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Too big to fail

Reader rjs points us to:

Everyone’s Missing the Bigger Picture in the Reinhart-Rogoff Debate

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring. Initially, RR never pushed an austerity-only prescription. As they wrote yesterday: The only way to break this feedback loop is to have dramatic write-downs of debt. Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.” Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work. Indeed, the nation’s top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.


Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression. Unless we shrink the financial sector, we will continue to have economic instability.

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Tax increases

Joseph Rosenberg of Tax Policy Center notes that the chained cpi changes taxes for ppeople as well:

Obama Budget Plan Results In ‘Back Door’ Tax Increase For Middle-Class Households: Analysis:

For those looking to put the woes of Tax Day behind them, we have some bad news: It’s probably only going to get worse. President Obama’s budget proposal, released earlier this month, includes a provision that would steadily boost taxes for middle-class households over the next 10 years, according to an analysis from the nonpartisan Tax Policy Center….Adjustments in income tax brackets are currently tied to the headline inflation measure. By tying the definition of income tax brackets to a different measure of inflation, called the chained consumer price index, Obama’s budget creates a “back door” tax increase, Joseph Rosenberg, a research associate at the Tax Policy Center, told The Huffington Post. With Obama’s budget change, taxpayers would move into higher income tax brackets and face higher tax rates more quickly than they would have before, Rosenberg said. Since growth in real wages tends to outpace inflation, Americans will have to pay more in taxes before their money is worth more.

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Michael Ash and Bob Pollin

Robert Walmann and Kenneth Thomas have traded e=mails with Michael Ash. Michael Ash and Bob Pollin, two economists at PERI, respond to Carmen Reinhart and Kenneth Rogoff in the New York Times:

THE debate over government debt and its relationship to economic growth is at the forefront of policy debates across the industrialized world. The role of the economics profession in shaping the debate has always come under scrutiny.

In particular, attention has focused on the findings of the Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, “This Time Is Different: Eight Centuries of Financial Folly,” received acclaim for its use of hard-to-find historical data to draw conclusions about the origins and nature of financial crises and how long it takes to recover from them.

Ms. Reinhart and Mr. Rogoff have published several other papers, including a 2010 academic article, “Growth in a Time of Debt.” It found that economic growth was notably lower when a country’s gross public debt equaled or exceeded 90 percent of its gross domestic product.

Earlier this month, we posted a working paper, co-written with Thomas Herndon, finding fault with this conclusion. We identified a spreadsheet coding error — which Ms. Reinhart and Mr. Rogoff promptly acknowledged — that affected their calculations of growth rates for big economies since World War II. We also asserted that the two of them erred by omitting some data and improperly weighting other statistics. In an Op-Ed essay and appendix last week, Ms. Reinhart and Mr. Rogoff denied those accusations.

They referred to this debate as an “academic kerfuffle,” but we believe the debate has been constructive, because it has brought greater clarity over the ideas shaping austerity policies in both the United States and Europe

The entire piece can be read here

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Yowza. Now Even AEI is Dissing Austerity.

Fiscal austerity–or deficit cutting–is the subject of much current debate. As Europe proves, severe austerity can slow growth or lead to recession.

Despite periodic slowdowns, the US economy is on a sustainable fiscal path. The deficit is projected to drop below 2.5 percent of GDP by 2017, below its 30-year average, helped partially by the sequestration budget cuts.

Instead of pursuing short-term fiscal reform, as suggested in the president’s recently released budget, Congress should focus on working toward long-term tax and entitlement reform.

via Austerity undone – Economics – AEI.

Cross-posted at Asymptosis.

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“Yes, the government must pay its bills in the long run.” (Every few centuries?) Questions for Krugman.

I’d like to push back on Paul Krugman a bit, on this bit in particular:

Yes, the government must pay its bills in the long run

You hear this from him a lot. And I want to ask him:

Paul, are you letting yourself be sucked into the very syndrome that you so bemoan and berate? Are you saying this because you feel the need to cast yourself as being sensible, responsible, moderate, and somewhat centrist — in short, as a Very Serious Person?

