Relevant and even prescient commentary on news, politics and the economy.

## 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

clear
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

## The rest of the dinner table deficit/debt discussion: Equity

I promise, there are numbers here, but lets have some fun first and write a screen play to set up the point. It is long, but…

“Dear, I’m getting nervous. We seem to keep adding to how much money we owe and our income hasn’t changed for the better. What can we do?”

At this point of the conversation, the conservative ideology (Republican and Democratic Parties) suggests and encourages you to believe that the answer is something like: “Well Honey, as I look over the horizon I see no possibility for improving our current position. The only thing we can do is cut back on our spending. We have to stop spending on anything we don’t need to live. If we are willing to sacrifice then eventually we’ll have savings that we can then use to invest such that we have more income.”

Now, for most Americans at this moment in the euphemistically labeled “business cycle” Honey’s response would be: “But I don’t know where else we can cut!” Of course to the conservative there is always something that money is being spent on that is in actuality an indulgence for which one should repent and thus cut from their spending if said spending is greater than one’s income. This is true because no righteous individual would ever let the devil of consumption tempt them from the path to wealth heaven. Redeem one’s self through the power of restraint of consumption urges.

## Wealth, debt, consumption…revisited

Here are reminders of Angry Bear posts and contrbutor thinking on “Wealth, debt,and consumption”.

Wealth versus income

Usually my articles present facts and data and try to drive down to a conclusion. This time, I’m going to drive down to a couple of questions.

Income and consumption jazzbumba

Part 2 … wealth and consumption jazzbumpa

Consumption and compensation Rebecca Wilder

More on wealth and consumption Rebecca Wilder

## Lifted from Robert Waldmann’s more private thoughts

Lifted from Robert Waldmann’s more private thoughts:

I love this video.

I agree that it is very odd for Romney to brag about balancing a budget with a 1.5 billion dollar federal bailout. But what exactly does it mean for a manager of a firm to balance a budget ? I’d say the very minimum is to keep the firms you control out of bankruptcy. By this standard Romney is not a budget balancer at all. At Bain he made huge amounts of money relying on limited liability. Several Bain controlled firms went bankrupt. Those were budgets under Romney’s control (sole shareholder CEO and all that) which were as un balanced as budgets can be.

I know I am mixing up budgets and balance sheets. I am doing that to bend over backwards to try to meet Romney half way. Really a corporations budget isn’t balanced if it issues debt. Unbalanced budgets are the key to private equity. Romney’s whole career as a businessman is based on understanding that an obsession with avoiding debt is costly.

On this he is consistent in practice as well as being consistently dishonest, since as you note, he proposes a huge increase in the US budget deficit. The approach of loading an entity up with debt and not worrying about what happens if it can’t pay has worked very well for him so far, so why shouldn’t he stick with it_
I’m very sorry I wrote an outraged comment on your post critiquing #rateloweringbasebroadening (RLBB)for not critiquing it completely enough. In this video you make the key point that extremely high income people will gain money they sure don’t need from RLBB as they just don’t have deductions on the order of their income (importantly this refers to Romney style RL and maybe a bit of BB (but no details) and things are different if the BB includes raising taxes on capital income and capital gains).

On Gas prices, I note that US consumption is a large fraction of world consumption. A US gas tax probably would cause lower petroleum prices in the medium run (not immediately only after people trade in their SUVs for cars). It makes no sense for a country to pretend it is tiny when it is large. Laissez faire is optimal only when price taking is optimal. In the world petroleum market, the US acts as a monopsony which has no interest in maximizing profits. It’s as if Saudi Arabia ignored the effect of their exports on prices. Of course you know this (you praised Mankiw on the gas tax). Fleet economy standards may be a silly way to do it based on the US obsession with low gas prices, but I suspect that Obama’s policies are causing lower petroleum prices and will eventually cause significantly lower petroleum prices. “There is nothing [more] a US President can do” is true given and only given political limits.

