What Reinhart and Rogoff should do now
Carmen Reinhart and Kenneth Rogoff wrote an angry open letter about how Krugman has been uncivil to them. Krugman’s reply strikes me as being convincing even devastating.
Update: My full fisking here.
I want to focus on one sentence in the R&R letter
“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 policy conclusions. “
The claim that there are such limits is not supported with any historical evidence. I think it is plainly false, unless the limits are say thta the politicians can’t travel faster than light by distorting academic work.
The example of R&R and the alleged 90% critical level of debt to GDP is proof that their claim is false. Politicians have gotten huge policy traction citing them and Herndon had a significant impact on the policy debate.
update: The huge traction is documented here
Also note the case of Kenneth Arrow whose first welfare theorem and impossibility theorem have been used for decades to argue that markets are superior to political processes and who is a democratic socialist. His view on that rather important issue has had no impact on the debate, while misuse of his mathematical results has had a huge impact. Phillips made no claim that the scatter he plotted was a structural relationship. He expressed horror over how it was used.
R&R’s claim about history is plainly utterly false and they should know it.
But there is something they can, and really should, do. If politicians are misusing their work, they can denounce those politicians by name. Consider
The 90% debt-to-GPD ratio was sighted by many as proof of the necessity of austerity in fiscal matters. Paul Ryan’s 2012 “Path to Prosperity” budget plan cited the paper and specifically cited the 90% figure. European Union Economic and Monetary Affairs Commissioner Olli Rehn cited the study when urging EU member nations to cut their budgets, saying, “Serious empirical research shows that public debt above 90% of GDP acts as a permanent drag on growth.”
Reinhart and Rogoff could and should have said “Paul Ryan, you know nothing of our work” (obligatory Annie Hall reference). They did not. They still can. I think they should. His claims have no basis in the evidence and all reality based people should say so.
I think R and R should admit to themselves at least that they were caught publishing bogus research, change their names at get jobs working at the local Seven-Eleven.
But if they keep talking, they CAN turn this all into an “academic kerfuffle” and the people will decide it is just more politics as usual… if they even notice at all. “Mainstream economics” will continue without a pause.
“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 policy conclusions.”
No need for a panicked fiscal surge
By Kenneth Rogoff
It is folly to ignore the risks of debt accumulation, writes Kenneth Rogoff
As it becomes increasingly evident that the recovery will remain subdued in Europe and the US, there is a growing chorus for indefinitely sustaining aggressive post-crisis fiscal stimulus.
Governments that instead propose gradually reducing deficits and ultimately stabilising debt to income levels – such as both Germany and the UK – are accused of pig-headed fiscal conservatism. Had they only a better grasp of Keynesian truisms, we are told, these countries’ leaders would realise that their penury risks throwing already weak economies into double-dip recessions, or even a sustained depression.
There is no question that huge uncertainty hangs over the global economy, but is the case against commonsense fiscal conservatism so compelling? I don’t see it. Yes, output growth is likely to remain tepid compared with a normal post-recession recovery. As Carmen Reinhart and I have repeatedly emphasised in our research, anaemic growth with sustained high unemployment is par for the course in post-financial-crisis recoveries. Yes, Europe’s sovereign debt and banking problems are unlikely to disappear soon. But sovereign debt problems are a typical aftershock of any wave of international financial crises. Worrisome as the current conjuncture may seem, the normality of the crisis trajectory to date hardly suggests the need for a panicked fiscal response.
Indeed, it is folly to ignore the long-term risks of already record peace-time debt accumulation. Even where Greek-style debt crises are unlikely, the burden of debt will ultimately weigh on growth due to inevitable fiscal adjustment. The fact that the markets seem nowhere near forcing adjustment on most advanced economies can hardly be construed as proof that rising debts are riskless. Indeed, the evidence generally suggests that the response of interest rates to debt is highly non-linear. Thus, an apparently benign market environment can darken quite suddenly as a country approaches its debt ceiling. Even the US is likely to face a relatively sudden fiscal adjustment at some point if it does not put its fiscal house in order.