I ask because over four centuries and two centuries respectively (six hundred years combined), the U.K. and the U.S. governments have paid off their debts exactly once: the U.S. in 1836.

This happy event was followed, in 1837, by one of the most catastrophic depressions in either country’s centuries-long history. Likewise, the one other time that the U.S. got close to paying off its debt (the U.K. never has), in 1893, a disastrous depression followed immediately thereon.

Every depression in U.S. history has been preceded by a major decline in nominal Federal debt. It’s not a sufficient condition for, or reliable predictor of, depression (many declines have not been followed by depressions), but it does seem to be a necessary condition.

So we haven’t had to pay off our debt, and the one time we did (plus one time we got close), we were not happy with what ensued. From that history, how can you conclude that, now, “the government must pay its bills in the long run”?

To quote Chris Cook (HT Izabella Kaminska; emphasis mine), the national debt:

is a national equity

At least two-thirds … came into existence as mortgage loans, and are therefore backed by claims over the productive value of the US land and buildings which they fund. Much of the rest consists of claims over the value of US assets which fund the productive capacity of US corporations. The remainder – which provides the credit necessary to finance the circulation of goods and services in the US – is based upon the magnificent productive capacity of the US people.

Only by liquidating US Incorporated could this National Equity [read: Debt] ever be redeemed.

Such a liquidation, of course, would involve liquidating our overwhelmingly largest real asset: the ability of the American people to work. (Something your ideological opponents seem intent on doing.)

Of course you might well mean that we can’t increase deficits faster than GDP growth forever. But in today’s monetary world you have to at least question even that. Since 1971, when the U.S. stopped promising to redeem its dollar for anything besides…dollars (perhaps in some other “dollar” form, like Fed reserves), that proposition has become at least questionable. Dollars really might be like points issued by a bowling alley, and we may be able to issue a lot of them before we see problems with inflation.

I don’t think we really know; we don’t have any comparable situation to look back on (except maybe Japan, and that’s a glass, darkly). For a decade or so after the ’71 sea change, monetary authorities and markets flailed to adjust their reaction functions to the brave new world. Then those interacting functions settled down and we saw twenty years of steady inflation and steadily-declining interest rates. That may have been the inevitable emergent path for the world’s dominant economy and currency issuer, resulting inexorably from the game rules put into place in ’71/’73.

The place we are now — where Japan landed two or three decades earlier — may be the inevitable (and perhaps enduring) result.

Yes, rising globalization and the political rise of neoliberal Reaganomics may have contributed, but it seems possible that even absent those trends, we would have ended up in this place, perhaps sooner perhaps later.

So now, having arrived at this point, reaction functions are getting rejiggered again, and in a big way. (The institution of IOR was a big change, for both the Fed’s and the markets’ reaction functions.) One key element of those reaction functions is the belief that “we can’t keep running deficits forever.” But at least some parts of the market are acting as if we (and certainly Japan) can. And they may very well be right.

All of which is to say, think again. Think deeply. I’m not sure you’re thinking in your usual clear-eyed manner about a belief that may not be true. At least, given the new rules of the game, we might be a very long way — decades? centuries? — from a point where large government deficits or debt might pose any danger to our economy.

All my tentative language above should make clear that I’m not at all certain of this. I’d sure like to hear what you think.

Cross-posted at Asymptosis.


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Currency is Equity, Equity is Currency

This is utterly brilliant:

Twitter / izakaminska: Why equity is a type of privately issued currency

Steve Randy Waldman has been here before, with the idea that currency issued by government (ultimately through deficit spending) is “equity” in government, or in America. But this reverses it beautifully, with the notion that private equity issuance is also currency issuance. Google stock is currency.