(OK so enough being responsible. Now a dumb joke about a smart guy — a smart Pollack joke
Love the denunciation of rate cutting and base broadening.  You are the most effective populist since  President  Jackson, Pollack.)

## Debt and Growth

Art at The New Arthurian Economics and I are looking at the relationship between debt and economic growth.  Art started with an observation of two FRED series, total credit market debt owed (TCMDO) and Gross Domestic Product (GDP,  nominal or GDPC1, inflation adjusted – take your pick.)

Graph 1, from FRED, shows these data series.  I’ve chosen nominal GDP and, for reference, also included the total Federal Debt.

Graph 1 TCMDO, GDP and Total Federal Debt

In 1950, TCMDO was about 1.3 times GDP, but growing a bit more quickly.  By 1980, the ratio was 1.6, and by 1987 it was greater than 2.  Now that ratio is approaching 4.  Note that TCMDO is also close to 4 times greater than total public debt.  This is why Art and I agree that private, not public debt is the problem that needs to be addressed, but is largely ignored.

Linked here are Art’s posts with graphs of YoY growth in both factors, pre 1980 and post-1980.  Pre 1980, their moves are similar in magnitude, and pretty well coordinated. Post 1980 there is still some occasional similarity of motion, but the coordination breaks down and debt growth is generally quite a bit higher than GDP growth.  The 80’s in particular stand out as being starkly different from the previous period.

Graph 2 shows the entire data set, since 1952.

Graph 2 YoY % Growth in TCMDO and GDP

These observations led Art to the reasonable hypothesis that, “Output growth slowed when debt became excessive.”  This, in fact, might explain the great stagnation.

I suggested, and Art accepted two corollaries to his hypothesis.

1) There is a non-excessive amount of debt. Let’s call it “just right.”
2) Below the “just right” amount, there might also be “not enough.”

Actually, there is a lower level hypothesis, to which Art’s is corollary: That there is a functional relationship between debt and growth, in which growth is the dependent variable.

This is what I will explore in this post.

Graph 3 is a scatter plot of GDP vs TCMDO YoY % change for each, FRED quarterly data from Q4, 1952 through Q2, 2012, with a best fit straight line included.

Graph 3 GDP vs TCMDO, YoY % Change

The relationship is quite clearly positive.  The R^2 value at .39 is rather low, but not terrible.  There is quite a bit of scatter in the data.  Note the circle of data points around the left end of the line.  More on that later.

Next, I divided the data by decades, frex, 1961-1970.  This admittedly simplistic data parsing reveals that the slope and R^2 values are strongly variable over time.  Graph 4 shows the scatter plot along with the slope and R^2 values for each decade.  These data values are arranged in the chart in chronological order and color matched with the corresponding data points.

Graph 4 GDP vs TCMDO, YoY % Change by Decade

I’ve added a brown line connecting the dots for the first decade of this century.  The chronology proceeds from a cluster near the center of the graph into a clockwise circular spiral.

Graph 5 shows how the slope and R^2 vary over time.

Graph 5 Slope and R^2 Over Time for GDP vs TCMDO

After the 60’s, the slope plummets, and by the 80’s R^2 is a laughable 0.035.  Though the slope has remained low, R^2 has since recovered to 0.38, which is near the whole data set value of 0.39, and only slightly less than the 0.40 to 0.44 of the first three decades.

The slope changes can be interpreted as generally less GDP bang for the TCMDO buck, as the TCMDO/GDP ratio increases.  This is totally consistent with Art’s hypothesis.

I have more to say about the GDP -TCMDO relationship, but this post is getting long, so I’ll save it for a follow-up.

For now, I’ll close with a few questions.

1) Do you think we’re on to something?
2) What do you think of the methodology?
3) “Excessive debt” is suggestive, but non-specific.  How should this concept be quantized?
4) How should I go at exploring corollaries 1 and 2 mentioned after Graph 2?
5) Any thoughts on what was there about the 80’s that blew up the prior debt – GDP relationship?
6) Is there such a thing as productive vs non-productive debt, and how would they be characterized?

