"Liberals don't actually oppose all fiscal austerity. They cheered for the expiration of the Bush tax cuts on the wealthy and mostly shrugged at the end of the payroll tax holiday."
As Jon Chait notes "mostly shrugged" amounts to uh nothing. Not denouncing one of the moves towards austerity enough to satisfy Barro is not the same as supporting austerity when a Democrat is in the White House and spending like drunken sailors when a Republican is.
I will now google to see what "mostly shrugged" means
Ezra Klein recently sure doesn't claim he shrugged (in a context such that he would be tempted) http://wapo.st/1ayBRDa
"I’m not willing to throw out the idea that raising payroll taxes hurts the economy. But I have to admit that the payroll tax increase hasn’t hurt as much as I expected."
Dylan Matthews "Mark Zandi has argued that payroll tax cuts generate $1.24 of economic activity for every $1 they cost."
This is not a shrug http://krugman.blogs.nytimes.com/2011/08/05/anti-stimulus-politics/
nor this https://bitly.com/shorten/
"Politically the best way to get more stimulus is probably extending the payroll tax holiday for workers and "
Brad Plumer didn't shrug http://wapo.st/10Pj0Df
uncontestably ideological DailyKos and David Dayen agree http://bit.ly/13BIy5b
My mom and dad's representative didn't shrug (he's in the leadership) http://wapo.st/SSo6a3
when it come to BS "mostly" is mostly a strong enough weasel word to get away with anything, but Barro's claim does not stand up to googling.
Rob Ford thinks his scandal might be good for Toronto
Huh ! OK just ask youself, if you see two headlines "Worthwhile Canadian Initiative" and "Mayor Filmed Smoking Crack" which story are you going to read ?
To you unfortunate people living hin huge, beautiful, liveable cities* which no one can find on the map, keep up hope. There's a Ford in your future.
* I live in Rome which is huge a beautiful. Everyone can find us, because all roads lead to Rome. This only partially explains the traffic.
OK I have to tell the boring story. I'm late (as usual) I approach a traffic circle with the big red and white transoms put up so that people who ignore the circularity notice their mistake but aren't killed (they are ugly and clash with the nearby wall constructed before the birth of Christ but I love them) . The access lane to the circle is completely blocked by a bus with the engine running and the driver walking around on the sidewalk talking on a cell phone. I flash my lights and wonder what to do. I could, in theory, cross the double solid white line and drive on the wrong side of some transoms on the exit from the circle then turn right. But that would be illegal and, much worse, driving the wrong way towards a blind curve and maybe into an oncoming car.
A police car drives up. I am relieved as I assume there is a bent fender and I can ask one of the police officers to stop traffic so I can get to the traffic circle. Barely pausing the policeperson driver goes across the double white line and drives the wrong way around the transom. Oh. Someone behind me honks. I now fear that the police will ticket me if I do what one of them just did. But I do it anyway.
I drive a Ford Ka. I'm pretty sure there is a Ford in my future, driving the other way, head on.
But our neo Fascist mayor was never filmed smoking crack. So there.
The question is why is the AS-AD model rarely seen on econoblogs.
It seems to me you get an AS curve pretty quickly by assuming that, in the short run, some firms adjust prices and others don't. I mean you don't have to get into Calvo pricing to get to "facing increased demand for a given price a firm might produce and sell more or raise prices so let's assume a bit of both (really some firms don't change prices at all most days but uh aggregate wave hands jump to aggregate demand)". You have to say something about imperfect competition and second order costs of other than optimal pricing, but really, perfect competition is a strange idea which people don't grasp at first. I think the hard part is the counter-intuition explaining why with perfect competition and flexible prices the AS curve is vertical. AD has to be given as a function of the money supply. I mean that's the way things are. Yes real world central banks target an interest rate. I think there is little AS-AD on the web not because bloggers appeal to DSGE, but because most have gone all the way back to an IS curve (real interest and output) assuming AS doesn't matter and with the LM curve replaced with something like a Taylor rule. AS if anything, is an adaptive expectations augmented Phillips curve which matters only because of real interest rates, the monetary authority's response to inflation and debt deflation/inflation. I don't know of anyone whose policy advice or discussion of current events shows any hint of any intellectual influence of DSGE models. I see basically Friedmanites who say monetary policy is key (I don't understand their arguments) Keynesians who seem to be thinking of an IS curve and a few new classicals who, frankly, seem to have gone quiet lately (by which I really mean neither you, nor DeLong nor Krugman link to them). I read DSGE in discussion of new Keynesian DSGE models but I can't remember having any sense of anything coming from them beyond aggregate demand matters, expected inflation matters, and there is something like an expectations augmented Phillips curve (except for hysteresis which we will ignore). This is, I think Keynesian economics as of 1960.
There are two obvious points. As noted by Douthat, the proposal has nothing to do with really existing US Conservatism "Is it an agenda that the party is likely to actually embrace anytime soon? That’s much more doubtful". This is reform conservatism not reform liberalism and is based on the assumption that Douthat et al have something to teach liberals too.
