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.

 

[Doc Savage Fan]

What exactly do you mean by the term "austerity"? It seems that some want to twist the meaning of this word into something it is not.

 

[fskimospy]

What exactly do you mean by the term "austerity"? It seems that some want to twist the meaning of this word into something it is not.

Yes, many people do. Austerity is defined by economists and policy analysts as policies that reduce government deficits.

 

[Anarchist420]

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.

Debt to GDP ratio doesn't mean anything, and that 2.2% growth is due to govt spending.

What exactly do you mean by the term "austerity"? It seems that some want to twist the meaning of this word into something it is not.

Good question. UK has raised taxes and not cut spending so I don't get why so many people think there is austerity there. They also have a weak currency policy.

I don't see what's so hard for the Keynesians to get about the fact that govt spending doesn't increase prosperity and that there are just as many times when spending reductions helped. We have super high spending here and not many jobs to show for it.

 

[fskimospy]

Debt to GDP ratio doesn't mean anything, and that 2.2% growth is due to govt spending.

Your statement is both without factual basis and irrelevant to the point of the paper.

Good question. UK has raised taxes and not cut spending so I don't get why so many people think there is austerity there. They also have a weak currency policy.

I don't see what's so hard for the Keynesians to get about the fact that govt spending doesn't increase prosperity and that there are just as many times when spending reductions helped. We have super high spending here and not many jobs to show for it.

You are attempting to use the somewhat novel and newly invented conservative definition of austerity that excludes tax increases and says that cuts in the rate of growth (thus leaving more people to compete for the same resources) do not count as attempts to reduce deficits.

You are more than welcome to those definitions if you would like, but those are ideological definitions, made to preach to the choir and excuse policy failure.

 

[Anarchist420]

nvm.

 

[Anarchist420]

You are attempting to use the somewhat novel and newly invented conservative definition of austerity that excludes tax increases and says that cuts in the rate of growth (thus leaving more people to compete for the same resources) do not count as attempts to reduce deficits. You are more than welcome to those definitions if you would like, but those are ideological definitions, made to preach to the choir and excuse policy failure.

Thank you, but I'm not a Conservative. I'm a libertarian. Alexander Hamilton was a Conservative.

 

[cubby1223]

Well, luckily for me I never based my economic beliefs on any research done by Reinhart-Rogoff.

How does Cypress fit into this research?

Look, no one will disagree that more government spending helps GDP. But the only way government can spend more is either (1) someone else lends money to the government, or (2) the government prints new money. At what point will other people stop lending the government money, and at what point will printing money cause too great of inflation? And what effects will these have on the common civilians? There is going to be pain at some point, the question is, will the pain of austerity be greater or less than the pain that comes if the other options come true?

 

[Incorruptible]

Many of the countries practicing so called "austerity" have actually been increasing spending and taxes. This is the same thing as the people who blamed the financial crisis on "capitalism" when it was crony-Capitalism that was responsible.

Government can't spend your own money better than you can.

 

[fskimospy]

Well, luckily for me I never based my economic beliefs on any research done by Reinhart-Rogoff.

How does Cypress fit into this research?

Look, no one will disagree that more government spending helps GDP. But the only way government can spend more is either (1) someone else lends money to the government, or (2) the government prints new money. At what point will other people stop lending the government money, and at what point will printing money cause too great of inflation? And what effects will these have on the common civilians? There is going to be pain at some point, the question is, will the pain of austerity be greater or less than the pain that comes if the other options come true?

Cypress would be a single data point out of a whole ton. The whole point of good economics research is to work out larger understandings instead of look at individual cases. Also, this doesn't have anything to do with the current amount of spending being done by a country, it has to do with aggregate debt/GDP load. ie: the negative results of debt should weigh on growth regardless of what current spending is. Additionally, Reinhart-Rogoff uses real GDP, which accounts for inflation.

One of the principal arguments for austerity is that government debt hurts economic growth above a certain threshold. This paper was one of the primary sources for this claim. A re-evaluation of their data seems to indicate that that assumption is wrong. With this new data, does anyone wish to reconsider their beliefs?

 

[Abwx]

All the governments debts are taxes that were reported
to the future under the pressure of the plutocracy that
went lending this money to the very same states with
interests to finance the said deficits.

With time , thez interests kept increasing thoses
debts to the point that their total mass is remotely
related to the actualy borrowed amounts.

Now , thoses interests are fully monetized and are
added to the money supply , creating inflation wich
is battled thanks to reduction of the the massses
salaries purchasing powers.

You have to accept that a bigger part of your work
is absorbed by this fiat money , that is , to give it
a real value at the expense of your real income
and that is what is called austerity.

 

[Atreus21]

I don't claim to have a good understanding of what is meant by austerity, but it seems to me that it's used as a general term to describe trying to get your fiscal house in order (reducing debt/deficits). If that is correct, then I don't see how it's possible to argue against it in principle. I can see argument over the best way to implement it, sure.

To that extent, it seems to be common sense that reducing deficits will hurt in the short term, but will have better long term effects. That's pretty much the definition of reducing debt in general; it's literally a good investment (paying off a loan at 20% interest is like making an investment with a guaranteed 20% rate of return, tax free).

Shrug. Anyway, that's my layman's understanding.

 

[chucky2]

Sweet. I vote for the Fed Gov to inject $10T into the economy this year to adhere to the Spender mantra. Sounds legit...

 

[fskimospy]

I don't claim to have a good understanding of what is meant by austerity, but it seems to me that it's used a general term to describe trying to get your fiscal house in order (reducing debt/deficits). If that is correct, then I don't see how it's possible to argue against it in principle. I can see argument over the best way to implement it, sure.

