No intellectually honest defense of austerity left standing

[Capt Bringdown]

Linchpin Pro-Austerity Paper Rife with Errors; Recomputed Results Show No Growth Hit from High Government Debt

There appears to be no intellectually honest defense of austerity left standing.

The IMF has already ‘fessed up that it does not work in practice, that cutting government spending when growth is weak simply leads the economy to contract further, making debt to GDP levels even worse than before. That admission was based on the miserable results it has produced when implemented.

But now, a new paper by Thomas Herndon, Michael Ash and Robert Pollin of PERI, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff (http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf),” is a devastating takedown of the factoid commonly bandied about by austerians, that if government debt rises above 90% of GDP, growth suffers. That belief in turn was based on a paper “Growth in the Time of Debt” by Carmen Reinhardt and Kenneth Rogoff, which did a 20 country comparison from 1946 to 2009. This paper claimed that when debt rose over the scary 90% to GDP level, growth fell to -0.1%.

Turns out that is not true. A number of economists had challenged the findings for asserting causality when all it showed was a correlation. In addition, a number of economists tried replicating the Reinhart-Rogoff results for years, with no success. Reinhardt and Rogoff refused to share their underlying computations. Five years later, now that the Reinhart/Rogoff work is widely accepted as true, they finally sent their “working spreadsheet” to the PERI team. As Herndon, Ash, and Pollin report:

Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not −0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

So the widely touted finding is wrong on its face. The paper goes through a litany of what is wrong with their analysis. The biggest gaffe is a spreadsheet error which rather conveniently omitted five countries, Australia, Austria, Belgium, Canada, and Denmark, entirely.

The good news is the paper has gone viral. Even non-economic sites have picked up on it and are flagging that the “error” has been hugely destructive, to wit, ars technica: Microsoft Excel: The ruiner of global economies?
A paper used to justify austerity economics appears to contain an Excel error. (http://arstechnica.com/tech-policy/2013/04/microsoft-excel-the-ruiner-of-global-economies/)
-- more --> (http://www.nakedcapitalism.com/2013/04/linchpin-pro-austerity-paper-rife-with-errors-recomputed-results-show-no-growth-hit-from-high-government-debt.html)

[Capt Bringdown]

An economics paper claiming that high levels of national debt led to low or negative economic growth could turn out to be deeply flawed as a result of, among other things, an incorrect formula in an Excel spreadsheet. The paper has been cited abundantly by the world's press politicians, including one-time vice president nominee Paul Ryan (R-WI).

[boutons_deux]

the rogoff take down is already posted

http://www.spurstalk.com/forums/showthread.php?t=212441&p=6485106#post6485106

[Winehole23]

tough luck, boutons. this one is better.

[Capt Bringdown]

NYT: A Study That Set the Tone for Austerity Is Challenged --more --> (http://economix.blogs.nytimes.com/2013/04/16/flaws-are-cited-in-a-landmark-study-on-debt-and-growth/?ref=business)

In recent years, policy makers in Europe and the United States have fastened on the notion that reaching a certain heavy burden of debt would threaten future economic health — often to justify austerity budgets that increased unemployment and sapped economic strength in the here and now.

But now some economists are challenging the very foundations of that idea, raising questions about whether such a debt threshold even exists and setting off a fierce debate that flared up on Tuesday across the Internet about whether potentially flawed research is at least partly responsible for the slow growth that has bedeviled most advanced industrial countries since the recovery from the financial crisis began in 2009.

Many politicians interpreted the research (Reinhart and Rogoff) as showing a direct relationship between debt and growth. If a country reached a debt burden of more than 90 percent of its annual economic output, the logic went, it would quickly fall into a debt trap that would leave it struggling to grow in the coming years. Prominent politicians — including Olli Rehn of the European Commission and Representative Paul D. Ryan, the chairman of the House Budget Committee — cited it as a reason to try to impose major budget cuts.

-- more --> (http://economix.blogs.nytimes.com/2013/04/16/flaws-are-cited-in-a-landmark-study-on-debt-and-growth/?ref=business)

[Th'Pusher]

Wondering why the people who whined about climate gate are not jumping on this with the same ferocity. Data was being manipulated to advance a political agenda. Are there no parallels?

[boutons_deux]

Wondering why the people who whined about climate gate are not jumping on this with the same ferocity. Data was being manipulated to advance a political agenda. Are there no parallels?

you're way behind the news. climate gate has been totally debunked as conspiracy by the BigCarbon-financed climate denier whores.

the math errors in the Rogoff have been confirmed by many analyses.

[boutons_deux]

The Reinhart-Rogoff Debt-to-GDP Error: Why it Matters




Written by Dean Baker


Thursday, 18 April 2013 12:02


The Carmen Reinhart and Ken Rogoff (R&R) paper purported to show that countries with debt-to-GDP ratios above 90 percent see sharply slower growth rates, and has been widely cited in policy discussions in the United States and Europe and used as a rationale for a near-term focus on deficit reduction. Politicians and policy analysts relied on the results of this paper to insist on spending cuts and tax increases even in economies that are operating at levels of output far below full employment (http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte/print#). Based on R&R’s findings, they argued that it was important to keep debt levels from crossing the 90 percent threshold.