I admire Douthat's dedication and patience, but I don't think he has useful policy proposals which are new to say Obama. He has a diagnosis which is roughly that inequality is a problem (not per se but in se or something) and existing social welfare programs are not perfect. I am going to skip to the proposals and fisk.
a. A tax reform that caps deductions and lowers rates, There is no hint of a justification for the proposal to lower rates in the diagnosis which I didn't cut and paste or later in the op-ed. The justification is, I guess, that reform conservatism must be conservative and to be a conservative one must propose lower tax rates. Clearly Douthat was just clearing his throat -- my guess is that he didn't seriously consider the possiblity of not typing "lowers rates" in a sentence which included "tax".but also reduces the burden on working parents and the lower middle class, whether through an expanded child tax credit or some other means of reducing payroll tax liability. (Other measures that might improve the prospects of low-skilled men, ranging from a larger earned income tax credit to criminal justice reforms that reduce the incarceration rate, should also be part of the conversation.) Been there done that. This was part of the ARRA (which Douthat denounces below) extended for two years with the payroll tax partial holliday whose further extension was blocked by Republicans. The tax proposal is to agree that the Democrats are right (and stop talking about the 47%). then a bit of soft on crime as the icing on the cake. I agree, but this is moderate leftism not reform conservatism.b. A repeal or revision of Obamacare that aims to ease us toward a system of near-universal catastrophic health insurance, and includes some kind of flat tax credit or voucher explicitly designed for that purpose. Ah catastrophic health insurance related program activities. "ease us towards" was too radical, so he added the additional weasel word "aims". Also been there done that. It is the tax on cadillac health plans. It clearly was the maximum which was politically possible. the proposal in general would be rejected by both parties and the vast majority of the public. c. A Medicare reform along the lines of the Wyden-Ryan premium support proposal, and a Social Security reform focused on means testing and extending work lives rather than a renewed push for private accounts. Here Douthat assumes that Medicare advantage on steroids will reduce costs even though Medicare advantage increased costs. This is a triumph of faith over evidence. It is just not reality based. Means testing social security will create perverse incentives (it punishes saving) and save little money. Extending work lives is the most regressive approach to social security reform and makes no sense (we work to live we don't live to work).
d. An immigration reform that tilts much more toward Canadian-style recruitment of high-skilled workers, and that doesn’t necessarily seek to accelerate the pace of low-skilled immigration. (Any amnesty should follow the implementation of E-Verify rather than the other way around, guest worker programs should not be expanded, etc.) Douthat agrees with Obama on immigration reform. Notably he sides with the AFL-CIO against the Chamber of Commerce. I agree that keeping unskilled workers out is right wing, but I'm the only one. This is just agreeing with Obama but trying to be rude about it.e. A “market monetarist” monetary policy as an alternative both to further fiscal stimulus and to the tight money/fiscal austerity combination advanced by many Republicans today. I don't think this will work. I have written much too much about it. Note that Douthat advocated further fiscal stimulus as point a. f. An attack not only on explicit subsidies for powerful incumbents (farm subsidies, etc.) but also other protections and implicit guarantees, in arenas ranging from copyright law to the problem of “Too Big To Fail.” The path to reform is for Conservatives to occupy Wall Street. Here he is well to the left of Obama and out there with Sherrod Brown (and the diaper guy).
The reform conservatism is moderate progressivism (basically the Obama agenda) plus the Ryan Medicare proposal (try what's failed) and standard conservative tics (lower rates, Any amnesty should follow, no further fiscal stimulus).
I am going to skip back to the diagnosis part. I think that Douthat's proposals suggest only one objection to
1) The core economic challenge facing the American experiment is not income inequality per se, but rather stratification and stagnation [skip] 2) The existing welfare-state institutions we’ve inherited from the New Deal and the Great Society, however, often make these tasks harder rather than easier: Their exploding costs crowd out every other form of spending, require middle class tax increases and threaten to drag on economic growth; their tangled web of subsidies and credits and tax breaks often benefit the already-affluent and create perverse incentives for the poor, and the distortions created by the way they pay for health care, in particular, contribute mightily to the rising cost of health insurance and thus the stagnation of middle class incomes.
Note the proposal suggests nothing (more exactly nothing not done already by Democrats and reversed by Republicans) about the alleged "perverse incentives for the poor." I haven't clicked the link, but I note that Douthat's only proposal to this is something along the lines of a making work pay tax credit -- that is from Obama's 2008 proposal (temporarily) enacted in 2009.He wants to reduce tax breaks for the affluent. This was in Obama's 2008 proposal and he is still fighting for it. Much of this is endorsement of Obama 2008 program disguised by "welfare state" New Deal" and "Great Society." Douthat provides no link or argument about how public spending on health care drives up private health insurance premiums. I think he doesn't because he can't. I guess he could be referring to the fact that health insurance isn't taxed. This is not social welfare or inherited from the New Deal or the Great Society. Replacing the exemption with a tax credit is an egalitarian move. Obamacare is the first step in that direction. But my point (if any) in quoting the diagnosis is to note that none of the proposals have anything to do with anti poverty programs. The only link between the diagnosis and the proposals is that both have something to do with health care spending.
Me: I claim DSGE models generally need one arbitrary constant per phenominon to explain...The number of exogenous unexplained random variables keeps growing...DSGE seems not to have pulled away with this paper. Smith: I'd say instead that it's not clear that DSGE has pulled away. A new parameter has been added to explain a previously ignored phenomenon. But that doesn't mean that the model will then fail to "pull away" by explaining more phenomena in the future without the addition of yet more parameters.
hmm I can't resist arguing about grammar. "DSGE seems not to *have* pulled away" is in some past tense. I didn't make a claim about what "will then" happen in the future. Well uh tenses uh grammar. I stand by my claim.
Me: Fitting is not forecasting. It is easy to be wise after the fact.
Smith: Yes, sure. BUT, keep in mind that pseudo-out-of-sample forecasting, while not the same thing as true out-of-sample forecasting, is also not the thing as fitting.
I think that pseudo out of sample forecasting can be substantially the same as fitting.
The ways this can happen are
A)one tries something find it doesn't fit pseudo out of sample then one tries something else. This is fitting. the Computer isn't doing all of the work but the process is trying different things till one gets a good fit.
