student asking favors of some of the most respected economists in the world, he got no reply, until one afternoon..." You know, the "favor" of doublechecking their dangerously buggy academic product for them.
Maybe that was a terrible exaggeration from the journalist. Who knows what happened in this particular case? But in contrast, Graeber, who couldn't even be considered for a professor job in North America (but gets jobs elsewhere, like the London School of Economics), said: "What collegiality means in practice is: 'He knows how to operate appropriately within an extremely hierarchical environment.' You never see anyone accused of lack of collegiality for abusing their inferiors. It means 'not playing the game in what we say is the proper way.'" (http://chronicle.com/article/A-Radical-Anthropologist-Finds/...)
(Afterwards, Graeber tweeted, "in the interview I added "you can be accused of 'lack of collegiality' for being too nice." That is, too nice to students." One reason the dismal pseudoscience gets even little things wrong.)
Harvard should keep them, and endure the reputation decrease as a result. This incident should stand as a long-term reminder that the Ivy League is does not have an infallible monopoly on genius.
What seems at issue -- besides whether an economist's work should be accepted at face value -- is under what conditions a country should borrow or impose austerity.
Here's an analogy --
When times are good, governments frequently raise taxes, because hey, we can afford it.
When times turn bad, governments frequently raise taxes, because hey, our tax base has eroded and we need it.
When times are good, governments frequently LOWER taxes, because hey, we can raise the same revenue
When times turn bad, governments frequently LOWER taxes, because hey, people can't afford it.
borrow in bad times, pay back in good times, is well established. Governments are good at borrowing in bad times, but bad at paying back in good times. Look at late-90s US, when we briefly had a balanced budget, and instead of preparing for the bust, we rushed headlong into it.
Professors that immediately decide that the student is wrong, and must be convinced otherwise.
The spreadsheet financial analysis that provided the expected results and therefore never checked for errors.
A single study that gave economists, and clearly an awful lot of politicians, the confirmation they needed to strengthen their resolve in the face of opposition.