## Debt, Recession, and That Ol’ Devil Denominator

Krugman recently presented this graph, showing household debt as a percentage of GDP.

Second, a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression.

There are those who seem to believe that if Krugman says it, it must be wrong.   Here is Scott Sumner’s reaction.

What do you see?  I suppose it’s in the eye of the beholder, but I see three big debt surges:  1952-64, 1984-91, and 2000-08.  The first debt surge was followed by a golden age in American history; the boom of 1965-73.  The second debt surge was followed by another golden age, the boom of 1991-2007.  And the third was followed by a severe recession.  What was different with the third case?  The Fed adopted a tight money policy that caused NGDP growth to crash, which in turn sharply raised the W/NGDP ratio.  Krugman has another recent post that shows further evidence of the importance of sticky wages.  Forget about debt and focus on NGDP.  It’s NGDP instability that creates problems, not debt surges.

Bold emphasis is provided by Marcus Nunes, who goes on to say:

Why does the share of debt rise? I believe it reflects peoples “optimism” about future prospects. In the chart below I break down Krugman´s chart and separate mortgage and non-mortgage household debt as a share of NGDP. I also add the behavior of the stock market (here represented by the Dow-Jones Index).

[See the linked Nunes post for his chart.]

Eye of the beholder, indeed.  Nunes makes an expectations-based argument, and adds:

Non-mortgage debt remains relatively stable after 1965, fluctuating in the range of 17% to 22% of NGDP. No problem there.

But the reality is that non-mortgage debt has grown quasi-exponentially in the post WW II period.

Sumner, as always, beats the NGDP drum.

My friend Art takes a jaundiced view of the Sumner-Nunes interpretation.  He gets it exactly right.  To see why, let’s go back and have a look at the data.  Here is straight CMDEBT (Household Credit Market Debt Outstanding,) presented as YoY percent change – not distorted by a GDP divisor.

Sumner sees a debt surge from 1952 to 1964.  I see a secular decrease in the YoY rate of debt growth from over 15% to under 5% by about 1966.

Sumner sees a debt surge from 1984 to 1991.  I see a decrease in the YoY rate of debt growth from over 15% to about 5% over that same span.

Sumner sees a debt surge from 2000 to 2008.  I see a modest rise into a broad peak between 2003 and 2006, with a net decrease in the rate of debt growth over the 2000 to 2007 period.  In CY 2008 debt growth goes negative.  Here’s a close-up view.

So much for optimism-fueled debt growth.

Between the non-existent debt surges Sumner sees a golden age from 1965 to 1973.  I’m a bit puzzled by a golden age boom that straddles one recession and leads directly into another; though I will admit that average GDP growth then looks impressive compared to the GDP growth of the last decade.  But the thing that Sumner misses within his “golden age” is the big debt surge from 1971 to 1974.

By my reckoning, Sumner is incapable of identifying either a debt surge or an economic boom.

So what is going on here?  Sumner and Nunes either fail to realize or deliberately ignore that the quantity CMDEBT/GDP has a denominator.  Let’s look at GDP.  Here is YoY GDP growth over the post WW II period.  And, of course, this is NGDP – not inflation adjusted – the very quantity to which Sumner ascribes so much gravitas.

The average GDP growth over the period 1948 to 2007 is 7.04%
The average over the “debt surge” period 1952 to 1964 is 5.35%
The average over the “debt surge” period 1984 to 1991 is 6.85%
The average over the “debt surge” period 2000 to 2007 is 5.24%

What we have are three periods of below average GDP growth, two of them substantially so.  The middle one is only slightly below average, but that is misleading since there is a steep decline in GDP growth over the period.

Consider C = A/B.  If B is small or decreasing, it will tend to make C large or increasing.  To ascribe all of the changes in C to changes in A is to ignore that Ol’ Devil Denominator.

