A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, May 31, 2013

Transcript: Investing in Public Goods

 Today on the podcast, back down to business.  Investment.  The collapse of the I-5 bridge just north of Seattle last Thursday reminded us of the crumbling physical infrastructure, but the social infrastructure is crumbling also.  Amid calls to let the private sector do it.  We'll think about that. And in honor of Steve Keen's passing through, filling Town Hall, we have to look at debt and how it relates to investment.
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That's more than enough, but our preliminary note has to do with a new piece relating to the Rogoff-Reinhart debacle.  Miles Kimball and Yichuan Wang from the University of Michigan crunched the Rogoff-Reinhart numbers (as corrected) and found that, No, high sovereign debt does not lead to low growth.  It's the other way around.  Low growth leads to high debt.

Demand Side knew this from the inside, but we did not think to try to prove it statistically.  Correlation is not causation, we said.  Heck, even Carmen Reinhart said it under her breath.  Kimball and Wang, though, took off the statistical analysis gloves and showed that high sovereign debt does not affect growth going forward.  Their primary tool was the scatter chart of long-run growth rates to debt levels.  The central trend showed heavy influence of low growth in producing higher government debt, but again, and quoting Kimball and Wang:
"... the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."
The full text of the piece is on the transcript at demandsideeconomics.net, as well as a link to the original site. 

We had Steve Keen in town, maybe I mentioned that.  The guy is brilliant.  We threw everything we had at him, paired him with a bond fund manager from Russell Investments, dropped him down cold in front of a conservative talk show host, then a liberal doubter, and finally a community radio guy who browsed around in left field.  On point, straight talk, at the right level of understanding.  He clicked with everyone.  Fans clustered around the stage after the evening talk.  The conservative talk show guy pencilled us in for a follow-up, but the truck hit the bridge, the bridge went in the water, and all the newscasters left town to look.

The bridge hit the water.  That brings me to the problem with Steve Keen.  It is a financial economy.  Agreed.  Growth and employment are determined by income and the change in debt, which comprise aggregate demand.  Agreed. [Although apparently there will be vigorous discussion on that point later in June at the Harvard Law School.] But the economy is also real stuff.  Growth and employment are all very well and good, but they are the buzzing around the hive, they are not necessarily the honey in the hive or the strength of the structure of the hive.

And for all Steve's insight about how to get things going again, there is still the question of direction.  All the energy and organization and employment in the world is not so good if the locomotive is heading for the cliff.  In fact, you might argue that that current stagnation has the benefit of slowing that locomotive a bit in its race toward the climate crisis.

I would love to be in Pula, Croatia, this week, where Steve Keen and James K.Galbraith are on the same bill.  [Luxurious accommodations here.]  "Economics in Crisis - the Crisis of Economics." Although the luxury of the context belies any crisis whatsoever.  James -- I cannot bring myself to call him Jamie -- is the point man for planning.  And direction is surely what we need. If we can get the audio, we will certainly relay it.

 Infrastructure Spending

 There's a chart online showing the collapse of infrastructure spending since 2008.  Yes, there was a blip up with the Obama stimulus (ARRA), but not above the 2008 peak.  It's not enough to waste breath on.  Two-thirds of the ARRA money went to tax cuts. 

In the middle of the last decade a blue ribbon commission -- public-private -- came up with a plan to put $250 billion PER YEAR for 20 years into surface transportation, to be financed by a 5 cent per year hike in the gas tax over that period.  That is the scale we need.  That was on rail, roads, waterways, harbors.

Plus we need a nation-wide DC transmission grid to bring renewable power to urban centers.  Plus we need a re-design of transportation and retrofitting of commercial and residential structures.  We cannot afford not to do it.

But here's the worst of it, our educational and social infrastructure is collapsing as well:


Now that's just medical research, thanks to On Point and Tom Ashbrook.  Science across the board is being eviscerated.  Just as huge challenges loom we are going to lose a generation of scientists.  Why?

Here's Club for Growth's Barney Keller with the cogent answer:  Government debt is the problem.


Leaving aside the waste of $300,000 in annual salary to spin doctor Keller, there are plenty of feces being thrown here.  Social Security in balance for twenty years.  Compare that to the Pentagon's budget.  Of course, it's bull.  I'll stop playing it.  It is phenomenal that this is what passes for deliberation in our nation's capital.

Now let's go back to Keynes, and Leon Keyserling.

The level of investment has to be enough to absorb savings, or the non-consumption inherent in savings will eat away at incomes.  Over time, a wealthy society invests more and more relative to consumption.  They need to maintain the higher investment.  If you start cutting, you cut incomes, you cut economic activity, you reduce savings in the aggregate.

