Yesterday the equivalent of front page news broke in the economics world. A paper by economists Thomas Herndon, Michael Ash, and Robert Pollin found serious flaws in the research of Carmen Reinhart and Ken Rogoff which in turn had found that public debt seriously hampers economic growth. The flaws they identified include what appears to be a serious Excel coding error by Reinhart and Rogoff and a charge of using data selectively. The best analysis of the story I’ve found so far is at the Financial Times:
Carmen Reinhart and Ken Rogoff have had a bad day. The two economic historians’ research, which implied that public debt overhangs can hamper economic growth, was perhaps one of the most cited pieces of work in recent years. Their advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth, has become a widely used point in discussion. And it’s under attack by a trio at the University of Massachusetts, Amherst – Thomas Herndon, Michael Ash, and Robert Pollin.
As FT Alphaville has noted, the issue is about one of Reinhart and Rogoff’s most heavily cited papers on the importance of debt. This paper has been accused of being the victim of fat-fingered Excel coding, as well as selective use of data and odd weighting of how different episodes are weighted, which seemed – to the authors – to make little sense.
If you’re interested in the subject of public debt or fiscal austerity, read the whole thing.
As you can imagine, anti-“austerians” are crowing. IMO the celebration is a bit premature. I have yet to see any analysis that suggests that public debt is irrelevant to economic growth or that it’s positively correlated with economic growth. The paper mentioned at the top of the post just points out that the degree to which public debt hampers economic growth isn’t as great over the 90% level as Reinhart and Rogoff’s findings had found.
How governments spend money, how much they spend, and its sources still matter.
As I have repeatedly said here, I think that there are times and circumstances when running large deficits is prudent. I don’t believe that means that all government spending is good. Governments can be just as profligate and foolish as individuals. Maybe more so.
Update
In fact, if you are among the many left-of-center people who credit Bill Clinton’s policies for the economic boom of the late 1990s, you believe that too much debt is a drag on economic growth. That’s because the only even remotely plausible mechanism for Clinton’s wondrous powers of economic restoration lies in the 1993 deficit reduction bill, which is supposed to have freed up capital to be invested in the real economy rather than getting absorbed by government borrowing. So if you’ve been excoriating George Bush’s poor economic management, and comparing it unfavorably with Bill Clinton’s responsible stewardship, surprise! You agree with Reinhart and Rogoff.
And you’re not alone. I think it’s fair to say that most economists and wonks think that at some level, government borrowing becomes a problem. And I’d guess the majority think that the problems kick in somewhere around the 100% of GDP mark.
As I’ve mentioned before I don’t think there’s any credible reason to believe that Clinton’s policies resulted in the boom of the late 90s. I think he was fortunate to be president when forces of investment and technological development that had been under way for over a decade finally bore fruit.
How governments spend money, how much they spend, and its sources still matter.
Come now, it doesn’t matter how government spend, or the sources, the only thing that matters is aggregate demand! Get with the program, Schuler.
Reinhart and Rogoff committed an act of gross negligence, if not outright fraud. As many of us stated at the time.
“How governments spend money, how much they spend, and its sources still matter.”
I think that is the meat of the matter, and everyone here knows how I feel. What is disconcerting is the apparent data and interpretation fraud. (my words) I feel the same way about the global warmists.
Data is good or bad. Analysis is either fair or fraudulent. I don’t tolerate the latter. I’m an engineer at heart.
Analysis is either correct or incorrect. Fraudulent is a matter of intent.
I’m not going to register with the FT to read their blog (I’m tired of free registration scams), so my question is this: Was there a peer review process for R&R’s work? If so, the reviewers should be held up to as much scorn (if indeed scorn is warranted) as R&R.
I think this might be a confidence issue. A high debt-GDP ratio is tolerable as long as people do not think it is a problem, and therefore the ratio is variable depending upon the existing conditions. This would also apply to countries.