Sumner does bring up NGDP growth late in the passage quoted above, but I don’t get his point.  If I’m reading him correctly, he claims that NGDP growth crashed between 2000 and 2008, and that caused the Debt/GDP ratio to rise.  But NGDP growth was sharply up from 2001 to 2003, relatively steady through 2006, and never crashed until 2008.  If there is any sense in his argument, somebody will have to explain it to me.

What actually happened was a real debt surge – but it was between 1997 and 2004.  Meanwhile, GDP growth both before and after the 2000-2003 dip was around 6 to 7%.  Then, in 2006, household debt growth and GDP growth both started to slump, and in 2008 took a nose dive together.

Sumner and Nunes have made a very fundamental error – not so much in the math itself as in the application of logic.  This is sloppy thinking, and any conclusions drawn from it must be highly suspect.

To get a handle on what is really going on, let’s look at debt growth and GDP growth together.

They don’t move in lock-step, but the similarity is striking.  Specifically, every recession except 2001 corresponds exactly to a minimum in debt growth.  So Sumner’s advice to “forget about debt” looks like it’s missing something very important – specifically that the household component of spending [aka GDP growth] has been debt financed.  To put it in context, have a look at Krugman’s first graph in the article linked above.   It shows what we all know, but some chose to ignore – that median wages have stagnated for 40 years.

In my narrative, the reason household debt grew to almost 100% of GDP is that stagnating incomes have not been able to support the cost of the American life style – due to decades of inflation, but probably largely driven by the costs of health care and education.  Remember – contra the prevailing view of economists today – spending, and therefore GDP growth, is directly dependent on income, not on wealth

Debt is a useful tool that develops into a problem when it becomes too burdensome to service.  Looking at debt as a percentage of GDP provides a clue as to how serviceable the debt is.  When you also consider that all of the GDP growth over several decades has gone to the top income earners, you can see that the debt servicing problem is made that much worse for the average person.

Nunes thinks debt rises when people are optimistic about the future, and he weaves a narrative based on that idea.  He then blames the 2008 collapse on bad policy, including a contractionary Fed.   He appears to want spending growth, but refuses to recognize the exhausted ability of ordinary people to spend.

In my view – and I think the data supports it – Krugman and Art have this exactly right.  And, as is nearly always the case, those who disagree with PK on what is happening in the real word have to invent a fantasy-world explanation – or, if I can borrow an especially tortured metaphor from Nunes,  pull a red herring out of a hat.

Cross-posted at Retirement Blues.

## PSA: Steve Keen at the Roosevelt in NYC tonight at 5:00/6:00

Talk is called “Neat, Plausible, and Wrong: the Deluded Discipline of Economics.”

I have to quibble with the “plausible” portion: there is no possible way to rationalize contemporary Microeconomics with any reasonable conceit that the Macroeconomics produced are “first-best” or anything similar.*

I doubt I’ll be there at 5:00, but certainly by 6:00. Hope to see some of you there.

Any questions for Professor Keen can be emailed to me or put in comments.

*This may be the root of my disagreement with Brad DeLong, who learned Macro and Micro when it was still possible—barely—to envision a GUT of Economics, even in a (weak form, as it were) Arrow-Debreu world. In the past thirty years, the strange delusion that Arrow-Debreu actually reflects the world has come to dominant Micro—with the rather predictable adverse consequence that Macro has to be more-than-the-sum-of-the-parts—i.e., include a positive social aspect—to be the best of all posible current worlds. But a positive social aspect is not part of the NeoKeynesian** cant, so you end up, effectively, declaring (for instance) that Gary Becker is wrong and discrimination is a beneficial business practice.

**As I have noted before, in economics the phrase “neo” is added to the front of a word if you are putting forth a belief set that is diametrically opposed to what came before: neoClassical and neoKeynesian are the most obvious examples of this.

by Daniel Becker
(This is a long post. The time for sound bite debate to the demise of learned discussion is over for we are flirting with danger.)
Via a post at Financial Armageddon I learnt of a paper looking at the relationship of austerity implementation and social unrest. It is recent, dated August 2011.
Jacopo Ponticelli, Universitat Pompeu Fabra
Hans-Joachim Voth, UPF-ICREA, CREI and CEPR
Discussion Paper No. 8513
August 2011
Centre for Economic Policy Research
The Financial Armageddon article shows the first chart of the paper which presents: the relationship between fiscal adjustment episodes and the number of incidents indicating instability (CHAOS).