This debate is important because the threat to growth from high debt levels was one of the main arguments against the aggressive use of fiscal policy to boost growth. The work of HAP and UMass economist Arindrajit Dube has essentially undermined the basis for this argument. No one can still maintain that we have good evidence that debt levels of the size we could conceivably face in the near future would impair growth.

The new paper from HAP works off the original spreadsheet used by R&R and uncovers several important calculation errors.


The most important of these errors was excluding four years of relevant data from New Zealand. Correcting this mistake raised New Zealand’s average growth rate in high debt years from the -7.9 percent R&R reported to a positive 2.6 percent.
Because only 7 countries have crossed the 90 percent debt-to-GDP barrier highlighted by R&R, this change alone raises the growth rate among the high debt countries by 1.5 percentage points.


When this and other adjustments are made to R&R’s data, the sharp falloff in growth rates for countries with debt to GDP ratios above 90 percent disappears.


While the corrected growth rate is still lower for high debt countries, the difference is much smaller and nowhere close (http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte/print#) to being statistically significant.
Furthermore, the sharpest falloff in growth rates occurs at very low debt levels (less than 30 percent of GDP).
If the corrected results from R&R could be taken as a basis for policy, then the implication would be that countries should strive to have extremely low debt to GDP ratios, certainly well below the levels that the United States and other wealthy countries have generally sustained.


Of course many economists have long raised conceptual objections to R&R’s basic approach. The most obvious of these is the problem of causation.


Countries with bad economic performances are likely to have high debt to GDP ratios.
This is both because they are borrowing a lot to support their economy and also because if GDP grows quickly then the debt (http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte/print#) to GDP ratio is likely to fall. (Since GDP is the denominator in the ratio, a faster growing GDP directly lowers the ratio.)
University (http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte/print#) of Massachusetts economist Arindrajit Dube did an analysis of the R&R data, “Growth in a Time Before Debt (http://www.nextnewdeal.net/rortybomb/guest-post-reinhartrogoff-and-growth-time-debt),” that compellingly demonstrated this pattern of reverse causation. He found that high levels of debt to GDP were not a good predictor of future GDP growth.
Specifically, the current year’s debt level tells us almost nothing about growth rates over the next three years.
However Dube found that the current year debt to GDP ratio is a very good predictor ofpast growth. There was a very strong relationship between high debt to GDP ratios in the current year and slow growth in the prior three years.
This finding strongly suggests that the weak relationship between growth and debt-to-GDP ratios in the corrected R&R paper are simply an artifact of reverse causality.Weak or negative growth leads to more debt.


The policy prescription from the corrected R&R paper is that people troubled by high debt-to-GDP ratios should focus their energies on maintaining strong economic growth (http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte/print#).


Japan can be poster child for this story of reverse causation. Its economy soared in the 80s driven by bubbles in both its stock and housing markets.
During this period it had very low debt to GDP ratios.
Then the bubbles burst in 1990. It subsequently had slow growth and also ran large deficits to support the economy.


There are other important conceptual reasons for questioning the R&R claim that high debt leads to slow growth.


Debt is to some extent arbitrary. A country like the United States holds literally tens of trillions of dollars of assets (e.g. land, mineral rights, fishing rights, the airwaves etc.) that it could sell at any time.
No one could really believe that if we sold of $1.5 trillion in assets and thereby shaved 10 percentage points off the debt-to-GDP ratio that the economy would suddenly boom.
Nor is the value of debt constant through time. The bonds issued at very low interest rates today will sell at steep discounts (http://www.cepr.net/index.php/blogs/beat-the-press/how-much-unemployment-was-caused-by-reinhart-and-rogoffs-arithmetic-mistake) when interest rates return to more normal levels.
Again, no one could really believe that if we bought back these bonds at sharp discounts, and thereby reduced our debt-to-GDP ratio, that the economy would then grow more rapidly.


We know that spending on infrastructure, education and other areas could boost growth and increase employment. At this point there is no reason other than personal prejudices against debt not to pursue policies to increase growth and create jobs.




http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte?utm_source=CEPR+feedburner&utm_medium=feed&utm_campaign=Feed%3A+cepr+%28CEPR%29

note that DC is not concerned about jobs or growth.

The Repugs are busy going after vaginas, USPS, unions, teachers, dozens of abortion bills, while the Dems have their heads up their asses.

[2centsworth]

the one argument would be government malinvestment . Though the current level of government spending isn't going to lead to "bankruptcy" it certainly isn't leading us to prosperity neither.

[boutons_deux]

it certainly isn't leading us to prosperity neither.

nope, govt spending is too small to counter-cyclically make up for the $Ts the corps' cash not being spent,invested.

[Capt Bringdown]

There's no need for all this economic sadomasochism (http://www.guardian.co.uk/commentisfree/2013/apr/21/no-need-for-economic-sadomasochism?CMP=twt_gu)

If Reinhart and Rogoff's 'error' has discredited the prevailing policy dogma, now is the time for an alternative that works

The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a "debt-to-GDP ratio" will always, necessarily, lead to economic contraction – and who had aggressively promoted it during Rogoff's tenure as chief economist for the IMF –, had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession.

As I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement. True, it's never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.

-- more --> (as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement. True, it's never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.)