B) Pseudo explaining an ad hoc reduced from model which fits the data. First fit. Then figure out a model which implies the coefficients of the reduced form model. In this case, step 1 is look for dramatic extraordinary behavior of time series in 2008 (many are well know and were discussed a lot in 2008-9 especially including huge quality premia).
Step 2 toss one in a VAR along with the DSGE state from some sort of filter. This is fitting not forecasting
Step 3 motivate the variable as an indicator of an otherwise hard to observe rare shock and again filter so that the deep disturbance in the problematic period is basically that newly introduced shock.
I get really really cranky in comments. this post is pure curmuggeon therapy and not worth reading. the story is a DSGE model plus the financial accelerator due to Bernanke Gertler and Gilchrist (1999) fits the data from the great recession OK:
Wow you were impressed ! I am feeling very very cranky, partly as i feel abandoned on anti-DSGE Island. I haven't read the paper, so my comment isn't worth reading.
That said, I will now imagine a superficially convincing but invalid article with that title and abstract.
1) Recall the absolutely key fundamental insight "making predictions is difficult, especially about the future" Yogi Berra [update spelling corrected thanks to anonymous -- I'm a worse speller than the average angrybear booboo]. What we have is 4 years after the event a working paper in which a DSGE model manages to fit the now long known data. Fitting is not forecasting. It is easy to be wise after the fact.
2) I claim DSGE models generally need one arbitrary constant per phenominon to explain. In this case it is the correlation between a quality premium and subsequent output growth. Scientific success occurs when the number of stylized facts fit or correct predictions made exceeds the number of degrees of freedom. A failed approach is neck and neck with the data. DSGE seems not to have pulled away with this paper.
3. The number of exogenous unexplained random variables keeps growing. 2008 was extraordinary, because a large but not post WWII unprecedented downturn was associated with huge huge yield spreads. I am pretty sure that they are ascribed to something unobservable. In Bernanke Gertler Gilchrist 1999 quality premia change endogenously with GDP. Ascribing 2008 to a financial shock will not shock anyone. The question is whether we can predict such financial events. A model with exogenous shifts is the variance of ability across entrepreneurs does not do this.
4)is there anything added by the D or the GE ?
In Bernanke Gertler Gilchrist 1999 the effect of investment decisions by other firms on sales by this firm and so the interest rate it must pay to borrow are modelled. There is something genuinely general equilibrium there. I concede that it is a good paper in the (fairly recent) theoretical macro literature (I think this may be my only such concession except for related papers by over-lapping sets of authors).
But you can get a good fit to recent investment with an accelerator and an even better fit if you toss in "loan officer report on lending conditions"
Consumption is always well modelled as a backward looking smoothed series of aggregate disposable income. Real output is well modelled as aggregate demand. I think inflation is well modelled with an adaptive expectations augmented Phillips curve.
Models which are, by now, ancient, fit the data very well certainly needing no more fiddling than the DSGE model which fits OK.
What is the point of DSGE ? The idea is that a micro founded model makes useful predictions following extraordinary events (so just looking what happened last time isn't OK). That sure didn't work for DSGE in 2009. Or also that they work across changes in policy regimes.
So a multiplier accelerator Phillips curve model would make the same predictions whether or not the FED were attempting extreme non standard monetary policy. Uh it did. and it fit the data. Fancier models made it possible to fantasize about manipulating expectated inflation and therefore getting higher investment than one would guess with an accelerator. The linked study [update: the Goldman-Sachs study cited by Menzie Chin at econobrowser] shows that this was a step away from reality. posted by Robert
permalink and comments5:42 AM
I comment on the comments thread to David Warsh's post here (there I neglected to put quotation marks around the Meegs quote).
Your comment is awaiting moderation.
This is an interesting comments thread. I noticed no attempts to defend the post at all. Since many of the comments point out false claims of fact in the post, defending it would be a challenge. However, our host should read the comments and either defend his claims or retract them.
"There is an alternate universe–one I really wished we lived in–in which BRAD DELONG AND PAUL KRUGMAN Ball … Alas, the Keynesians led a politically INeffective campaign for fiscal stimulus."
They campaigned for both. In particular, after roughly 2009 they switched their focus from fiscal to monetary policy, basically because they knew there was no way another large stimulus would get through Congress (Krugman by the way, argued in early 2009 that the ARRA was the only chance for fiscal stimulus so this is just another correct Krugman prediction).
DeLong especially is quite casual about the difficulty of obtaining higher inflation. I have regularly argued with his claim that another QE will work, that the latest QE did work and that of course the latest QE didn’t work, because Bernanke didn’t say the exact right magic words when announcing it.
Now only in an alternative universe could a DeLong/Krugman campaign be politically effective, since Republicans are against whatever they are for.
What will we learn the day Ben Bernanke announces that we are starting that path towards normalization? It might be that we simply learn that he is becoming optimistic about growth in the US. This will be good news. [skip] this has to be good news.
There is a second and more pessimistic scenario: the day Ben Bernanke announces that QE is ending we learn that the economy is not doing much better but that the FOMC has simply changed their mind.
[skip] what matters is how the stock market will read the communications of the central bank. The words chosen to communicate their actions at that point ... will make a great difference.
I can't comment there. I comment here. First I don't see why it has to be good news that Bernanke is optimistic. It isn't as if traders have such deep respect for his judgment (I do but I have never bought a share of stock). But more how can Fatas know that the words chosen by the FOMC will make a great difference. The QEIII and QEIV announcements don't seem to have made a great difference (the S&P 500 index went in opposite directions on the two days if I eyeball FRED graphs correctly).