While 90% may be correct in 2005 or 2015, it may not be correct in 2010. The number for Greece may not be the same for the US.
Am I correct in saying that we are cutting government jobs at a time when a whole bunch of people are already out of work in part because of this now-discredited research?
I think that’s a bit of an exaggeration. That very topic is being debated right now. Reinhart and Rogoff’s is not the only support for the finding. Very similar findings have been produced by the BIS, IMF, and OECD.
I think the fair conclusion is that it’s not so much whether debt matters but how much it matters.
No, that is not what is happening. State and local governments have RECENTLY been cutting jobs because they can’t raise the revenue to meet large payrolls, and unlike the federal government, they can’t print money to make ends meet. State and local governments kept adding jobs until the recession was almost (technically) over.
The federal government added almost 190,000 civilian jobs (not including Census workers) through 2010. They have since cut back, so that now there are only 26,000 more federal civilian jobs than there were in December of 2007. Put another way, the federal civilian workforce is now 1% larger than it was when the recession started. Meanwhile, private industry payrolls are down over 2%.
All government jobs are down 511,000 from the start of the recession. Private industry is down 2,336,000 jobs, currently. Federal civilian government job totals are up.
Just for the record, I don’t think we should be cutting the number of federal, state, or local jobs. I think we should be cutting the pay of federal, state, and local public employees. Their pay went up under incorrect assumptions, generally summarized as “we’re not as rich as we thought we were”. The pay levels need to be trimmed to a more realistic level.
The paper in question was never subjected to peer-review, and the authors refused to release their data and methodology for two years. This of course did not represent a problem for austerians and deficit-scolds who waved it like a bloody shirt.
Europe has put itself into a depression based (according to the Troika!) on this paper, citing it as proof-positive of the need for budget cutting. Millions have ben put out of work and into the streets for a fraud.
So, Ben, if Greece had just continued running massive trade and governmental deficits everything would be hunky-dory?
Greece has many problems but one of its largest is that it’s not a monetary sovereign. Or, to turn the coin the other way around, that it’s using the same currency as Germany.
Total government employment is at recent record lows.
http://www.brookings.edu/blogs/jobs/posts/2012/08/03-jobs-greenstone-looney
“How governments spend money, how much they spend, and its sources still matter.”
I dont think this has ever really been disputed. Even those who want more spending think it matters how you spend it and where it comes from and especially how much. I think there is a belief that “Keynesians” believe all govt spending is good. Not so.
Steve
But, as I pointed out the other day, the total federal payroll is at a record high.
Icepick,
You champion policies which create mass unemployment. That’s just the way it is and to suggest R&R’s professional malpractice was ok because it moved opinion toward the preferred direction is outrageous.
Total government employment is at recent record lows.
Yeah, and the Dow is at RECENT record lows, too.
You champion policies which create mass unemployment. That’s just the way it is and to suggest R&R’s professional malpractice was ok because it moved opinion toward the preferred direction is outrageous.
I’m not seeing you and your party doing shit about unemployment, asshole, and you didn’t when you had control of everything. And given that I’m the one here that is and has been unemployed throughout this whole goddamned “recovery” that you socialist-dickhead-Chavez-wannabes brag about, don’t give me a bunch of shit about how I don’t care about unemployment. All I’ve heard from you fellows in the Obama Butt Boy Brigade is how fucking wonderful the economy is and that “Fuck you, you deserve it!” So Ben, you can shove that moral sanctimony up your ass, assuming there’s room, and let the gerbils play with it.
Ben,
Really? Outright fraud? Please. Reinhart and Rogoff, based on the story I read, gave the Amherst tria their data and excel file. Not exactly something fruadsters would do.
STFU.
The growth rate that the Amherst trio got was nothing to crow about. It was 2.2%. That is not great. In fact, when you have high levels of unemployment it is actually bad.
But you don’t see guys like Ben talking about this. Instead he’d rather come here and rant like a raging neckbeard that still lives in his mom’s basement.