“CHAOS is the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in a
single year in each country. The first set of five bars show the frequencies conditional on the size of budget cuts. When expenditure is increasing, the average country-year unit of observation in our data registers less than 1.5 events. When expenditure cuts reach 1% or more of GDP, this grows to nearly 2 events, a relative increase by almost a third compared to the periods of budget expansion. As cuts intensify, the frequency of disturbances rises. Once austerity measures involve expenditure reductions by 5% or more, there are more than 3 events per year and country — twice as many as in times of expenditure increases.”
This is a rather disturbing chart. Certainly the recent events in England play into the subject of this paper. That WE are now setup for our version of austerity implementation, this paper should be put in the hands of all the staff members of congress and the president. If I had my own national news show I would have in the corner of the screen the above chart along with the google map of all the riot locations in London and in big letters: Cut SS, MC, Medicaid. Really? You want to go there?
There is more to this paper than just the apparent connection between austerity and upheaval. “Controlling for economic growth does not change our results. This suggests that we capture more than the general association between economic downturns and unrest.”
This is the most powerful statement of the paper. It implies that “Man” in all his glory is responsible for such social activity. It is not the “natural” course of economic activity that creates such volatile activity.  It is the economic policy implementedthat determines whether there will be unrest or not. Currently, the proposed austerity is based on an a priori of “we’re broke”. It is stated with the authority of natural cause. Mother Nature Economy did it’s thing and well…we’re broke. All we can do is rebuild after the storm. Yet, an economy is totally of human design. The republican who stated that the conservative movement was making reality was more correct than their fantasizing of control and power would allow them to realize. Thus I delve into this paper more after the jump.

