Thought for the Day: 23 January 2015

Joe Stiglitz, The Politics of Economic Stupidity:

[L]ow interest rates will not motivate firms to invest if there is no demand for their products. Nor will low rates inspire individuals to borrow to consume if they are anxious about their future (which they should be)…. Demand is what the world needs most. The private sector – even with the generous support of monetary authorities – will not supply it. But fiscal policy can. We have an ample choice of public investments that would yield high returns – far higher than the real cost of capital – and that would strengthen the balance sheets of the countries undertaking them.

The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics.

“If you want to know whether things like the 2009 stimulus bill and the various iterations of quantitative easing have worked, this is the comparison you need to look at.”

Brad DeLong points us to Matt Yglesias, The US recovery has been a disaster; the eurozone’s has been much worse:

As this chart from the OECD’s new report on the US economy shows, the economic recovery in the United States has been incredibly weak.


But it’s also been enormously stronger than the recovery in the eurozone. If you want to know whether things like the 2009 stimulus bill and the various iterations of quantitative easing have worked, this is the comparison you need to look at. Have they worked to make the economy healthy? No. Have they worked to make the economy healthier than it’s been in the place where they didn’t do that stuff? Absolutely.

There’s no such thing as a well-controlled experiment in macroeconomics.   This is about as you’re ever going to see.   The US enacted a modest stimulus.  In contrast, Europe went all in for austerity.   Modest stimulus won.


How not to analyze data: Reinhart/Rogoff edition

I’m not much for writing this evening so I’ll outsource most of this.  To Doug Muder for the intro:

“[Last week] a controversy broke out in economics, and it actually deserves your attention. A paper that has had a major influence on public policy around the world turns out to be wrong. And not just wrong in a subtle way that only geniuses can see, or even wrong in an everybody’s-human way that you look at and say, “Oh yeah, I’ve done that.” This one was wrong in three different ways that make you (or at least me) say, “That can’t be an accident.”

The bogus paper came out in 2010: “Growth in a Time of Debt” by Carmen Reinhardt and Ken Rogoff (both from Harvard). The paper that refutes it appeared last Monday: “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff“ by Thomas Herndon, Michael Ash, and Robert Pollin (all from the University of Massachusetts).

Handoff to Paul Krugman:

The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear.  [One of those papers] was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP.

Some of us never bought it, arguing that the observed correlation between debt and growth probably reflected reverse causation. But even I never dreamed that a large part of the alleged result might reflect nothing more profound than bad arithmetic.

But it seems that this is just what happened. Mike Konczal has a good summary of a review by Herndon, Ash, and Pollin.

Long story short, Reinhart and Rogoff (RR) screwed up the Excel spreadsheet they used to derive their conclusions.  RR’s conclusion that ohmygodwereallgonnadie if debt exceeds 90% of GDP?  Invalid.  They used the wrong numbers omitted some critical data from their analysis.

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Austerity Watch: 27 February 2013

From the NY Times, Austerity Kills Government Jobs as Cuts to Budgets Loom:

Two year change by quarter, in constant 2005 dollars

Two year changes in government spending:  by quarter, in constant 2005 dollars

The chart is a bit difficult to read here.  Click through to the article for a better view.  The bottom line:  Contrary to what you may be hearing in the popular press and around the watercooler, government spending investment and consumption* has contracted over the past several years – almost 5% over the past two years.  That contraction is one of the reasons for the anemic economic recovery since The Great Recession kicked in.   Doubling down on those cuts will only exacerbate the problem.  From the article (emphasis added):

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Sequestration due to take effect March 2, would cut $85.3B from 2013 federal budget

Courtesy of Brad Plumer:

On March 2, the sequester spending cuts will start clamping down unless Congress votes to avert them. And on Friday afternoon, the White House explained just how those cuts would work.

The sequester, recall, will cut $85.3 billion from the federal budget in 2013 and affect everything except Social Security, Medicaid, a few targeted anti-poverty programs, and the ongoing wars. The Pentagon budget would face an immediate 7.3 percent cut and domestic discretionary programs would be cut by more than 5 percent.

The key feature of the cuts is that they would affect all agencies and programs equally — federal officials would not be able to pick and choose which programs get protected and which get the ax. The White House fact sheet below lists some examples of programs that would see cuts:  [Note:  Click through to Plumer’s article or on the ‘fact sheet’ link for details.]

Premature contraculation?

Wish I could take credit but Jared Bernstein just coined the term.  Here’s the context:

What’s holding back growth is inattention to the need for stimulus in the near term in an economy where monetary policy is at least partially hamstrung (zero lower bound), premature fiscal contraction (premature contraculation?), too much income and wealth inequality, and, over the longer term, the lack of a deep investment agenda in public goods, including education and worker training.

What motivated the comment was a piece Politico just published on what “top lawmakers, Continue reading

Weekly Digest – November 25, 2012

Economics (Sorry, no good news this week.)

Politics Continue reading