Also see the post below. Fatas is assuming that traders understand that QE is not pumping up share prices aside from it's effect on future GDP growth and such like. But many are sure that QE is pumping up share prices somehow. The assumption is that people don't believe something which makes no sense to Fatas even though they claim to believe it. I don't think that is a good assumption. posted by Robert
permalink and comments6:25 AM
So if the banks and shadow banks can just as easily repo their Treasury and mortgage holdings to finance lending, and there is no link between base money and credit creation, why is the Fed doing QE in the first place? By keeping rates low well out on the yield curve and providing comfort that the Fed will be there to fight the risk of recession and deflation, it creates an environment that enables, over time, a normalization of risk taking in the real economy. Our revealed belief is that the Fed can chop these nastier outcomes off the left-hand side of the distribution. As a result we start feeling better about getting our money back out of the mattress and putting it back to work.
This is not a semantic point. I can hear traders saying, “yeah, whatever, who cares, don’t fight the Fed, just buy.” But this concept has huge implications for the phase where the Fed decides to remove the training wheels. If the Fed money is not directly propping up the stock market and the economy underneath has been healing, the much talked about wedge between “Fed-induced valuations” and “the fundamentals” is likely considerably smaller than the consensus seems to think. It’s less “artificial.” In short, what all this means is the day the Fed lets up off the gas might give us a blip, or maybe that long-awaited correction, but ultimately the Policy Bears will end up getting crushed, again.
You assume that QE must be driving share prices up somehow. You explain how it isn't as simple as many think (I didn't know about them). But what if this isn't happening at all ?
So why is the Fed doing QE. Well we are in uncharted terrritory. I have great respect for Ben Bernanke, but that doesn't mean that he can tell if QE works without trying it. That woul require not just being a genius (I'm sure he is) but having rational expectations and he is human. Also one uses the tools one has. Even if QE doesn't work very well, it's all they have left at the zero lower bound. It's better to light one small candle than curse against the darkness. It is also better to buy $600,000,000,000 of Treasury notes (QE II) than curse against the darkness.
In fact, the post as a whole seems to me to suggest that QE has caused lower stock prices. Convincing titans of finance that something is driving prices above fundamentals should drive prices down as arithmetic says that this belief causes them to estimate a lower fundamental value. And they have titanic risk bearing capacity. The fear of a correction when the Fed takes the training wheels off should cause lower prices. What if that is the main effect of QE on share prices.
Correlation is not causation. Especially the argument thta these things happened in the same quarter so one caused the other is very unconvincing. I agree that the standard event study depends on the false EMH, but the modest announcement effect of QE III and wrong sign daily shift of QEIV should make you worry no ? posted by Robert
permalink and comments6:14 AM
In a rare treat Dean Baker disagrees with Paul Krugman. Sadly, I agree with Paul Krugman (but he just has to write something with which I disagree soon, I am sick of waiting).
Via Mark Thoma who makes a very interesting contribution to the debate
Paul Krugman misrepresents the central focus of the left-right divide in national politics. He tells readers:
"Start with the proposition that there is a legitimate left-right divide in U.S. politics, built around a real issue: how extensive should be make our social safety net, and (hence) how much do we need to raise in taxes? This is ultimately a values issue, with no right answer."
This is not an accurate characterization of the left-right divide in U.S. politics since there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance. Polls consistently show that the overwhelming majority of people across the political spectrum strongly support keeping these programs at their current level or even expanding them.
Note the bold. Krugman definitely didn't say it was the left-right divide. Krugman went on to discuss illegitimate left right divides, in which one side (hmm always the right) denies reality. I think that Baker is just noting that, as Krugman went on to argue, reality vs fantasy is the main divide in US politics.
There are, however, a lot of largely empirical questions whose answers need not, in principle, be associated with one’s position on this left-right divide but, in practice, are. A partial list:
I don't think that Krugman claimed that the legitimate debate divided the population roughly equally. He just said it was legitimate. The consistent advocates of small government may be few, but Krugman didn't say that they are numerous. Also, of course, the support for the huge domestic programs is not unanimous, so there is a debate, even if it is not the electorally crucial debate.
In fact, Baker tends to support the conclusion that Krugman reached. Krugman's main claim is that the political debate is, to a large extent, the reality based vs the fantasy based. Baker correctly notes that self identified conservatives and Republicans want to expand the really big programs, so when asked program by program they propose higher government spending. However self described moderates (and some liberals) claim to support lower government spending in the abstract. The real struggle is the vast majority of US adults Vs arithmetic.
I'd add to Krugman's partial list of 5 debates over simple matters of fact 6 more (and there are many more like this)
6. can you increase spending on Defence, Social Security, Medicare, and Medicaid (which is about as popular as Medicare) and cut total government spending roughly in half (the median fraction described as "wasted")
7. Is the Federal Bureaucracy over 5% of total employment (it's about 1% not counting the DOD and the post office)
8 Is the foreign aid budget over 10% of the total federal budget (the median answer in a poll. it was over 20% in another -- it is about two thirds of one percent of the federal budget).
9. Can people on TANF an food stamps live a middle class lifestyle
10. Is the food stamp budget over 10% of the Federal budget (it is about 2.3%).
11. Does more of the Federal welfare budget go to bureaucrats or to poor people (OK that may be Michelle Bachman vs reality and the majority of her fellow citizens)
The difference between my 6 and Krugman's 5 is that elite conservatives know the answers to my 6 and admit that they do when debating with elite liberals. Also many moderates and liberals make totally incorrect guesses about the federal budget which are wrong in the same direction as conservatives' guesses.
The fact that the programs which many people want to cut are small does not affect the political debate or elections, because those people have convinced themselves that they are large.