Some portray Japan, with nearly a 200 per cent government debt to income ratio, as a poster child for extremely indebted countries with low interest rates. Japan’s “success”, of course, has a lot to do with its government’s ability to sell debt domestically. How the country will handle its finances as saving by retirees shrinks and as its labour force rapidly shrinks, remains to be seen.
Similarly, the fact that postwar debts in the US and UK have exceeded 100 per cent of gross domestic product – a level that Ms Reinhart and I find to be above the threshold where growth might be affected – is hardly evidence not to worry about peace-time debt explosions. After a war, the natural phase-down in military expenditures combined with a surge of former soldiers into the workplace, makes it far easier to bring down debt-output ratios than after the kind of peace-time build-up we are now seeing. The risks of rising debt, while apparently far off, cannot be lightly dismissed.
At the same time, the stimulus benefits of massive fiscal deficits are not nearly so certain as proponents of a new surge of spending maintain. The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive. Ironically, a lot of the newfound conviction comes from the casual empiricism on the growth effects of the Bush tax cuts, evidence that few academics consider sufficient to outweigh the mass of previous results. Indeed, it will take researchers many years, perhaps decades, to sort out the effects of the massive fiscal stimulus that many countries undertook during the crisis. My guess is that scholars will ultimately decide that fiscal policy was far less important than monetary policy and measures to stabilise the banking system.
Aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all-out battle to avoid slipping into a depression. The risk of a second Great Depression was palpable, the huge cost of insurance arguably worth it. Today, the panic has abated, and a more sober cost-benefit analysis is required.
Importantly, governments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions. Knowing that governments are serious about stabilising debt levels makes it easier for most central bankers to rationalise continued crisis measures, as some central bank governors (notably in the UK) have quite candidly stated. Otherwise, of course, they will rightly worry about being gamed into inflationary finance of runaway deficits. If a double-dip recession does threaten, then monetary policy, including aggressive measures to combat deflation, remains by far the most reliable first line of defence.
Unfortunately, much of the world is going to be facing huge macroeconomic uncertainty for years to come. There is uncertainty about regulation, sovereign debt, the state of our banking and healthcare systems as well as about political fallout from the financial crisis. In this environment, measures to gradually stabilise debt burdens – to restore normality – surely make sense. If things turn radically worse for a sustained period, then yes, absolutely, further action will be necessary. But until then, a panicked government fiscal surge is far more likely to destabilise the nascent recovery than to nurture it.
What R and R appear to me to be doing in their letter to Krugman is arm waving and dust throwing.
I would note that it is nice of them to suggest that spending on infrastructure might be good as long as it is not “make work” and as long as we don’t pay too much for it (Boston’s Big Dig). I am not sure anyone is arguing to the contrary.
For myself, I get a little angry when they insert in passing, don’t you know, a reference to the “danger” caused by “retirement debt.”
Social Security is “pay as you go.” No debt is involved. As long as people can foresee that they will reach an age when they either cannot work (for various reasons) or won’t want to work, AND they can save enough while they are working to pay for the retirement they think they will need, AND they recognize that the only safe way to insure that retirement is by a government managed… but not government paid… pay as you go with wage indexing, and mutual insurance against severe poverty… there is NO DEBT whatsoever.
But the whole thrust and point of the “debt is killing us” people as been “we need to cut Social Security!” which has, dare I repeat, not a damn thing to do with “the debt.”
As we “enjoy” longer life expectancies, without knowing yet whether we will want or be able to work longer, it makes sense to pay a little more to cover the expected costs of that retirement.
Social Security is a little cheaper for workers if they can expect rising wages to provide an effective “interest” automatically from from growth in the economy over the years. To the extent that growth in wages is expect to slow, Social Security will be a little more expensive.