I won’t recap the argument here; you really need to read it. Just some thoughts:

I think different words might help make it clearer. I would say that there are many units of exchange in the world —  dollar bills, t-bills, stock shares, etc. Financial assets. They have various characteristics, a key one being limits on what they can be exchanged for. In general when we say “currency” we mean physical tokens that can be exchanged for (small quantities of) real goods. But we confuse things by not realizing that “currency” is a somewhat vaguely defined subset of “units of exchange.”

(Key distinction: the “units” I’m talking about are not measurement units like inches, degrees, or “the dollar” — units of account. Rather, in the sense of discrete units, chunks. As when a factory produces a certain number of units, which can have their value described relative to a unit of measurement/account, such as the dollar. More on the distinction between “unit” and “medium” of account/exchange here.)

You can’t buy a car or a government bond with quarters. So are quarters currency? Likewise, you can’t buy a pack of gum with a treasury bond — but you can use it to buy Fed reserves (if you’re a bank). Is the bond currency? You decide. But both quarters and bonds (and Google shares) are units of exchange. (This is why I’m still struggling with JP Konig’s “moneyness” concept: it seems to hinge on a single axis of “liquidity,” when in fact different units of exchange are differently liquid.)

We can also call these units of exchange “financial assets.”

I do not define a “bushel of apples” as a unit of exchange or a financial asset, but as a unit of commodity. Ditto an ounce of gold. Because in my definition:

1. Units of exchange/financial assets cannot be consumed by humans to produce human utility, and

2. Their creation requires no (or vanishingly little) input to production.

Returning to a previous (excessively long) post, these units of exchange/financial assets embody exchange value — money. Hence (alert: precise definition here) money is exchange value as embodied in financial assets. Money does not, cannot exist, absent such embodiment. A bushel of apples does not embody money: That bushel has exchange value, but the value is not embodied in non-consumable, only-exchangeable form.

Not sure how much this will help others, but it’s working for me.

Cross posted at Asymptosis.

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Do Savers “Take Resources out of Society”?

Revisiting a previous post, “Saving” ≠ “Saving Resources”*, wherein I question Scott Sumner’s notion that people who spend and consume more (save less) take resources “out of society.”

Try this:

John works for Debbie, and Debbie works for John.

They each start out with $100 in dollar bills, $200 total.

They pay each other in dollar bills: $100 a year, each direction.

Between them, through their labor, each year they produce $200 in real resources — things that humans can consume to derive human utility (or to produce more consumables in the future).

But: This year Debbie decides to save money, so she doesn’t hire John for as many hours, and only pays him $80. She leaves $20 sitting in her drawer; she doesn’t circulate it this year.

At the end of the year Debbie has $120, and John has $80.

Debbie has produced $100 worth of real resources, and John has produced $80 worth. $180 total, instead of $200 the year before.

Did Debbie “take those $20 in real resources ‘out of society'”? (Or was it John — lazy, feckless soul that he is — who didn’t do that $20 in resource-creation?)

We can certainly say that Debbie’s decision to leave the $20 sitting in her drawer instead of circulating (spending) it caused “society” (Read: John) to produce less resources than it would have if she had circulated (spent) it.

Is Debbie a “taker”?

Cross-posted at Asymptosis.


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Debt and Growth III

I’m going to try to make this post brief and comprehensible.  It contains no information not in an earlier post but I delete a whole lot of distracting data.

The question is does the Reinhart Rogoff (hence R-R) data set on public debt and real GDP in 20 rich countries post WWII contain evidence that a debt to gdp ratio higher than 90% causes lower real GDP growth.  My answer is no it does not contain any such evidence.

Note the very very low bar.  I claim no evidence of a bad effect not just no evidence that 90% is a critical level at which additional debt becomes extremely bad for growth but no evidence of any effect on growth at all.

