The economic framework for austerity is getting even weaker

[fskimospy]

It appears as if several basic methodological errors have been found with Reinhart-Rogoff along with an excel coding error that basically eliminate the conclusions drawn by the research.

http://www.nextnewdeal.net/rortybom...ere-are-serious-problems#.UW14rDQo2L4.twitter

The main result of their paper that is frequently used to justify austerity is that when countries break the 90% debt/GDP ratio they start to experience a major reduction in growth potential. They even find that average growth of countries with more than 90% debt/GDP is negative, which of course is bad news.

It turns out however that when other researchers attempted to replicate their findings they located two methodological findings. First, they excluded a number of years in which high debt countries had high growth and did so without any explanation. Secondly (and more worryingly), they engaged in some suspect weighting of their results, making equally weighted groups out of debt ranges. For example if a country spent 9 years with a debt/GDP ratio of 89% where they grew at 5% and then 1 year of debt/GDP ratio of 90% where they grew at -5%, the 9 years and the 1 year would be counted equally and average growth would be zero instead of 4%. Finally, it looks like they just missed some cells in an excel equation.

If you instead weight all years equally, include the missing years, and correct the excel coding error countries with more than 90% debt/GDP have an annual growth rate of 2.2% instead of -0.3%, wiping out all of their conclusions.

They might end up having good reasons for excluding some of that data or for weighting things differently, but I think those assumptions will be difficult to justify. In light of not only the real world failures of austerity but now even the theoretical underpinnings being taken out, does this affect anyone's belief in austerity? God, I hope so.

EDIT: I'm going to cross post this in P&N as a sociological experiment.

 

[ivwshane]

To be honest I really don't know how to respond to this. I would either have to agree with the outcome of the replication or have data that counters the new findings or point to another study that shows the benifits of austerity.

So all that is left is to give my opinion and quite frankly that doesn't mean shit as I'm not an economist.

Any other response would seem like complete bs.

But it does add to my confirmation bias😉

 

[fskimospy]

To be honest I really don't know how to respond to this. I would either have to agree with the outcome of the replication or have data that counters the new findings or point to another study that shows the benifits of austerity.

So all that is left is to give my opinion and quite frankly that doesn't mean shit as I'm not an economist.

Any other response would seem like complete bs.

But it does add to my confirmation bias😉

It's more a question for people who believe that austerity is a good policy right now as this seems to cast one of its central assumptions into doubt.

 

[ivwshane]

Yeah but let's say I believed in austerity, what would my counter argument be? The only thing it could be would be to point to another study. Are there other studies that show austerity works? I guess one could point to individual examples but so could the other side of the argument.

 

[fskimospy]

Yeah but let's say I believed in austerity, what would my counter argument be? The only thing it could be would be to point to another study. Are there other studies that show austerity works? I guess one could point to individual examples but so could the other side of the argument.

Or maybe there just isn't a coherent argument for austerity being good policy anymore. (that would be my argument)

 

[Bowfinger]

Interesting article, thank you. Also not an economist, but from my lay perspective it certainly seems to yank the rug out from under austerity proponents.

 

[Jaskalas]

Or maybe there just isn't a coherent argument for austerity being good policy anymore. (that would be my argument)

I believe the frame of refrence behind austerity is based on the premise of negative consequences for stimulus. That debt and printing money are nice short term fixes... while having problems down the road. That people weary of those consequences would rather see the economy pick itself back up in an organic manner.

We see stimulus as something that is easily mishandled, or dangerous to play with. Clearly we've not necessarily felt any harm from it yet. Perhaps it will turn out to not be as bad as we feared, but I don't think anyone really knows when the other shoe would drop. Or even what it looks like if it does.

So when it comes to telling you no, we're left empty handed. You get to crow while the economy "recovers" - we just question how real and tangible this recovery is once you stop stimulating. There is a plan to pull it back, yes?

I'm in no position to tell you what is going to happen, but I hear frequent fear of inflation, bubbles busting, no end in sight for the continued devaluation of the dollar. We may not have anyone here versed in the subject able to tell you "how it is".

For all I know it's all speculation.

 

[woolfe9998]

I believe the frame of refrence behind austerity is based on the premise of negative consequences for stimulus. That debt and printing money are nice short term fixes... while having problems down the road. That people weary of those consequences would rather see the economy pick itself back up in an organic manner.

We see stimulus as something that is easily mishandled, or dangerous to play with. Clearly we've not necessarily felt any harm from it yet. Perhaps it will turn out to not be as bad as we feared, but I don't think anyone really knows when the other shoe would drop. Or even what it looks like if it does.

So when it comes to telling you no, we're left empty handed. You get to crow while the economy "recovers" - we just question how real and tangible this recovery is once you stop stimulating. There is a plan to pull it back, yes?

I'm in no position to tell you what is going to happen, but I hear frequent fear of inflation, bubbles busting, no end in sight for the continued devaluation of the dollar. We may not have anyone here versed in the subject able to tell you "how it is".

For all I know it's all speculation.