Does that include contractors?
Keep in mind <a href="http://theglitteringeye.com/?p=19252"<this post by Dave. Yes, that is for the federal work force, but the point is still valid…what about contractors? Are local government jobs being cut, and then filled with private sector contractors? IDK.
Well messed up that link….still works tho…
This part is interesting:
Look at that, nearly all of increase in spending can be explained by military and health care spending.
So, we have been spending lots and lots of money in a totally and wholly unproductive manner (blowing shit up in foreign countries).
Bravo!
Federal pay increases have been fairly modest over the last decade (and nonexistent for a few years now). I think what happened over the past couple of decades is grade inflation – Jobs, for example, that would have been a GS-9 25 years ago are now GS-11’s or 12’s. And in DC it’s hard to find a federal job that isn’t at least a 9 unless it’s unskilled labor. Practically everyone I know is at least a 14 or is guaranteed 14 with a few years seniority.
I think this is how federal organizations get around the GS pay scale restrictions, especially for areas like DC. If you look at the pay scale and the supposed education requirements, there should be a lot more GS-2’s and 3’s than there are and they don’t get paid hardly anything. I think people hit the median US income around GS-9.
A few months back I looked up the GS levels again and was genuinely shocked at how much they’d changed over the years.
“Total government employment is at recent record lows.”
For the last 30 years, probably longer.
Steve
“All I’ve heard from you fellows in the Obama Butt Boy Brigade is how fucking wonderful the economy is and that “Fuck you, you deserve it!—
Some of us keep saying it is a balance sheet recession and govt cant really do much about it in the short run. (Reading FTW.)
Steve
Here’s the problem, steve. Let’s assume that you’re right, it’s a balance sheet recession. If that’s the case, much of the ARRA was not only misdirected, it was counter-productive. Additionally, since individual debt stopped declining a couple of years ago, no progress has been made and the only components of policy, the tax cuts, that might have made any difference in letting people correct their balance sheets, have been allowed to elapse. That means that the administration’s policy runs completely counter to your policy preferences. Why support the administration’s policy?
I think you’re presenting a false alternative. The choices aren’t limited to either a government that’s all-powerful in dealing with economic problems or a government that is completely powerless to have any effect whatever. In my view the truth is messier. The federal government can introduce incentives that have incremental effects. Additionally, as I said five years ago, if there has been a time in the last 60 years for direct federal mass employment programs, a WPA or whatever, this was it.
My story of the last five years is somewhat different. President Obama will seize opportunities to accomplish goals his supporters want but he won’t fight for anything. Look at what’s going on now. The gun control legislation that he claims to want looks like it’s going down in flames. What would have been needed to change that? Maybe one more Republican vote in the Senate and five more Democratic votes. A president who was actually interested in the realities of politics might have been able to do something about that.
Exactly the same scenario may play out in immigration reform. We’ll see.
It’s all about the politics and nothing about the policies. I don’t think the president should get a pass for that.
Let me further explain why Ben might be incorrect.
Reinhart and Rogoff’s work can be put in the following manner:
Qualitative: High levels of debt (past a certain threshold) result in growth that is sub-par. The implication is that high debt levels can restrain growth.
Quantitative: That over 90% Debt-to-GDP ratio economic growth is reduced to -0.1%.
Now, Reinhart and Rogoff can be wrong on the quantitative aspect, and it looks like they are based on the preliminary analysis we’ve seen so far. But that does not necessarily invalidate the qualitative aspect of their argument. If 2.2% after a severe recession that also resulted in substantial increases of public debt is below what we’d typically see after a severe recession without such debt accumulation then their point may still be valid, but with less strength.
Why is this important? Well, 2.2% growth is anemic. It would still indicate a very long time for things like unemployment and possible even labor force participation ratios to recover…maybe a decade or longer.
Running around like a spreging shitlord calling people frauds really isn’t helpful. And that would be the category that Ben has fallen into.