I think Dean Baker responded to Krugman's throat clearing (aka his Obamanation) and neglected the point he wanted to get to, to be sure, only after inserting a "to be sure" to be sure he wouldn't be accused (again) of claiming no one can legitimately disagree with him.
Back in the late
1980s, you helped shape the concept of an emerging marketdebt overhang. The financial crisis has laid bare the fact that
the dividing line between emerging markets and advanced countries is not as
crisp as once thought. Indeed, this is a recurring theme of our 2009
book,This Time is Different: Eight
Centuries of Financial Folly.
Today, the growth bind of advanced countries in the periphery of the eurozone
has a great deal in common with that of emerging market economies of the 1980s.
their debts are not denominated in a currency of their own. The pattern is clear – borrowing in Euros is
risky as is borrowing in dollars for countries other than the USA. Following DeGrauwe (and I’m sure countless others) Krugman has
repeatedly stressed the difference between debts in a currency the debtor can
print at will and debts in other currencies.
Let’s see if R&R ever mention the fact that debts in the eurozone
are denominated in Euros.
We admire your past
scholarly work, which influences us to this day. So it has been with deep
disappointment that we have experienced your spectacularly uncivil behavior the
past few weeks. You have attacked us in very personal terms, virtually
non-stop, in yourNew York Timescolumn and blog posts. Now you have doubled down
in theNew York Review of Books, adding the accusation we didn't share our
data. Your characterization of our work and of our policy impact is
selective and shallow. It is deeply misleading about where we stand on
two sentences discuss fundamentally different issues. The policy impact is not the same as their
stand on policy. This should be obvious
to everyone who reads newspapers.
And we would
respectfully submit, your logic and evidence on the policy substance is not
nearly as compelling asyou imply.
take aim at our 2010 paper on the long-term secular association between high
debt and slow growth. That you disagree with our interpretation of the results
is your prerogative. Your thoroughly ignoring the subsequent literature,
however, including the International Monetary Fund's work as well as our own
deeper and morecomplete 2012 paperwith Vincent Reinhart, is troubling.
idea that post WWII OECD experience is what is relevant to post WWII OECD
policymakers is not eccentric at all.
More data does not mean more data which are relevant. Krugman has explained why he considers data
from countries which borrow in foreign currencies or which are on the gold
standard to be irrelevant. He has
explained why he focuses on the data he uses.
The claim that a paper which ignores these issues is “deeper and more
complete” than a paper where they are not relevant is unsupported by logic or
Perhaps, acknowledging the updated
literature-not to mention decades of theoretical, empirical, and historical
contributions on drawbacks to high debt-would inconveniently undermine your
attempt to make us a scapegoat for austerity. You write "Indeed, Reinhart-Rogoff may have had more
immediate influence on public debate than any previous paper in the history of
this is hyperbole, it should be possible to come up with an example of a paper
which has had more immediate influence on public debate. R&R don’t, because they can’t. In any
case, the assertion that a claim is “wild hyperbole” should be based on
something not nothing. The claim is very
likely true. Strong claims are not necessarily hyperbole.
you never seem to
mention our other line of work that has surely been far more influential when
it comes to responding to the financial crisis.
claim “surely been more influential” is completely unsupported by any
evidence. Note that R&R seem to ignore
the phrase “public debate.” Krugman was not discussing influence on academic
economists. Do R&R claim that the
paper was quoted more often in newspapers in congressional and parliamentary
debates, in speeches by policy makers ?
In the context of a discussion of “public
debate” the claim is plainly obviously false and R&R must know it.
2009 book (released before our growth and debt work) showed that recoveries
from deep systemic financial crises are long, slow and painful. This was
not the common wisdom at all before us,as you yourself have acknowledged on more than one occasion.
also repeatedly noted that recoveries from deep systemic financial crises are
long slow and painful before the book was published. The books is a work of economic history which
adds a lot. But R&R should have
noted that Krugman had critiqued the alleged common wisdom before their book
Over the course of
the crisis, and certainly by 2010, policymakers around the world were using our
research, alongside their assessments, to help justify sustained macroeconomic
easing of both monetary and fiscal policy fronts.
This claim is obviously false. It asserts that “by 2010, policymakers around the world … justify sustained macroeconomic easing of …
fiscal policy. “ Which policy makers ? What easing of fiscal policy ? The claim is
absurd on its face. There was not fiscal
policy easing in much of the world in 2010.
R&R seem to be totally out of contact with planet earth. Now it may be that policy makers were using
their research to advocate fiscal policy easing. I’d be interested in names, dates and
citations, since I know of no such policy makers. But the claim that there was fiscal policy
easing to justify is totally nuts. Also
Krugman made a relative claim. Influential does not mean more influential than
the R&R 2010 AEA presentation.
I google reinhard rogoff ninety danger Circa 585.000 risultati(0,33 secondi)
I google reinhard rogoff this time is different Circa 400.000 risultati(0,17 secondi)
Not so surely.
Your desire to blame our later 2010 paper for the
stances of some politicians fails to recognize a basic reality: We were
out there endorsing very different policies.
a plainly false assertion on a simple matter of fact Krugman has repeatedly noted that basic reality
claim of fact is false. They are
literate and claim to have read Krugmans critiques of them. .I found the proof of the falsehood of their
claim that Krugman failed to recognize a basic reality in a few minutes by
googling krugman reinhart rogoff..
Anyone with experience in these matters knows that
politicians may float a citation to an academic paper if it suits their
purposes. But there are limits to how much policy traction they can get
with this device when the paper's authors are out offering very different
a claim about history which is plainly false.
