As someone scientifically trained, I was astonished to read that these two professors seem to have published a theory resting merely on an apparent association between Debt/GDP ratio and GDP growth, without making any attempt to show a causal link between the two. Can this be right? If it is, then it strikes me that the standard of logic accepted in the economics fraternity is abysmally poor. Or is it that the work of the good professors has been misreported in the press? Can anyone with a decent grasp of economics tell me?
Economics is some what like physics - it starts with observations and then tries (much less successfully) to generalize the observations into laws - For example the "law of supply and demand" states things about how prices change. Often a correlation is first observed and reported / published. For example the "Beveridge curve." Then it is the subject of much speculation as to what is the casual relationship reflected in the observed correlation. Just today, I commented – gave my alternative POV about part of a Beveridge curve paper I read and partially quoted here: http://www.sciforums.com/showthread...e-worse-news&p=3063384&viewfull=1#post3063384 Unlike physics, which can be rigorously tested and thus develops widely accepted causal laws, economics is the "dismal science" and strongly conflicting views are common about the causal relationships. As I understand the criticism of Reinhart-and-Rogof´s widely known paper (I have quoted from it many times as it supports my POV that the > 100% debt to GDP ratio is a disaster for the US, which it cannot recover from) is not that it is "just correlation" of collected data, but that they processed their data in Excel spread sheets with errors.
They made a couple of programming errors in their Excel macros (iirc at one point they divided by a sum instead of a root mean square, something like that), but the more telling problems are the lack of support in better chosen evidence ( they seem to have cherrypicked and fudged, so that other people checking their work with more consistently chosen evidence do not reproduce their correlations), and the lack of mechanism (what they seem to have assumed for mechanism violates some well established Keynesian economic theory, without arguing their case). The paper is widely known but not so widely accepted or endorsed among professionals - its status accrued on the basis of its convenience and value to specific political factions in the US, and not for its intellectual value or analytical insight. The Beveridge Curve was presented with an obvious mechanism, and clear supporting reasons for the correlation that were backed by observation.
To iceaura If the causal connection, an inverse slopping line linking job openings to unemployment rate has a single mechanism that is well known and accepted, why this huge change? Must be more complex, multi-facited, and still debatable connections. Please Register or Log in to view the hidden image! Please Register or Log in to view the hidden image! The author of the paper these graphs are from calls their difference "a puzzle."
Thanks for this. So if I follow you and iceaura correctly, all Reinhart and Rogoff did was report an observed association and this was then grabbed by people with political axes to grind, who drew unwarranted conclusions from it. Is that about right? Adam Posen had a piece in the Financial Times last weekend in which he said the causal relationship is almost certainly the opposite of that assumed by these political people, namely it is likely that a reduction in growth rate is the cause of the increase in Debt:GDP ratio, rather than the other way round. Obviously if you have rising debt and growth slows (for whatever reasons) such that it no longer keeps pace, then the ratio will rise. Whereas, he says, nobody has been able to come up with a plausible mechanism that could explain how a rise in Debt/GDP above 90% would choke off growth. And further, he says, there are plenty of cases where economies have continued to grow when the debt was > 90% of GDP, so the association these professors report is far from being a general law, as these political people appear to have assumed. Interesting - and perhaps a bit frightening - to see how people can seize on things that they like to believe are true and build whole castles in the air on the back of it. (Subprime mortgages and the rationale for the Iraq invasion would be 2 more examples, I guess.)
