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.
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.
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.
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...
[1] http://www.google.com/publicdata/explore?ds=ds22a34krhq5p_&#...
[2] http://www.google.com/publicdata/explore?ds=ds22a34krhq5p_&#...
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 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.
http://www.reuters.com/article/2013/04/18/us-usa-fed-discoun...
But, as you say, they haven't been very serious about such an idea for quite a while.
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)
Here's another story about austerity: http://articles.washingtonpost.com/2012-01-20/opinions/35438...
(but yes, it's after a war, so that somehow makes it inexplicably different? People still debate this)
IMHO, of course, I am am not an economist. Not that they seem to agree on much either.
Summary of the article: http://tldr.io/tldrs/5171189e1a18dac804000170/meet-the-28-ye...
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.
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.
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.
Last time that'll happen for a while.
http://andrewgelman.com/2013/04/16/memo-to-reinhart-and-rogo...
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.
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.
It's telling that now that their data is exposed as being incorrect, the original authors still are standing behind their conclusions.
http://blogs.wsj.com/economics/2013/04/17/reinhart-rogoff-ad...
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%
The revised 2.2% is much closer than the original -0.1% to the rate at the next level down (3.2%).
So now they are clinging to the fact that 2.2% growth is still less than 3.2%. It is, but it's much closer than the old, original -0.1% growth.
Without that, it's another data point correlating economic growth and sovereign debt - and not a very interesting one, either.
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.
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.
It's a "heads I win, tails you lose" game.
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.
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.
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".
Not to say that waste, corruption, poor capital allocation, etc aren't all legitimate problems. But that's not the question at hand.
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.
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.
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.
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'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.
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.
It's like robin hood in reverse.
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".
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..
>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.)
Oh, I'm sorry, I thought I was supposed to sound like an Austrian "economist".
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.
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.
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.
It's an association. It does not prove that there is causation, nor the direction of the causal arrow.
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.
Apparently "don't spend money you don't have on negative-return investments" isn't common sense.
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.
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.
EDIT: btw, here's Portuguese per capita GDP in constant terms between 2000 and 2007 to dispel the success argument - http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&#...
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)
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.
Although I would say my opinion on the Democrat party is that it is not run by liberals just as the Republican party is not run by conservatives.
As for the rest, I agree.
"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.
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.
No god but Capital, say the Austrians, and the Market is His Prophet.
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.)
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.
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.
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.