Skipping now to the end.  Do we have investment in real stuff that will return enough to pay it off?  Not in the private sector.  Overcapacity is a legacy of 30 years of economic policy aimed at business investment.  Housing?  Please.  Eighty billion a month from the Fed to buy down interest rates and buy up mortgage-backed securities has begun to turn equity back up, so long as the federal agencies keep buying mortgages.  But are we really going to find value there?  Stocks, of course, are not investment at all, just trading.

All the productive investment left -- and there is plenty of it -- is in public goods.  Education, health care, infrastructure.

But we just got another Harvard guy as chief economist.  It's Jason Furman the new chair of the Council of Economic Advisers.  Just a week after we lampooned Harvard here for its Rogoff's and Reinhart's and Niall Ferguson's and Larry Summer's and Barack Obama's and W's and HW's and on down the line, we got A NOTHER Harvard guy.  Don't know if he's Robert Rubin's choice, but he's been in DC for twenty-five years.  The worst part, he has support from Harvard's Greg Mankiw.

Today's podcast brought to you by @kleinbattle.  Yes, it's Twitter coming to Demand Side.  Can you stand it?  Follow us and next week we'll tell you the humiliating story of our first tweet. @ K L E I N B A T T L E.  Maybe we'll even explain the derivation of the name.  Hey, we didn't know it would be public.


After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth

Debt as percentage of GDP
Leaving aside monetary policy, the textbook Keynesian remedy for recession is to increase government spending or cut taxes. The obvious problem with that is that higher government spending and lower taxes tend to put the government deeper in debt. So the announcement on April 15, 2013 by University of Massachusetts at Amherst economists Thomas Herndon, Michael Ash and Robert Pollin that Carmen Reinhart and Ken Rogoff had made a mistake in their analysis claiming that debt leads to lower economic growth has been big news. Remarkably for a story so wonkish, the tale of Reinhart and Rogoff’s errors even made it onto the Colbert Report. Six weeks later, discussions of Herndon, Ash and Pollin’s challenge to Reinhart and Rogoff continue in earnest in the economics blogosphere, in the Wall Street Journal, and in the New York Times.

In defending the main conclusions of their work, while conceding some errors, Reinhart and Rogoff point out that even after the errors are corrected, there is a substantial negative correlation between debt levels and economic growth. That is a fair description of what Herndon, Ash and Pollin find, as discussed in an earlier Quartz column, “An Economist’s Mea Culpa: I relied on Reinhardt and Rogoff.” But, as mentioned there, and as Reinhart and Rogoff point out in their response to Herndon, Ash and Pollin, there is a key remaining issue of what causes what. It is well known among economists that low growth leads to extra debt because tax revenues go down and spending goes up in a recession. But does debt also cause low growth in a vicious cycle? That is the question.

We wanted to see for ourselves what Reinhart and Rogoff’s data could say about whether high national debt seems to cause low growth. In particular, we wanted to separate the effect of low growth in causing higher debt from any effect of higher debt in causing low growth. There is no way to do this perfectly. But we wanted to make the attempt. We had one key difference in our approach from many of the other analyses of Reinhart and Rogoff’s data: we decided to focus only on long-run effects. This is a way to avoid getting confused by the effects of business cycles such as the Great Recession that we are still recovering from. But one limitation of focusing on long-run effects is that it might leave out one of the more obvious problems with debt: the bond markets might at any time refuse to continue lending except at punitively high interest rates, causing debt crises like that have been faced by Greece, Ireland, and Cyprus, and to a lesser degree Spain and Italy. So far, debt crises like this have been rare for countries that have borrowed in their own currency, but are a serious danger for countries that borrow in a foreign currency or share a currency with many other countries in the euro zone.

Here is what we did to focus on long-run effects: to avoid being confused by business-cycle effects, we looked at the relationship between national debt and growth in the period of time from five to 10 years later. In their paper “Debt Overhangs, Past and Present,” Carmen Reinhart and Ken Rogoff, along with Vincent Reinhart, emphasize that most episodes of high national debt last a long time. That means that if high debt really causes low growth in a slow, corrosive way, we should be able to see high debt now associated with low growth far into the future for the simple reason that high debt now tends to be associated with high debt for quite some time into the future.

Here is the bottom line. Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.