I think the objections to stimulus stem from an inherent suspicion that deficit spending just continues ad infinitim. Yet that isn't a problem with stimulus per se. We're supposed to keep a balanced budget until the economy tanks. The trouble is when you've run deficits for years in an up economy, then the economy goes down, and stimulus seems a lot harder to shallow because no one believes the deficit spending will ever end.

The moral of this story is, you don't start two wars, a new entitlement, and enact two tax cuts, without paying for any of it, while the economy is fine. If we had stood up to that and stopped it then a stimulus would have been easier to perceive for what it is supposed to be - temporary.

 

[ivwshane]

I believe the frame of refrence behind austerity is based on the premise of negative consequences for stimulus. That debt and printing money are nice short term fixes... while having problems down the road. That people weary of those consequences would rather see the economy pick itself back up in an organic manner.

People can worry about the consequences of deficit spending or more precisely stimulus but are those fears based in reality?

 

[randomrogue]

This is very interesting. However austerity is based on only one groups findings?

 

[Moonbeam]

Austerity vs. stimulus is a political hot potato between right and left. There are right and left economists and as a result I think there is right and left motivation in the economic views they produce. I look at global warming and see a political agenda to constantly raise doubt and keep any action to deal with the problem from happening. I think to myself that the defenders of austerity could be just the same think, keeping doubt alive so no stimulus ever takes place. I see the period of Obama's first term as an attempt by Republicans to ruin the American economy so Obama wouldn't get reelected and that makes them traitors, in my opinion. I think the opposition to stimulus is just ore of the same.

 

[fskimospy]

This is very interesting. However austerity is based on only one groups findings?

It isn't based on only one paper, no. This is one of the most influential papers for proponents of austerity though. So while it's not the only deal, it's a big f'in deal.

 

[Mursilis]

I think the objections to stimulus stem from an inherent suspicion that deficit spending just continues ad infinitim. Yet that isn't a problem with stimulus per se. We're supposed to keep a balanced budget until the economy tanks. The trouble is when you've run deficits for years in an up economy, then the economy goes down, and stimulus seems a lot harder to shallow because no one believes the deficit spending will ever end.

Which it likely won't.

The moral of this story is, you don't start two wars, a new entitlement, and enact two tax cuts, without paying for any of it, while the economy is fine. If we had stood up to that and stopped it then a stimulus would have been easier to perceive for what it is supposed to be - temporary.

The deficit was looking to be a looming problem long before Bush II was elected. Neither party is truly committed to fiscal discipline, because the populace really isn't either.

 

[woolfe9998]

Which it likely won't.



The deficit was looking to be a looming problem long before Bush II was elected. Neither party is truly committed to fiscal discipline, because the populace really isn't either.

I agree with that to a point. We were able to achieve something approximating a balanced budget in Clinton's second term, which can be credited to both parties to some extent, as well as a booming economy.

In any event, these observations don't affect the point I'm trying to make - that it's a lack of fiscal discipline in good economic times which makes it difficult for people to support stimulus during a recession. This is highly unfortunate when stimulus is really needed.

 

[fskimospy]

I agree with that to a point. We were able to achieve something approximating a balanced budget in Clinton's second term, which can be credited to both parties to some extent, as well as a booming economy.

In any event, these observations don't affect the point I'm trying to make - that it's a lack of fiscal discipline in good economic times which makes it difficult for people to support stimulus during a recession. This is highly unfortunate when stimulus is really needed.

We have only really had two significant periods of fiscal irresponsibility: Reagan and GWB.

Reagan started the process of running large peacetime deficits in a good economy. Presidents before him had really not done this to a significant extent.

GHWB reigned them in. (and maybe lost for it, haha!)

Clinton had low, easily sustainable deficits and dramatically reduced our debt/GDP ratio, which is what really matters.

GWB once again increased our debt/GDP ratio in a growing economy when he should have been decreasing it.

Obama is running large deficits in a deeply depressed economy, in line with what he should be doing.

The idea that they would never be reigned in just doesn't match up with history. Look at the US debt/GDP ratio over time:

 

[chucky2]

So a family of 4 makes a $100k one year, and living completely within its means spends $99.9k.

The next year nothing changes, but mom and dad both get a better bonus and now their yearly income is $110k.

It seems what you are saying is, they now should be spending, minimum, $110k.

Please explain this logic, as I do not - nor have ever - understood it.

 

[woolfe9998]

We have only really had two significant periods of fiscal irresponsibility: Reagan and GWB.

Reagan started the process of running large peacetime deficits in a good economy. Presidents before him had really not done this to a significant extent.

GHWB reigned them in. (and maybe lost for it, haha!)

Clinton had low, easily sustainable deficits and dramatically reduced our debt/GDP ratio, which is what really matters.

GWB once again increased our debt/GDP ratio in a growing economy when he should have been decreasing it.

Obama is running large deficits in a deeply depressed economy, in line with what he should be doing.

The idea that they would never be reigned in just doesn't match up with history. Look at the US debt/GDP ratio over time:

Yes I agree with this, and it accords with my understanding of our fiscal history. I expect the deficit spending to be reigned in over the next several years, particularly after the economy gets back in full swing. My only concern is that we may have cut spending 1-2 years too soon.

The irony of opposing stimulus is that it perpetuates the economic downturn which worsens the deficit problem.