Why is my result different from almost everyon else’s (except for Dube’s) ?  Well I take the very very first step to address causation — I run a regression including lagged real GDP growth.  This is the first standard totally unconvincing way to try to determine causation from historical data.  A significant estimated effect of debt would mean that debt “Granger causes” low growth where Granger cause is the English translation of post hoc ergo propter hoc.




the dependent variable is annual real GDP growth.  The first coefficient is on the debt to gdp ratio in percent rounded down to 90 if it is over 90.  The second coefficient — the coefficient of interest — is the ratio minus 90 if it is over 90 or zero if it is under 90.  This coefficient is an estimate of the effect of further debt once debt has already reached 90% of GDP — exactly the effect of interest.  l1drgdp is the one year lagged rate of real GDP growth. _cons is aconstant term.

The point is that the coefficient on debtgdpmin90 is actually very slightly positive.  There is no evidence in the R-R data set that debt to GDP ratios greater than 90% are worse for growth than a debt ratio of 90%.


Here is the stata do file which generates the result.  It uses the R-R data set as processed a bit by Herndon et al and available here 


use C:\rjw\Papers\Peri\RR-processed.dta

quietly tab Country,gen(count)
gen cntry = count1+2*count2+3*count3+4*count4+5*count5+6*count6 + 7*count7 + 8*count8+9*count9+10*count10+11*count11+12*count12+13*count13+14*count14+15*count15+16*count16+17*count17+18*count18+19*count19+20*count20

gen l1drgdp = dRGDP[_n-1] if cntry[_n-1]==cntry

gen debtgdpto90 = debtgdp + (90-debtgdp)*(debtgdp>90)
gen debtgdpmin90 = debtgdp-debtgdpto90

gen debtgdpto30 = debtgdp + (30-debtgdp)*(debtgdp>30)
gen debtgdpmin30 = debtgdp-debtgdpto30

reg dRGDP debtgdpto90 debtgdpmin90 l1drgdp




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All Currency is “Fiat” Currency

Or to be more precise, all currency is consensus currency.

Units of exchange (dollar bills, great big rocks at the bottom of the ocean) can have value merely because everyone in a community agrees that they have value. That value need not be declared, defined, or enforced by by some “fiat” authority with powers of (ultimately physical) coercion — though it often or usually is.

That’s one big realization I came to from Graeber’s Debt: The First Five Thousand Years. (Though he doesn’t state it so succinctly, and I’m not sure he’d agree with it.)

Think of gold coins. If their exchange/consensus value is (enough) less than the (commodity) value of their metal content, people will melt them down and sell the metal. Arbitrage happens. Their consensus exchange value must be higher than the exchange value of their constituent metal, or they’re simply not currency any more; they’re chunks of commodity.

That differential between currencies’ consensus value and their commodity value is their very sine qua non: the thing that makes them what they are, without which they would not be currencies.

So why gold coins? Because the next city-state over, or the one 500 miles away, might not have the same consensus about those coins’ value as in your city-state. But there is a much wider consensus as to the value of gold. As far as they’re concerned, your ruler’s gold coins have the value of their gold content, and that’s all. But at least they have that value, because the gold-value consensus is widespread. 

So if you’re a trader looking to buy 1,000 yak skins from the remote Azbakalians, you can carry a bunch of gold coins there and trade them instead of carrying 1,000 amphoras of lima-bean oil. Yeah, you sacrifice the extra consensus value you’d have if you instead used those gold coins to buy things locally, but the cost of transporting all that oil is higher than that loss.

So is a physical one-ounce lump of gold a unit of “currency”? I’d say no. Because while the consensus value of gold might be different and might change at different times and places, there is no particular time and place where it has two different exchange values: its local consensus value and its foreign-trade commodity value. It only has its commodity value.

How does this work for cigarettes in a POW camp? They’re obviously used as some type of currency, as units of exchange. I’d suggest that because some people smoke and some don’t — some people value them highly for the utility their consumption can deliver, while others have no use for them — their average commodity value is lower than their average exchange/consensus value. (Also: new cigarettes are constantly being delivered and shared out in some way by the Red Cross or whoever, and they’re constantly being consumed. This is never true of coins or paper bills, which can’t be consumed.) This raises issues of distribution, power, wants, needs, and satisfactions, which I’d love to hear discussion of by my gentle readers.

Cross-posted at Asymptosis.


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