Arrow is a social democrat but his work has been used very successfully
to argue that markets work an elections don’t.
Phillips was horrified by the use made of his scatter plot (read Zombie
Economics). Uh Godwin’s law violation
warning. Darwin did not advocate
genocide but that did not put limits on Hitler.
Rousseau said that France was not capable of Democracy and any effort to
establish it in France would fail, but that didn’t limit Robespierre. The claim is obviously false. The episode of
R&R’s AEA presentation is proof enough to anyone who reads the papers, but
human history is full of proof that the claim is plainly nonsense. No sensible person could possibly believe
such a thing. I am sure that R&R
don’t except when it is convenient to them.
You can refer to the appendix to this letter for our
views on policy through the financial crisis as they were stated publicly in
real time. We were not silent.
Very senior former policy makers, observing the
attacks of the past few weeks, have forcefully explained that real-time
policies are very seldom driven to any significant extent by a single academic
paper or result.
seldom does not mean never. Note that no
current policy makers deny that their AEA presentation drove policy debates to
a significant extent. I know of no one who has made that claim about that
particular paper, because it is false. R&R discuss the general pattern and
assert that if something is “very rare” it couldn’t have happened recently Such plainly invalid arguments made by such smart
people are “very seldom”.
It is worth noting that in the past, polemicists have
often pinned the austerity charge on the International Monetary Fund for its
work with countries having temporary or permanent debt sustainability
issues. Since its origins after World War II, IMF programs have almost
always involved some combination of austerity, debt restructurings, and
structural reform. When a country that has been running large deficits is
suddenly no longer able to borrow new funds, some measure of adjustment is
invariably required, and one of the IMF's usual roles has been to serve as a
lightning rod. Even before the IMF existed, long periods of autarky
and hardship accompanied debt crises.
also worth noting that this has nothing to do with the debate between Krugman
and R&R. They are attempting to tar
him with guilt by association with IMF bashers.
Now let us turn to the substance. The events of the
past few weeks do not change basic facts and fundamentals.
Some Fundamentals on Debt
advanced economies now have levels of debt that surpass most if not all
historic episodes. It is public debt and private debt (which often becomes
public as a crisis unfolds). Significant shares of these debts are held by
foreigners in most cases, with the notable exception of Japan. In Europe,
where the (public and private) external debt exposures loom largest, financial
de-globalization is well underway. Debt financing has become an
increasingly domestic business and a difficult one when the pool of domestic
saving is limited.
Note no mention of the Euro. Does the claim apply to European countries
outside of the Eurozone ? R&R
completely ignore the issue of domestic denominated vs foreign denominated
debt. They must know it makes a critical
As for the United States: our only short-lived
high-debt episode involved WWII debts, which were held by domestic residents,
not fickle international investors or central banks in China and elsewhere around
the globe. This observation is not meant to suggest "a scare"
in the offing, with bond vigilantes driving a concerted sell-off of Treasuries
by the rest of the world and a dramatic spike US in interest rates.
when denying that they are suggesting a scare they neglect to mention that the
result of the bond vigilantes could be depreciation of the dollar and increased
demand for US made products. The balance
depends on FOMC policy (including future expected FOMC policy). Rogoff is, to put it very mildly, very
familiar with the concept of an exchange rate and the importance of exchange
rate regimes (I agree with Krugman that he is the world’s number 1 or so
international macroeconomist). A
discussion of a sell-off of Treasuries with no mention of exchange rates is an attempt
to hide the reason that their work is not relevant to the US policy debate.
on financial repression suggests a different scenario. But many emerging
markets have stepped into bubble-like territory and we have seen this movie
before. We should not take for granted their prosperity that makes
possible their continuing large-scale purchases of US debt. Reversals are
possible. Sensible risk management means planning for these and other
contingencies that might disturb today's low global interest rate environment.
Treasury also sells long term debt instruments.
That is a way to plan for those contingencies. There is no reason it has
to rely on future decisions by investors.
It can lock in low interest rates now.
Surely R&R know about Treasury bonds.
debt and growth. The Herndon, Ash and Pollin paper, using a different
methodology, reinforces our core result that high levels of debt are associated
with lower growth. This fact has been hidden in the tabloid media and
blogosphere discourse, but this point is made plain by even a cursory look at
the full set of results reported in the very paper they critique.
Still at U Mass Amherst Dube shows that the timing is
low growth then a high debt to GDP ratio except for extremely high growth at
extremely low ratios (basically Axis countries whose debt was forgiven growing
quickly soon after WWII as noted by Krugman).
I have noted that for the post wwII OECD dataset there is no evidence at
all that high debt to GDP granger causes low growth. Herndon, Ash and Pollin (2013) is an
important paper, but it was not the last contribution to the literature.
the result was prominently featured in our2012Journal of Economic Perspectivespaper with Vincent Reinhart on Debt Overhangs, which
they do not cite. The main point of our 2012 paper is that while the difference
in annual GDP growth between high and lower debt cases is about one percent a
year, debt overhang episodes last on average 23 years. Thus, the cumulative
effect on income levels over time is significant.
Notice how the data are divided into categories “high
and lower debt” this creates a step by assumption. This is the key point of
debate with Krugman (see his reply) http://krugman.blogs.nytimes.com/2013/05/26/reinhart-and-rogoff-are-not-happy/ . The
calculation is not useful to policy makers. Also growth is not just brief recessions
and the effect of debt (note a literature too huge to cite) so this does not address
the issue of causation (as frequently suggested by CR&R and I think VR and
no I won’t find the link)).
the debate of the last few weeks does not change the fact that debt levels
above 90% (even if one entirely rejects this marker for gross central
government debt as a common cross-country "threshold") are very rare
altogether and even rarer in peacetime. From 1955 until right before the
recent crisis, advanced economies spent less than 10% of those years at a
debt/GDP ratio of higher than 90%; only about two percent of the years are
above 120% debt/GDP. If governments thought high debt was a riskless
proposition, why did they avoid it so consistently?