Sort of. Reinhart and Rogoff did make errors in their analysis of the data, and some are suggesting they "cherry picked" their data too, but I have not seen any evidence of that. Certainly, economics being the "dismal science" lets people with a POV give different causal connections, that support their biases. (Perhaps ´they "cherry picked" their data,´ is just that, until someone tells what was omitted as not supportive of the conclusion they wanted to draw.) Another good example of what I said about the difference between economics and physic - universally agreed on reasons for the observed correlations are rare in economic, but very common in physics. AFAIK, there are only two examples in all of human history where >90% to GDP ratio were not disasters, and both were very special / unusual cases: (1)England, at the start of the industrial revolution did borrow heavily (more than 100% of GDP) to build steam-powered looms, but that was very productive borrowing as they had an empire to export textiles too and their GDP grew very rapidly driving the Debt to GDP ratio down to, 30% in a few years. For example, India was only allowed to buy English made textiles and Gandhi lead a drive to have Indians make their own. He did spin his cotton and then weaved all his own clothes. When England put a high tax on salt, he walked several days to the sea and made his own salt via solar evaporation too - IMHO, he is one of histories greatest peaceful revolutionaries. (2) After the end of WWII, the US debt to GDP ratio was >100% but rest of the world´s industrial production was in ruins while during the wars US productive might had more than doubled plus, and very important, was women (Rosie the Riveter) had permanently joined the labor force. It was much like England at start of the industrial revolution - US had the whole world to sell too and was the only nation with high volume production capacity. Now the table has turned 180 degrees - the US is losing both absolutely and very much so reltatively, its industrial productive capacity to other nations. The sad mistake is that US borrowing has been for greater consumption than it could pay for so now only thing delayng collaps is the Fed & Treasury "printing" even more thin-air money. Soon most will no longer accept these green pieces of paper for goods and service the US would like to import. (3) No other case I know of exists, but I would be glad to learn of it, if one does exist;However, many cases may exist where >90% debt to GDP ratio greatly reduces growth for even a decade. The US´s (and now EU + Japan´s new "abenomics") problem is they are all thinking more debt (deficit spending, less valuable currency, etc.) is how to solve the problem of excessive debt. This is "homopathic economics" - Hair of the dog that bit you is the cure. A depression, not a recovery, is coming. Yes, "economics" evolved but if it had been designed, it was surely designed to permit this "justification of any POV" but common greed with restrained regulation under GWB was very important in your first example. The fact that GWB is not vey bright and easily guided and had the ex-CEO of Halliburton as his main war hawk advisor was main reason for invasion of Iraq. The French had all the lucrative oil contracts (so were highly opposed to the invasion and vilified by the US). They understood the main point of the war was to steal those contracts. In fact, even in the post Saddam era the telephones did not work for several years. They were made with French manufactured parts and France was not allowed to even bid on post war construction contracts. AT&T etc. made parts were not compatible with the French made telephone system. Economics (and statics) are God´s gifts to politicians.
Well, Posen says the following:" A casual perusal of c.20th economic history, let alone more rigorous econometric analysis, turns up multiyear periods in the UK and US following the 2nd World War, and in Belgium, Italy and Japan in the past 20 years, where public debt was greater than 90% of GDP but nothing much happened. Either stagnation in economies led to slowly rising debt levels, as in Italy or Japan of late, or growth returned and debt levels declined, as in the UK and US in the 1950s. The latter two escaped the black hole of debt without an austerity rocket booster." Seems even the historical facts are not generally agreed! Like you, I'm sceptical that there is any short term fix to this. Seems to me the message of the crash is we were all behaving as if we were richer than we were, due to falsification by the financial industry - with regulatory acquiescence - of the true levels of risk in lending, and basically we all have to be a bit poorer for a while to make up for it. But I can also see the force of the argument that if GDP does not grow then the tax take available to pay off debt simply won't be there. What worries me as a pensioner is that the temptation will be to make the net savers fund the net borrowers, which can easily be done by encouraging a dose of inflation - and thereby reducing the real value of debt and the real value of savings. I like your anecdote about phones in Iraq by the way - I did not know this. What a farce.