There are two points that need to be understood if we are to apply the lessons of this social economic paper. Point 1:
“However, countries with very high levels of constraints on the executive show a weaker degree of association…Table 10 demonstrates that in countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative – more spending buys a lot of social peace.”
So, some kind of governance that includes self determination is a mechanism for minimizing upheaval/unrest. I believe the American Revolution would be an example of upheaval in the face of “minimal executive” constraint. Finding that constraint of the executive is determinative does not mean such rights are exercised by the people to their benefit:
“The political economy literature on austerity suggests a paradox. There is no significant punishment at the polls for governments pursuing cut-backs (Alesina, Perotti, and Tavares 1998; Alesina, Carloni, and Lecce 2010), and no evidence of gains in response to budget expansion (Brender and A. Drazen
2008).”
I don’t know what to make of such findings. Certainly there must be more in the details of the studies sited. If such lack of response by the electorate is true, then we are in deeper trouble than realized.
Based on this conclusion, the authors ask:
“Why, then, is fiscal consolidation often delayed, or only implemented half-heartedly?”
They suggest fear of unrest may be the reason and footnote the following:
14 Alesina, Carloni and Lecce (2010) also suggest that implementation of budget measures may be harder if the burden falls disproportionately on some groups.
I would hate to think that austerity measures are not implemented simply because of fear of a reprisal that appears to be short lived with no political loss to those implementing the policy instead of not implementing austerity because research and experience prove it to be actually harmful in it’s results and even contradictory to the desired outcome of greater prosperity with reduced risk of living. If the politico is acting based on the former, it show’s no conviction of ideology and philosophy. If they fail to acted based on the latter, it shows a lack of character of inquiry and enlightenment. In either case, Naomi Kline’s work notes that austerity is always implemented with some form of force. In our country the force appears to be consolidation and control of the media combined with massive amounts of spending thus control of the debate and knowledge of the subject matter. Though the police state is in place thanks to Bush/Cheney and the expansion under Obama.
Point 2:
“Further, we examine if the spread of mass media changes the probability of unrest. This is not the case. If anything, higher levels of media availability and a more developed telecommunications infrastructure reduce the strength of the mapping from budget cuts to instability.”
In their conclusion they flatly state: Contrary to what might be expected, we also find no evidence that the spread of mass media facilitates the rise of mass protests.
This suggests that cutting communications as some have done recently in an attempt to curb the upheaval is not a procedure that works in the long term. The focus of the complaint, materialized via upheaval will have to be addressed. It is not the ease of rallying the masses, the pep squad going viral that solely explains the materialization or degree of unrest. Though it may explain the reduction in strength of austerity implementation and resulting upheaval. I think the authors have stumbled upon the modern version of the printing press coming into existence and the effects it had.
The authors review current literature on the subject and find there is some confliction as to the effects of budget cutting. I’ll let you read it, but my take home is that it depends on what stage of national development the country is in as to the extent austerity will produce unrest, if the unrest is sustained post implementation and whether it promotes growth. They even site:
Giavazzi and Pagano (1990) and Alesina et al. (2002) find that cuts can be expansionary. Amongst the reasons suggested for this finding are a reduction in uncertainty about the course future spending (Blanchard 1990a), and a positive wealth shock as a result of lower taxes in the future (Bertola and Drazen 1993).3
I guess we know where the current meme comes from. Unfortunately the authors also note:
IMF interventions, on the other hand, often led to more frequent disturbances (Morrison, Lafay, and Dessus 1994).
Similarly, Haggard, Lafay and Morrison (1995) find that IMF interventions and monetary contractions in developing countries led to greater instability.
Recently, work by the IMF has suggested that austerity measures may be less expansionary than previously thought; they may well have the standard negative Keynesian effects as a result of lower demand (IMF 2010; Pescatori, Leigh, and Guajardo 2011).
Oh no! What is the IMF going to do now? I’m still praying for you Greece.
The author’s sum up the literature review with:
Remarkably, to the best of our knowledge, there exists no systematic analysis of how budget cuts affect the level of social instability and unrest in a broad cross-section of developed countries, over a long period.
Wouldn’t you think that such research would be considered key to one’s knowledge base before we start implementing policy that to date has been mostly tried and studied in 3rd world situations?  Wouldn’t you think that the advising
the proof of effectiveness from these advising economist? Even medicine has acknowledged there is a difference between men and women other than genital development. The review of literature is clear. Start cutting and you will piss people off such that they express it ultimately in violent means though if you can ride it out the violence abates and prosperity looms until it doesn’t because people just plain have no money. The word for today is: Demand. Use it in a sentence as it relates to this discussion.