It turns out that both factors together, as projected by the Trustees… longer life expectancy and slower growth in wages… will create a need to save (via the payroll tax) about one tenth of one percent more per year, mostly over the next twenty years, much less after that.
Thats an extra eighty cents per week per year… slowing to something like an extra five cents per week per year by the end of the seventy five year actuarial window…
If we pay for this, THERE IS NO DEBT. If we do not pay for it but continue to spend the money, of course there would be debt. But the fact is we cannot continue to spend without paying. The “retirement debt” hysterics are all based on the assumption that we will continue to spend without paying. And the only option they offer us is to “cut spending,” never mind about how the elderly will feed themselves. We are not allowed even to think about paying for it. Because once we realize that “paying for it ourselves” amounts to an extra eighty cents per week per year, we realize how stupid the whole “debate” is.
And, sorry to say, the dear kind hearted “progressives” who want to save the workers from the burden of paying that extra eighty cents per week, are quite certain they can get the money by forcing “the rich” to come up with the money.
The rich won’t. And if they did, the workers would not like living on welfare. No one likes living on welfare.
I am beginning to ramble. The simple facts are: there is NO “retirement debt,” and of course. all we have to do is pay for our own needs, taking advantage of a government plan… but not government money… that takes the risks out of “saving.”
what i called “retirement debt” above R and R called “old age liabilities.”
my point is the same: this is not debt. as long as people expect to live longer than they can work, they need to find a way to pay for it. Social Security is pay as you go. No “debt” is involved.
Yet, while R and R only refer to it in passing, Social Security is singled out by the debt hysterics as THE thing that needs to be cut.
None of them mention that the current debt was caused mostly by bad behavior on the part of the big banks.
Future costs of living longer, or the medical care needed to live longer, are not “debts”. They are future expenses, which we can pay for as we go, just like we always have. Even without real growth in the economy we can pay for these things, that is, if we value living longer more than we value some of the other things we buy that our parents and grandparents couldn’t afford even think about, despite not living very long or having very effective medical care.
All Social Security does is take the risks out of saving at least ‘enough’ for these high probability eventualities.
thanks. it is sadly necessary for me to point out that you have shown Rogoff directly contradicting himself. Or as they say in my neighborhood, “lying through his teeth.”
It also seems to be entirely lost on him that the current recession was not caused by debt, but by the banks who favor his policy prescription.
I would clarify the statement that Social Security has no debt. That is true. The Social Security program is not a debtor. It is, however, one of the Treasury Depts. many creditors. Social Security holds Treasury debt instruments as a significant part of its assets. These are held in the Trust Fund which is said to have a total asset value of approximately $2.6 Billion. That is the amount of Social Security contributions from workers’ pay that was borrowed by the US government and is held in the form of Treasury Notes in the Trust Fund. And that debt is no less legitimate than Treasury Notes held by any other entity including private parties, corporations, banks, or other foreign nations.
Quote from R&R, July 2011 from their Bloomberg article: “Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown.”
Note they are clear about CAUSATION, and set the 90% limit themselves. They conveniently forgot to put this into their letter or its appendices today. Their reference is clearly toward Krugman among other prominent Keynesians, who at the time were correctly pointing out that the original stimulus was inadequate, and austerity was completely wrong at that time. Clearly, R&R were on the wrong side of that argument, and their 2010 paper was widely used as R&R themselves pointed out as strongly asserting CAUSATION and the 90% limit.
Their sloppy work before the paper in 2010, continued cheerleading for its mistaken conclusions in the next two years, and this current resort to declaring Krugman as uncivil is reprehensible. The only reason to call Krugman that is that they want to give ammo to those who oppose his views. It turns out that Krugman has been right about nearly everything in this debate, and causing those who oppose him to try to move him aside as “uncivil” just to strike back against him is most unprofessional. FOR SHAME!