People are arguing that we need to cut our deficits NOW, even in a deeply depressed economy because of perceived negative effects from too large a debt load in the future. One of the main complaints is that it retards growth. While no one argues that one's fiscal house must be in order in principle, in order to make that policy preferable to the easily quantifiable damage that austerity causes now, they should be able to point to some clear benefits in the future. The error apparent in this research undermines that case.

To that extent, it seems to be common sense that reducing deficits will hurt in the short term, but will have better long term effects. That's pretty much the definition of reducing debt in general; it's literally a good investment (paying off a loan at 20% interest is like making an investment with a guaranteed 20% rate of return, tax free).

Anyway, that's my layman's understanding.

It's always dangerous to compare individual debt to government debt. They have very little to do with one another. I think it is extremely hard to argue that current austerity measures undertaken by governments, particularly in Europe, have led to superior long term outcomes for them.

 

[Incorruptible]

We have already spent trillions of dollars trying to "stimulate" the economy and it won't work. If you really want to fix the economy then you would cut spending. But it's nice to see what you really want.

 

[Darwin333]

I will give the article a read later, sounds like my type of stuff so thank you for posting.

Do you know if they weigh the amount borrowed versus growth in a particular year? If you see economic growth of 2% yet you had to borrow 8% of GDP to achieve that growth, mathematically you went backwards not forwards. The real mathematical problem is that if you are required to borrow money long term for growth, as we are, and there is a spread between percentage of GDP borrowed and growth the law of exponents says that debt must eventually start going almost vertical on a chart. That is bad.....

 

[Atreus21]

People are arguing that we need to cut our deficits NOW, even in a deeply depressed economy because of perceived negative effects from too large a debt load in the future. One of the main complaints is that it retards growth. While no one argues that one's fiscal house must be in order in principle, in order to make that policy preferable to the easily quantifiable damage that austerity causes now, they should be able to point to some clear benefits in the future. The error apparent in this research undermines that case.

Well, but what's the alternative? More stimulus? Doing nothing? If stimulus is artificial and bad in the long term, and austerity is bad in the short term, then perhaps doing nothing is the best option.

Also, in the case of the US, I can't simply look at trillion dollar deficits and conclude that every penny of it is holding the place together.

It's always dangerous to compare individual debt to government debt. They have very little to do with one another. I think it is extremely hard to argue that current austerity measures undertaken by governments, particularly in Europe, have led to superior long term outcomes for them.

Perhaps we should give it more time, then. It's only been roughly 5 years.

 

[fskimospy]

Well, but what's the alternative? More stimulus? Doing nothing? If stimulus is artificial and bad in the long term, and cutting is bad in the short term, then perhaps doing nothing is the best option.

That's sort of the point of the error found in this paper, stimulus isn't bad in the long term. Austerity increasingly appears to be bad policy in both the short term and the long term.

Perhaps we should give it more time, then. It's only been roughly 5 years.

Well I can say that their long term debt/GDP projections have been getting worse while the US' has been getting better... and even the US has been engaging in a lot of destructive austerity.

 

[Darwin333]

People are arguing that we need to cut our deficits NOW, even in a deeply depressed economy because of perceived negative effects from too large a debt load in the future. One of the main complaints is that it retards growth. While no one argues that one's fiscal house must be in order in principle, in order to make that policy preferable to the easily quantifiable damage that austerity causes now, they should be able to point to some clear benefits in the future. The error apparent in this research undermines that case.

While we can argue about timing all day long, do you honestly believe that given our history and what we currently know about our future that we will EVER in the near future be in a position to just balance the budget without seeing negative growth due to the spending cuts? If so I would really really be interested in hearing the how and when because EVERYTHING that I have seen, including the rights so called "balanced budgets" don't get us anywhere remotely close.

 

[fskimospy]

I will give the article a read later, sounds like my type of stuff so thank you for posting.

Do you know if they weigh the amount borrowed versus growth in a particular year? If you see economic growth of 2% yet you had to borrow 8% of GDP to achieve that growth, mathematically you went backwards not forwards. The real mathematical problem is that if you are required to borrow money long term for growth, as we are, and there is a spread between percentage of GDP borrowed and growth the law of exponents says that debt must eventually start going almost vertical on a chart. That is bad.....

This was a critique of Reinhart-Rogoff's methods, but I'm sure if you just google for it you can find the entire paper online.

 

[glenn1]

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.

No, I still support austerity. Only an idiot who drank the kool-aid of believing deficit spending = "investment" would continue to support stimulus at this point.

 

[fskimospy]

No, I still support austerity. Only an idiot who drank the kool-aid of believing deficit spending = "investment" would continue to support stimulus at this point.

A well reasoned counter-argument, to be sure.

 

[monovillage]

Yes, many people do. Austerity is defined by economists and policy analysts as policies that reduce government deficits.

So any policy that reduces government deficits is "AUSTERITY". OK got it.

 

[Atreus21]

That's sort of the point of the error found in this paper, stimulus isn't bad in the long term. Austerity increasingly appears to be bad policy in both the short term and the long term.

But that flies in the face of common sense. If stimulus isn't bad in the long term or short term, then why shouldn't we do it indefinitely? Does anyone really think debt can go up endlessly with no severe consequence? You said earlier that no one disagrees with the principle of keeping a fiscal house in order, but this seems to be exactly that.

This is why I don't understand that government accounting is so different from individual accounting. They may have differences, but not so many as to somehow make tons of debt bad for individuals but not for government.

Well I can say that their long term debt/GDP projections have been getting worse while the US' has been getting better... and even the US has been engaging in a lot of destructive austerity.

Apart from the sequester, what austerity has the US engaged in? Have deficits gone down by any significant margin?

 

[chucky2]

snip

Apart from the sequester, what austerity has the US engaged in? Have deficits gone down by any significant margin?

None, and, No.