We can think that there are other issues involved when people protest, but the authors make it clear, austerity brings out the greatest number of people. For those considering how to handle the masses when the austerity gets implemented:
“The simple correlations suggest that these co-movements do not extend to all indicators of unrest equally – riots, revolutions, and demonstrations decline as expenditure rises, but assassinations and strikes seem – at a first pass – uncorrelated. Similarly, output growth seems to correlate negatively with assassinations, riots, revolutions, and demonstrations, but not with strikes.”
And: “This suggests that unrest reacts particularly strongly to budget cuts and growth when unrest levels are already high.”
Go ahead, implement at your own imperil. In case you think this connection of unrest/upheaval is related to how they measure it, the authors checked that variable: “We conclude that the way in which we measure unrest does not matter for our main finding.”
Looking at the relationship of austerity policy involving taxes:
Higher taxes and lower expenditure are associated with more unrest, but the relationship is not significant. Tax increases have a positive sign, but the effect is not significant at standard levels of rejection (column 2). It is also small – a one standard deviation rise in the tax/GDP ratio increases unrest by less than 0.01 events. Overall, we find that improvements in the budget balance raise the level of unrest (column 3). As the results in columns (1) and (2) make clear, this reflects the impact of expenditure cuts, and not of tax increases.
And:
We find the same results as before – expenditure cuts wreak havoc, tax increases do so only to a small extent and insignificantly. Overall, the budget balance matters for predicting unrest.
Just to make sure no one gets this wrong: A change in budget balance predicts unrest if the balance is reduced via cuts. Kind of makes it difficult to accept that the masses want something for nothing. In fact, I would suggest “entitlement” as it has come to mean something for nothing is the wrong word to apply to government programs of which people pay for willingly via taxes and don’t get riotous if they are asked to pay more.
If we wanted to avoid the upheaval of austerity implementation we should consider:
In all specifications, the effect of GDP growth on unrest is negative. In contrast to the results for expenditure changes, the effect is not tightly estimated, except in the case of demonstrations, when it is also large – every 1% increase in GDP cuts the number of demonstrations by close to 0.4 events.
See, do something that actually improves the economy and people don’t protest! Wow, who’d a thunk it? Of course improving the economy such that people do not protest would mean having implemented something which produces an actually experienced improvement in the peoples lives. Something like real rising wages paralleling productivity rise and thus rising wealth. Unlike say, debt driven consumption only to have financing go away and then told to suck it up.
They look further at the connection of spending cuts vs economic growth and find:
In contrast, if expenditure changes are negative, they matter a great deal for unrest, driving up CHAOS by 0.19 incidents for each standard deviation of expenditure cuts. Next, we repeat the exercise for output changes. Increases in output do much to cut unrest (col. 3), with a one standard deviation increase in output (3.77%) reducing CHAOS by 0.2 incidents on average. In contrast, declines do not set off major disruptions to the same degree. Overall, the results in table 12 confirm that the relevant identifying variation for expenditure changes comes from cuts; for output changes, it comes from positive growth, not recessions.
This paper kind of makes you think about our current governance of Wall Street/Corp influence and apparent dominance of policy choices to the exclusion of polls showing people want no cuts in programs referred to as entitlements and instead have the budget balanced via tax revenue enhancement. Wonder what happens when virtual people known as corporations do not experience austerity yet have persuading influence over We the people’s choices via money into the election process.? I guess we are going to find out. As I have heard in the past: tort is the free market response to lax governance of the market. Is upheaval the same free market response to unresponsive policy toward the people?
My concern is that the initial response by those supporting and promoting austerity will be the furthering of the police state we have been developing since 9/11. Only it will also be fired up (pun intended) domestically. It is the response we have experienced in the past with the civil rights motion and even back to the labor movement. It appears that a police response is always the first response to protest as protest is interpreted as potentially criminal regardless of what the Constitution reads. Yet here we have a paper suggesting that all of it can be avoided. Combining this paper with the 2005 World Bank report on what creates wealth in a developed economy it appears to me that we have  in our hands the answer to what appropriate economic policy should look like for our current situation.
I asked September 2008 if we could please broaden our discussion regarding the crisis. That has not happened. The discussion is still disjointed, segmented and narrow. Now I’m imploring that we broaden the discussion. Pleading!