This is policy analysis made under the assumption that
policy makers know what they are doing. If one is willing to make that
assumption, there is no reason to bother with economic research.
Debt and Growth Causality
Your recent April
29, 2013NY TimesblogThe Italian Miracleis meant to highlight how in high-debt Italy, interest
rates have come down since the European Central Bank's well-placed efforts to
act more as a lender of last resort to periphery countries. No
disagreement there. However, this positive development is meant to re-enforce
your strongly held view that high debt is not a problem (even for Italy) and
that causality runs exclusively from slow growth to debt. You do not
mention that in this miracle economy, GDP fell by more than 2 percent in 2012
and is expected to fall by a similar amount this year. Elsewhere you have
stated that you are sure that Italy's long-term secular growth/debt problems,
which date back to the 1990s, are purely a case of slow growth causing high
debt. This claim is highly debatable.
repeatedly-expressed view that slow growth causes high debt but not visa-versa,
is hardly supported by the recent literature on the subject.
sentence immediately above is totally false.
R&R either know it is false or have neglected to read anything
Krugman wrote on the question. For
example he wrote
also puzzled by the way R-R deal with the reverse causation argument: they
admit it can happen, but argue that causation doesn’t always run from growth to
debt, but can run the other way. Isn’t that attacking a straw man?”
claim that the assertion which they definitely claim he made is a “straw man”
is the strongest possible proof that their claim is false.
Of course, as we
have already noted, this work has been singularly ignored in the public
discourse of the past few weeks. The best and worst that can be said is
that the results are mixed. A number of studies looking at more
comprehensive growth models have found significant effects of debt on growth.
We made this point in theappendix to ourNew York Timespiece. Of course, it is well known that the
economic cycle impacts government finances and therefore debt (causation from
growth to debt). Cyclically adjusted budgets have been around for
decades, your shallow characterization of the growth-debt connection.
is not a complete sentence, but the argument is that difference in growth are
nothing but the effects of debt plus brief recessions. This is nonsense. I am beginning to think
that maybe R&R really don’t understand this issue. It’s as if they have overlooked the entire
much too large growth regression literature.
Also it is easy to test if the lower growth due to debt/GDP over 90%
(compared to =90%) is due to short term correlation between the previous year’s
growth and this yea’ss ratio. For the post WWII OECD sample it is. This is one
simple regression. R&R have no
excuse for letting me be the first to report it.
As for ways debt might affect growth, there is debt
with drama and debt without drama.
Debt with drama. Do you really think that a country that is
suddenly unable to borrow from international capital markets because its public
and/or private debts that are a contingent public liability are deemed
unsustainable will not suffer lower growth and higher unemployment as a
result is a sharp depreciation of the currency sure. Rogoff is pretending he
doesn’t know what exchange rates are. I was in Italy when there was a sudden
collapse of faith in Lira denominated Italian debt (1992). It was the best thing that happened to the
Italian economy in decades.
and banks shut out from international capital markets, credit to firms and
households in periphery Europe remains paralyzed. This credit crunch has a
crippling effect on growth and employment with or without austerity.
Fiscal austerity reinforces the procyclicality of the external and
domestic credit crunch. This pattern is not unique to this episode.
only found when countries borrow in currencies which they can’t print at will
and countries which are determined to stay on the gold standard. R&R pretend that Eurozone problems have
nothing to do with the Euro.
Policy response to debt with drama. On the policy response to this sad state of affairs,
we stress that restoring the credit channel is essential for sustained growth,
and this is why there is a need to write off senior bank debt in many
countries. Furthermore, there is no reason why the ECB should buy only
sovereign debt-purchases of senior bank debt along the lines of the US Federal
Reserve's purchases of mortgage-backed securities would be instrumental in
rekindling credit and working capital for firms. We don't see your
attraction to fiscal largesse as a substitute. Periphery Europe cannot afford
it and for Germany, which can afford it, fiscal expansion would be procyclical.
Any overheating in Germany would exert pressure on the ECB to maintain a
tighter monetary policy, backtracking some of the progress made by Mario
the concern is that Draghi et al will be more austere than Merkel et al. It is an absurd preoccupation. German y overheating means inflation in
Germany. Europe needs inflation in the
core or deflation in the periphery. IIRC
deflation is always associated with severe recession whether or not there is a
A better use of
Germany's balance sheet strength would be to agree on faster and bigger
haircuts for the periphery, and to support significantly more expansionary
monetary policy by the ECB.
might or might not be better, but it is much less fun for Germans. It obviously won’t happen (nor will German
fiscal stimulus). It is a fantasy magic pony plan. To be interested in whether debt forgiveness
would be better than tax cuts one has to ignore political realities
entirely. In any case, there is no
reason with Krugman Reinhart and Rogoff can’t argue for both debt forgiveness
and German tax cuts. It isn’t as if
Germany’s balance sheet strength will be exhausted if they advocate a lot of
both. Also my pet obsession. The ECB is now close to the ZLB. I think it is clear that there isn’t much
more they can do (the US experience shows how totally ineffective nonstandard
monetary policy is in the absence of support from the fiscal authority).