As far as I have been following, there are two categorically different issues here - the shape of the graph, and its position relative to the origin. The shape is what is generally accepted, one of those insights that is obvious as soon as its made - clearly one would expect a tradeoff between job vacancies and unemployment rates, and with a little thought a concave upper right quadrant hyperbola is what the shape "should" be, more or less. The location of the curve - its minimum distance from the origin - is another matter. That is expected to vary between structurally different economies, but the factors and their relative importance are under discussion still AFAIK. It has moved, in the US, since 2009, and the various explanations haven't shaken out yet. Example: One clearly significant matter is the sudden creation of a large number of unemployables still solidly within their working years - men in their late forties and fifties. That bump in the unemployment rate moves the curve out along one of the axes - some job vacancies remain despite the presence of qualified job seekers. That appears to be one of the problems with the paper - the "many cases" are not easy to find or demonstrate clearly, and the argument depends on their demonstrated existence. No. What they are thinking - Japan after a couple of decades of thinking along your lines and suffering accordingly - is that as Keynes demonstrated one cannot expect a liquidity trap to release on its own. It yields only to force, and massive government stimulus is a better alternative than major depression. We have seen confirmation of Keynes's theory, btw, in the Obama stimulus - which was predicted by the Keynesians to be enough to hold the economy from crashing, but about half the size necessary to restore ordinary economic function, yielding exactly the situation we have found ourselves in. The recommendation is to supply the other half, and pull us out of the trap. The danger of course is inflation afterwards, but as Keynes also showed that is met via highly progressive and onerous taxation. Balance restored.
Well yes, I think George Galloway put it most pithily, when appearing before that ridiculous US Senate kangaroo court: "...150,000 people have been sent to their deaths on a pack of lies....". Galloway is pretty flaky in many ways, but on this occasion he spoke for millions, I thought. But I'm seriously off-topic now.
I agree that conceptually Keynes got it right; however in practice only the spend and not the tax part of his ideas is possible in a democracy like the US, where most think and understand little about why high taxes are needed during times of full recovery. Congress person who know that is the case, want more to be re-elected so never do what is needed. Only in democracies like in Scandinavia are the people well enough educated to understand, high taxes, well spent (on things like education, healthcare, productivity increases, research, etc. and not on consumption - living beyond your means) are a benefit.
It was possible, and in practice, in the US, for more than fifty years - from the early 1930s until the early 1980s and even beyond.
Please Register or Log in to view the hidden image! from latest review at: http://www.economonitor.com/blog/20...mpaign=EconoMonitor Highlights: Highly Strung Note HAP are Thomas Herndon, Michael Ash, and Robert Pollin who made the recent critical paper on RR = Reinhart & Rogoff´s original paper. The link above reviews both and notes as the graph shows the RR "mistake" is not very significant for the RR concluions. Also RR made 6 different analytical studies (median vs average effects, etc.) and only 2 had any known errors. from same source is: Please Register or Log in to view the hidden image! Note that interest on the 10 Year bond more than doubling in next four years plus continued trillion dollar deficits and or more printing of trillion dollars of thin air money will destroy confidence in the dollar as interest on the debt grows by nearly, if not more than, a factor of three. RR may have a few revisions to do, but their message is unchanged, especially as the growth slowing curve is turning sharply down even at 90% debt to GDP ratio and US is already above 100 on that ratio and climbing.
Their message is not clear - Keynes would read it as confirmation of the urgent need for large government stimulus in the US, followed by a return to the former prosperity supporting onerous levels of taxation on high personal and corporate incomes. You apparently read it as proof that large country economies inevitably and unpreventably founder and crash (since there is no way to avoid the occasional liquidity trap, and no non-crash way to get out of them except via massive government debt).