Steve V- They actually do indicate int heir research that debt goes up and growth is slow after an international banking crisis. It happens regardless of debt levels. I think you are probably correct about the qualitative part, I just dont know when it kicks in and when. As suggested above, it probably matters a lot how you got there, not just the absolute number.
Steve
“The federal government can introduce incentives that have incremental effects.”
Not so much in the long run. I think you are also incredibly optimistic about our politics. I dont think we have ever had a dynamic like we have now, or at least not on as wide a scale. The threat no longer comes from the other party, but from being primaried when it comes to retaining office.
Steve
I think the US is at or near the end of the balance sheet recession. This is indicated by the data from @Dave. The problem is not too much debt. The problem is the type and nature of the debt.
A person in an underwater house may be able to pay the monthly note, but he/she is stuck in the house until it can be sold or is paid off. Many of these houses will never be worth what they borrowed to purchase the house. Many locations are no longer desirable and never will be again.
This person may be able to afford a higher note, but they cannot move. This may also affect their job opportunities. They may be able to obtain other credit, but adding new debt to an underwater mortgage is probably undesirable.
The economy has grown through credit creation, but the borrowers are not able to turn over their existing debt for new credit. The fastest solution is to “rip off the band-aid”. Figure out a way to get people out of underwater mortgages ASAP, or wait until the debt is paid down. Waiting will cost years of lost growth, but the greedy bastards will be forced to live with the mortgage they tricked the bank into giving.
The latter is the “cut off one’s nose to spite one’s face” solution. It is not very productive, but it feels good.
Steve Verdon, you’re blind, and you’re the only one (as usual) hurling insults.
R&R selctivly omitted years and nations that conflicted with their conclusions. They deliberately weighted fewer years from fast growing, high-debt nations equally with fewer years from slow growing nations (19 years from Britain equally weighted with one year feom New Zealand). They then commited a spreadsheet “error” that just happened to confirm all their previous work in this area. Every “error” just happened to reinforce decades of work performed by them.
They are frauds. Don’t worry, people like them never pay a price. Just the way you like it.
Qualitative: High levels of debt (past a certain threshold) result in growth that is sub-par. The implication is that high debt levels can restrain growth.
An assertion with no evidence, again. The same assertion R&R have repeatedly made regarding causation. Nowhere in their work have they run even a single causality test. Nowhere. Bu that doesn’t stop ideologically driven folk like yourself. Nor did lack of peer review. Nor did numerous requests for their data being ignored. The paper confirmed what you wanted to hear and you ran with it.
Those of us who criticized the paper were correct, those who accepted it blindly (like you did) were wrong. As you have been on everything else. And I mean everything.
Reinhart and Rogoff were weren’t the only ones make this claim or doing research in that area.
As for evidence, there is this interesting blog post,
It does a nice job of showing how Reinhart and Rogoff’s tipping point argument is seriously flawed…the tipping point if anything is considerably lower. However, the higher debt goes, the lower growth goes. See the final two charts (in particular the one on the right–i.e. the one with controls…yes it means Rogoff and Reinhart are wrong, but it doesn’t mean that higher debt is nothing to worry about).
As for being insulting, gee you were so sweet and nice in this post. See Ben you can be an insulting jerk off without using swear words…me I just prefer to be blunt and call you an asshole when you act like an asshole.
It does a nice job of showing how Reinhart and Rogoff’s tipping point argument is seriously flawed…the tipping point if anything is considerably lower. However, the higher debt goes, the lower growth goes
Ah, more faith-based economics. “If I, Stevsie, assert causation more than once, free-market Jesus will make it so! I just have to belieeeeeeeve
Feel free to keep calling names. No one is afraid of you.
Pretty much all of it is faith-based.
” the mortgage they tricked the bank into giving.”
They tricked the banks into giving them liars loans? Those poor duped bankers.
Steve
I think Dave makes an interesting observation about Obama on gun control and Obama on an economic recovery package.