Debt without drama. There are other cases, like the US today or Japan
since the mid-1990s, where there is debt without drama. The plain fact
that we know less about these episodes is a point we already made in ourNew York Timespiece. We pointedly do not include the historical
episodes of 19thcentury
UK and Netherlands among these puzzling cases. Those imperial debts were
importantly financed by massive resource transfers from the colonies. They had
"good" high-debt centuries because their colonies did not. We
offer a number of ideas in our 2012 paper for why debt overhang might matter
even when there is no imminent collapse of borrowing capacity.
Bad shocks do happen. What is the foundation for your
certainty that as peacetime debt hits new records in coming years, the United
States will be able to engage in forceful countercyclical fiscal policy
if hit by a large unexpected shock? Furthermore, do you really want to
find out the answer to that question the hard way?
The US Federal Government has an
unlimited supply of dollars. The idea
that it might run out of dollars is obvious nonsense. It is like worrying about
a hot air shortage in the US Senate.
This is plainly obvious. There is
no way that R&R can fail to understand that the risk is of a future policy
error (resulting in a severe recession or high inflation) not of a binding
limit to the US Federal Government’s access to dollars. Also it takes a lack of
imagination or empathy to worry more about a possible future problem with the
unemployment rate is 7.5% the deep poverty rate is at record levels (party
because records don’t go back very far) and long term unemployment is far above
the previous post WWII high. I stress that think that in normal times the US
Federal Government should run a surplus, and indeed build a sovereign wealth
fund. But I believe this because I believe that people aren’t Ricardian so debt
creates the illusion of wealth and sub optimal capital accumulation and not
because I think the USA might run out of dollars.
The United Kingdom, which does not issue a reserve
currency, is more dependent on its financial sector and suffered a bigger
banking bust, has not had the same shale gas revolution, and is more vulnerable
to Europe, is clearly more exposed to the drama scenario than the US. And
yet you regularly assert that the situations in the US and UK are the same and
that both countries have the costless option of engaging in an open-ended
fiscal expansion. Of course, this does not preclude high-return
infrastructure investments, making use of the public balance sheet directly or
indirectly through public-private partnerships.
Policy response to debt without drama. Let us be clear, we have addressed the role of
somewhat higher inflation and financial repression in debt reduction in our
research and in numerous pieces of commentary. As our appendix shows, we
did not advocate austerity in the immediate wake of the crisis when recovery
was frail. But the subprime crisis began in the summer of 2007, now six
years ago. Waiting10 to 15 more yearsto deal with a festering problem is an invitation for
decay, if not necessarily an outright debt crisis. The end may not come
with a bang but with a whimper.
may. Also R&R may write an open
letter tomorrow saying Krugman was right about everything and apologizing for
this letter. But it’s not the way to
bet. An argument that a policy proposal
may cause problems without any evidence that it would or any explanation of how
it could is not worthy of Reinhart and Rogoff. They are appealing to prejudice,
because they have no evidence or argument.
Scholarship: Stick to the facts
The accusation in
theNew York Review of Booksis a sloppy neglect on your part to check the facts
before charging us with a serious academic ethical infraction. You had
already implicitly endorsed this from your perch at theNew York Timesby posting alinkto a program that treated the misstatement as fact.
"Wayback Machine" crawls the Internet and periodically makes
wholesale copies of web pages. The debt/GDP database was first archived inOctober 2010from Carmen's University of Maryland webpage.
The data migrated toReinhartandRogoff.comin March 2011. There it sits with our other
data, on inflation, crises dates, and exchange rates. These data are
regularly sought and found for those doing research who care to look. The
greater disclosure of debt data from official institutions is testament to
this. The IMF began to construct historical public debt data only after
we had provided a roadmap in the list of our detailed references in a 2009 book
(and before that in a2008 working paper) that explained how we had unearthed the data.
Our interaction with scholars and practitioners working
on real world questions in our field is ongoing, and our doors remain open. So
to accuse us of not sharing our data is an unfounded attack on our academic and
OK this is an important issue. Do R&R use sitemeter ? Update -- R&R did *not* make their data set available. Some of their data (debt/gdp) is publicly available. The data on real GDP growth are not (except via Herndon and even then there are multiple real GDP time series and I don't know which they used). see Herndon on the question. http://www.businessinsider.com/thomas-herndon-on-reinhart-and-rogoffs-data-availability-2013-5 He is very polite, but notes that they did not make their spreadsheet available. I'm pretty sure that it is the only way to find out that they weighted by debt episode and not by country-year. I am pretty sure that it was impossible to reproduce their 2010 AEA presentation results using publicly available data. I call this one too for Krugman, but it sure isn't as clear as the other issues.
Finally, we attach, as do many other mainstream
economists, a somewhat higher weight on risks than you do, as debts of all
measure -- including old age liabilities, public debt, private debt and
external debt -- ascend into record territory. This is not a
conclusion based on one or two papers as you sometimes seem to imply, but
rather on a long-standing body of economic research and extensive historical
experience about the risks of record high debt levels.
You often cite John
Maynard Keynes. We read Keynes, all the way through. He wroteHow to Pay for the Warin 1940 precisely because he was not blasé about large
deficits - even in support of a cause as noble as a war of survival. Debt is a
slow-moving variable that cannot - and in general should not - be brought down
too quickly. But interest rates can change much more quickly than fiscal
policy and debt.
interest yield of a 30 year bond as traded on the secondary market is not a
problem for the Treasury. Concerns about
future interest rates can be addressed by issuing long term debt. Are Reinhart and Rogoff familiar with the
meaning of the phrase “Treasury Bond” ? They are pretending that they have no
idea what it means.
You might be right, and this time might be, after all,
different. If so, we will admit that we were wrong. Whatever the
outcome, we intend to be there to put the results in proper context for the
community of scholars, policymakers, and civil society.