Yes. You read me "loud & clear" but I´ll just note that large part of why I think that way is only the "prosperity part" of your text I made bold ever happens in the USA. The "onerous levels of taxation" only happens in nations that educate ALL their voters well, like in Scandinavia. The typical US voter wants "goodies now" and to "send the bill to the yet unborn." Congress, noting that they don´t vote, does as the voters wish. One can make a strong argument, and I often do, that the collapse of the dollar is directly due to the local funding of pre-college schools in the US. I.e. only the kids of parents wealthy enough to live in rich neighborhoods get an education like ALL get in any Scandinavian school. For example, a typical 8th grade Scandinavian graduate has math and science skills equal to a typical 12 grader in the US, speaks fluently at least three languages, and knows 1000% more economics. When of voting age they vote for politicians than will tax them at >50% of their income so EVERYONE gets a good, nearly free, education thru college; good, nearly free, health care; honest public servants,** and less "mind control" by sound bites on TV*, purchased by the rich and powerful. A quasi "onerous levels of taxation" does occasionally happen in the US, but only for a tiny fraction*** of the population, when the popular mood is "soak the rich" and gets control of Congress, usually by some division or stupity in the GOP´s selection of candiates for office. Romney is a good example of "selection stupidity" at the presidential level. Quite dumb, but likable father figure, GWB whose mind was easily controlled was the GOPs`s "best selection" from their POV. GWB made two wars for the industrial-military complex, reduced taxes on the rich, created the corn to alcohol program with its huge cost for many and even larger benefits to the few, kept the SEC on a tight leash so it did not investigate Maddoff even when given 22 solid facts showing his was a Ponsi scheme. etc. * In US there is good reason to call the TV: the "idiot box." ** China does not have this part now, but they have started to work on it. The last thing to change in China will be the ending of "mind control" by the CCP. You can´t educate the population as well as they do in China, and expect to keep the political system unchanged. The Chinese look at their computer´s displaying social comment, economics, etc. at least as much as TV. The main question is how will that change happen - with or without a lot of blood shed? *** Mainly for highly paid CEOs, etc. with public records of salaries and other compensation, who can not take advantage of the many "loop holes" the lobbists of the powerful have gotten built into the 700,000 word tax code.**** Many of the very rich in US pay taxes at a lower rate than their secretaries do, thanks to these loop holes. This is in part why US´s CEOs make several times more than others in Europe, etc. do - I.e. their "after taxes" take home pay is still more but by smaller factor. **** My suggestion for the tax code, fits on a 3by5 index card! but the definitions, tables, and examples, do take both sides of one sheet of paper. See it at: http://www.sciforums.com/showthread...onsideration&p=1792841&viewfull=1#post1792841
For a different, but related take on how collapse is coming for the developed western world see wise Jim Jubak´s comments, partially condensed by me, here: http://www.sciforums.com/showthread...e-worse-news&p=3068588&viewfull=1#post3068588
It is unfortunate but economics like any of the sciences can be manipulated for economic and political gain. We don’t have to look far to see perversions of science to justify certain economic and political interests (e.g. Global Climate Change or Smoking Tobacco is not unhealthy, etc.). On occasion, the conclusion precedes the the study and this appears to be one of those instances. http://www.washingtonpost.com/opini...a6aa72-b43f-11e2-bbf2-a6f9e9d79e19_story.html Ring wing financial sponsors are buying their way into academia in order to promulgate their political ideologies. There is big money in promoting right wing ideology. http://www.huffingtonpost.com/robert-greenwald/are-the-koch-brothers-tea_b_1227981.html http://www.alternet.org/newsandview...ly_right-wingers_trying_to_influence_academia
Thanks. I liked all three informative links, especially the first for its balance and concluding paragraphs: "... It is absurd to blame them {R&R} for austerity policies. The authors of those policies chose the policies first and then cast about for intellectual ballast. While there may be no threshold beyond which debt becomes catastrophic, and while the British and American experiences both suggest that fiscal contraction in a slack economy where interest rates are near zero is inimical to growth, it is a grave mistake to suppose that debt can or should be accumulated with abandon. On all but the most optimistic forecasts, further action will be necessary almost everywhere in the industrial world to ensure that debt levels are sustainable after economies recover.* Now is not the time for austerity. Yet we forget at our peril that debt-financed spending is not an alternative to cutting other spending or raising taxes but only a way of deferring those painful acts." And yes as the last two illustrate well, the rich right wingers or corporations do more with their greater funds more to distort US colleges and "scientific" research than the left wingers do. * As this Jim Jubak article: http://www.moneyshow.com/investing/...Theres-Only-One-Way-out-of-Debt/?scode=015363 notes that recovery may be a long time in coming if, as he suggest, a large part of the current economic problems in the western developed world are due to aging populations growing smaller with declining birth rates. - I.e. a few decades needed for most of us "old timers" to die off before a good recovery begins. If you don´t want to read the full original, I cut it down** by 50% but it is still long here: http://www.sciforums.com/showthread...e-worse-news&p=3068588&viewfull=1#post3068588 **Mainly by dropping all his examples based in Europe support his arguments.