I think fundamentally he favored some more government spending and some more government control on guns, but ultimately he didn’t have very well developed ideas on either — only the belief that circumstances warranted “his side” getting some of what circumstances warranted, and ultimately he communicated that he didn’t care about the content of the legislation, so long as something passed. And at the end of the day, nobody is satisfied with either.
@steve
No matter how much I frown, my two dogs will not let a strange dog borrow their toys. If they have enough sense to not lend to strangers, the “Masters of the Universe” should know better. These guys can create complex financial instruments, but the lowly regulator can stop them “in their tracks”.
My dogs are not very smart, but they know when somebody is trying to feed them shit.
Nasty, greedy bankers team up with near-sighted, greedy debtors creating a balance sheet recession. Is that how it is being seen?
So, who is going to get us out of this mess?
The big, nasty, greedy bankers have gotten their bail-outs. Many of the really shaky homeowners, who should never have gotten into the game, are getting their loans mediated by the government, over the ones still struggling to make ends meet, and dutifully paying their mortgages. Are they suckers? And, the rest of taxpayers are being divided up into the haves and have nots, in order to create a societal wave of wealth distribution, via taxation and/or any other means available to the government.
Sounds like a good screen play, where the country is simply destroyed within by various factions.
I’m laughing so hard. I don’t drink anymore. Trying to lose weight. But a double scotch would go along way right now.
@Tasty- Your dogs would if, first, they were some other dog’s toys and, second, they got 50 giant bags of their favorite dog food for letting other dogs use someone else’s toys. (Why do people always forget the bankers were not loaning out their own money?)
“Many of the really shaky homeowners, who should never have gotten into the game, are getting their loans mediated by the government, over the ones still struggling to make ends meet, and dutifully paying their mortgages.”
Nope. The operative word is “few”, not many. As of November last year, only $4 billion dollars had been spent on HAMP, the program that sent Santelli raving. Almost nothing has gone to homeowners, but you wouldnt know that if you only listened to certain news sources. You are just certain that the govt is passing out money to the undeserving. Compare that with the money given to the banks. It is also convenient to ignore all of the people who did not take out subprime loans who are underwater just to make your narrative work.
“And, the rest of taxpayers are being divided up into the haves and have nots, in order to create a societal wave of wealth distribution, via taxation and/or any other means available to the government.”
Ignoring the fact that we divided into haves and have nots on the basis of income and wealth for the last 30 years. You want the top 0.1% to have all of the money and not pay taxes. Just how will the math work on that?
Steve
Not only are you asshole, you are also a moron. Admit it, you didn’t even read the article at the link did you.
It is clear you have nothing with which to argue except your cultish devotion to MMT.
@steve
(Why do people always forget the bankers were not loaning out their own money?)
If you mean they were mostly originating loans, I do not think many people understand that is what happens. They envision Bailey Building and Loan Association with Jimmy Stewart playing George.
The most profit is made on the worst credit scores. Bankruptcy brings in more offers not less. The financial institutions will “kill themselves” trying to get your business. You can always get credit, but you may be paying through the ass.
“It’s all about the Benjamins.”
@jan
Honestly, I do not get it.
If Jamie Dimon, Hank Paulson, Lloyd Blankfein, Vikram Pandit, etc. were tricked into extending credit by first-time home buyers or frowning regulators, I would suggest Wall Street fire them and hire somebody else. These people earn millions, and I have been assured they must be paid millions to retain their talent.
It should surprise no one. I’m with Verdon.
Drew, er, “Red.”
Honestly, I do not get it.
Nor, do I, Tasty.
You want the top 0.1% to have all of the money and not pay taxes. Just how will the math work on that?
Steve, the last time I looked at tax charts it appeared that the 1% were paying a tidy sum of taxes — except the likes of Buffett Google, or GE, perhaps, iromically strong supporters of democratic doctrine saying the rich should pay more taxes.
You’re too much a rebel to throw in with anyone, Red Drew.