@jurisdebtor thanks for quoting Rogoff. You have shown his claims with Reinhart in the open letter are false. He asserted causation. He claimed there was a threshold and he praised Cameron.
I’m sure he is especially eager to forget the last one.
I’d add that the empirical debate about fiscal stimulus is over whether the multiplier is greater than one or less than one. If the money is spent on reasonable projects, a multiplier of 0.5 would be plenty. In any case the literature is not relevant to rich countries now
The point, as Krugman has pointed out many times, is that the fiscal multiplier should be zero (it isn’t but it would be if monetary authorities were competent) except when the economy is in a liquidity trap.
on “the burden of debt will ultimately weigh on growth due to inevitable fiscal adjustment. ” I note that there is basically no evidence that higher taxes cause slower growth. As a Republican Rogoff is sure that they do, but he should know about the empirical literature.
Good post. RR’s failure to disown misuse of their work, indeed support of what they only now call misuse, is the strongest of several reasons to suggest that they are tools, not fools.
Other reasons are their resort to the “simplistic Kensian” straw man, and their joining in the projectionist chorus than Krugman is a meanie as he cops way more than he bats back.
thanks. i need to point out for those who are not clear on the concept that it is a strange thing when you blame the person you borrowed from for your debt.
at least as far as i know Social Security did not go around to all the Congressmen and aggressively sell loans to them… the way the banks went around to dubious third world “leaders” and aggressively sold them loans they could never pay back… and now point out self righteously how “high debt retards growth” after the banks come back and demand austerity from those they lent the money to.
what you are looking at is not an “academic kerfuffle” but a giant confidence game.
in which some “experts” will patiently explain to you that SS really does contribute to the deficit because, you see, the only possible way the country can pay back the money it borrowed FROM Social Security is to borrow more money from “the public.” It would have to pay back money it borrows from the public or the bankers would sulk. But it doesn’t have to pay back the money it borrowed from Social Security, because, well, after all, that’s just borrowing it from itself… never mind all those grannies who they told would get their money back when they needed it for their retirement.
it goes without saying that the country can’t tax people to get the money to pay back the money it borrowed in order to keep taxes low. I mean that would mean taxing the people who have money, and they vote.
“it goes without saying that the country can’t tax people to get the money to pay back the money it borrowed in order to keep taxes low. I mean that would mean taxing the people who have money, and they vote.” coberly
True enough, but government could begin to tax those people it has not been taxing enough given the assets that those people have routinely been taking out of the economy for their own advantage. Those who benefit most from the economic structure provided by the government owes back the greater share of supporting the cost of maintaining that government.
I was trying to be ironic.
I don’t think I’d care to try to sort out ‘oo gets the most out of government.
But since we are all in this together… and no way out… then we need to pay for it. Democratic government is supposed to guarantee that the amount we pay and the way we pay is reasonable and fair.
Since the rich people, mostly, are hollering about the deficit, I think it is reasonable that they should raise their taxes to help pay for it. I think it is also reasonable for the rest of us to pay our share… that is, a reasonable tax based on ability to pay (income), and that we we don’t have to try to sort out who got the biggest piece of burfday cake.
I expect the people who are paying the most (and that is the rich) would be most likely to complain “there must be a way to cut spending.” But I don’t think it’s reasonable of them to come in after the spending has been spent and steal the money they borrowed from the poor people.
and i wish it went without saying that the rich don’t pay for Social Security in the first place, so the whole thing is a damned lie.
they will keep saying with bland faces… “it’s the government borrowing from itself.” that’s not true. it’s the rich borrowing from the poor
and now talking fast and talking long so they don’t have to pay the poor back.
Social Security doesn’t cost the rich anything, but Mr Peterson and Mr Simpson hate the idea of the help having a day off. Even if they paid for it themselves.
I expect their upbraiding of politicians who used their study to begin about the same time the cold wave hits hell and there is a frost there overnight.