## If You Believe the Market Reacts to Information

The bad news of the day is that about \$5B (\$5,000,000,000) more than previously believed went to buy goods made in China, Japan, non-major South and Central American countries, and other places outside the U.S. Per the Vampire Squid (tm Matt Taibbi), this should cause a revision to Q2 US GDP from 1.3% to 0.9%.

The good news of the day is that weekly unemployment claims were “only” 395,000. (Let’s ignore the detail that last week was originally reported as 398K—breaking the streak—but is now 402K.)

The net result, at least as of 2:00pm is that the major equity indices are up by at least 3.80% (DJIA). The early articles claim that was because of the “good” news.

And the scary thing is, they’re correct. In the 193 weeks since the recession started,* there have only been 39 where initial claims were below 395,000, and two (including the current, possibly-to-be-revised week) that were at that level.

But, especially as none of Harry Reid’s appointees to The Grand Ripoff appear to believe that Jobs would do more good for balancing the budget than the Super Commission, it appears that three-quarters of that August body will be working solely on the numerator, not the denominator, of the Debt/GDP ratio.

## I want spending, I want spending, I WANT SPENDING!

By: Daniel Becker
There is some new information from Adam Hersh of Center for American Progress showing what has happened in the states that have followed the conservative economic approach (yes, talking to you Obama, DLC, Clintonites).  Keep cutting at your own risk.

Here’s the thing.  Like the Wile E Coyote, we seem to have run off the cliff.  Our feet are still moving like we are running because we have not noticed we are off the cliff.   Or I should say those in the lofty parts of our power house and economy have not noticed.   Now, in cartoons, sometimes the charater makes the realization and can scramble back to safety at the edge of the cliff.  However,  Wile E never did get it and always fell.

I’m not interested in being taken down by Senator, Represenative, President, Chairman Wile E Coyote.  No thank you.  I know we’re off the cliff as do the vast majority of not only the USA but it seems the rest of the 1st world nations.  So listen up Wile E.  We’re not following you any more ( I hear you Greek patrons).  Not going to try to catch that road runner your way anymore.   And here is why:

Relative to national economic trends, states that increased spending enjoyed on average:
0.2 percentage point decrease in the unemployment rate
1.4 percent increase in private employment
0.5 percent real economic growth since the start of the recession.

In contrast, states that cut spending saw on average:
1 percentage point increase in the unemployment rate
2.1 percent loss of private employment
2.9 percent real economic contraction relative to the national economic trend.

So, I hope the IMF is happy now.  I have to be honest, the study does note:

The three figures presented in the accompanying charts demonstrate that steep state government spending cuts have gone hand-in-hand with rising unemployment, falling private-sector payroll employment, and lower real growth in states’ gross domestic product, or GDP—the sum of all goods and services produced by labor and equipment in each state, minus imports. The analysis, however, does not tell us whether the spending cuts caused the negative economic outcomes. But in all three cases, steep spending cuts are statistically associated with markedly worse economic performance.

There are some nice charts at the linked article if you are more visual.  Personally, I feel this new info just further supports my position that people are not drowning (debt is not money and thus not water), they are dehydrating.  We need more of the water that already exists.  It’s the income inequality issue.  I am rather certain that more government cutting has no chance, zero chance of reversing the inequality.

If we can’t reverse the inequality, then we’re going to continue with what I pointed out in 2008.  That is, the top is taking money from the economy as income faster than the economy can produce it.  Can you keep spending more than you make?  No, is the conservative answer.  Well, can you keep taking it faster than you can produce it?  No, is the liberal/progressive answer.

The issue is not that we are spending too much via government because the government is not just another player in the economy.  As I have noted, as long as the government acts counter to the players in the economy and does so in a manor that assures equality and the reduction of risk in living, it is not a competitor.  It does not “crowd out” the private sector.

This leaves the real issue of a stalling economy, and declining living security one of  to much money being taken out of the economy.  For decades as noted, one group has been taking too much money out of the economy and have been doing it at ever increasing rates: the top 1%.  They are doing it faster than the economy can produce it.  This, as far as I am concerned is no different than government cutting spending.  Either way, money is taken out.  Velocity is what we are talking; how much and how fast money is moving through the economy.   Of course to understand such, one has to appreciate that Wall Street, banks, and markets are not an economy.  This is why the government, acting to fulfill it’s prime purpose of equality of power is never a competitior in the economy.

So, how convienent the conservative issue is debt.  Too much of it they say.  Too much spending.  HA!  The real debt is in the lack of income to everyone other than those in the top 1%.  They took and are taking so much money out of the system in the form of income (decrease union membership, tax cuts, off shoring, financialization, consolidation) that they have damaged the machine which allowed them to have growing income.  This is the real debt.  It is the lack of economic growth.  And the rich have caused it.  Yet there solution is to cut government spending and further reduce the amount of money in the active (remember velocity) part of the economy all the while taking even more out as income in their pockets?

Do you see how nuts Wile E Coyote is?