The graphs at the top show show our first take at analyzing the Reinhardt and Rogoff data. This first take seemed to indicate a large effect of low economic growth in the past in raising debt combined with a smaller, but still very important effect of high debt in lowering later economic growth. On the right panel of the graph above, you can see the strong downward slope that indicates a strong correlation between low growth rates in the period from ten years ago to five years ago with more debt, suggesting that low growth in the past causes high debt. On the left panel of the graph above, you can see the mild downward slope that indicates a weaker correlation between debt and lower growth in the period from five years later to ten years later, suggesting that debt might have some negative effect on growth in the long run. In order to avoid overstating the amount of data available, these graphs have only one dot for each five-year period in the data set. If our further analysis had confirmed these results, we were prepared to argue that the evidence suggested a serious worry about the effects of debt on growth. But the story the graphs above seem to tell dissolves on closer examination.

Given the strong effect past low growth seemed to have on debt, we felt that we needed to take into account the effect of past economic growth rates on debt more carefully when trying to tease out the effects in the other direction, of debt on later growth. Economists often use a technique called multiple regression analysis (or “ordinary least squares”) to take into account the effect of one thing when looking at the effect of something else. Here we are doing something that is quite close both in spirit and the numbers it generates for our analysis, but allows us to use graphs to show what is going on a little better.
The effects of low economic growth in the past may not all come from business cycle effects. It is possible that there are political effects as well, in which a slowly growing pie to be divided makes it harder for different political factions to agree, resulting in deficits. Low growth in the past may also be a sign that a government is incompetent or dysfunctional in some other way that also causes high debt. So the way we took into account the effects of economic growth in the past on debt—and the effects on debt of the level of government competence that past growth may signify—was to look at what level of debt could be predicted by knowing the rates of economic growth from the past year, and in the three-year periods from 10 to 7 years ago, 7 to 4 years ago and 4 to 1 years ago. The graph below, labeled “Prediction of Debt Based on Past Growth” shows that knowing these various economic growth rates over the past 10 years helps a lot in predicting how high the ratio of national debt to GDP will be on a year by year basis. (Doing things on a year by year basis gives the best prediction, but means the graph has five times as many dots as the other scatter plots.) The “Prediction of Debt Based on Past Growth” graph shows that some countries, at some times, have debt above what one would expect based on past growth and some countries have debt below what one would expect based on past growth. If higher debt causes lower growth, then national debt beyond what could be predicted by past economic growth should be bad for future growth.

Prediction of debt based on past growth

Our next graph below, labeled “Relationship Between Future Growth and Excess Debt to GDP” shows the relationship between a debt to GDP ratio beyond what would be predicted by past growth and economic growth 5 to 10 years later. Here there is no downward slope at all. In fact there is a small upward slope. This was surprising enough that we asked others we knew to see what they found when trying our basic approach. They bear no responsibility for our interpretation of the analysis here, but Owen Zidar, an economics graduate student at the University of California, Berkeley, and Daniel Weagley, graduate student in finance at the University of Michigan were generous enough to analyze the data from our angle to help alert us if they found we were dramatically off course and to suggest various ways to handle details. (In addition, Yu She, a student in the master’s of applied economics program at the University of Michigan proofread our computer code.)  We have no doubt that someone could use a slightly different data set or tweak the analysis enough to make the small upward slope into a small downward slope. But the fact that we got a small upward slope so easily (on our first try with this approach of controlling for past growth more carefully) means that there is no robust evidence in the Reinhart and Rogoff data set for a negative long-run effect of debt on future growth once the effects of past growth on debt are taken into account. (We still get an upward slope when we do things on a year-by-year basis instead of looking at non-overlapping five-year growth periods.)
Relationship between future growth and excess debt to gdp

Daniel Weagley raised a very interesting issue that the very slight upward slope shown for the “Relationship Between Future Growth and Excess Debt to GDP” is composed of two different kinds of evidence. Times when countries in the data set, on average, have higher debt than would be predicted tend to be associated with higher growth in the period from five to 10 years later. But at any time, countries that have debt that is unexpectedly high not only compared to their own past growth, but also compared to the unexpected debt of other countries at that time, do indeed tend to have lower growth five to 10 years later. It is only speculating, but this is what one might expect if the main mechanism for long-run effects of debt on growth is more of the short-run effect we mentioned above: the danger that the “bond market vigilantes” will start demanding high interest rates. It is hard for the bond market vigilantes to take their money out of all government bonds everywhere in the world, so having debt that looks high compared to other countries at any given time might be what matters most.

Five year averages across all countries

Our view is that evidence from trends in the average level of debt around the world over time are just as instructive as evidence from the cross-national evidence from debt in one country being higher than in other countries at a given time. Our last graph (just above) shows what the evidence from trends in average levels over time looks like. High debt levels in the late 1940s and the 1950s were followed five to 10 years later with relatively high growth.  Low debt levels in the 1960s and 1970s were followed five to 10 years later by relatively low growth. High debt levels in the 1980s and 1990s were followed five to 10 years later by relatively high growth. If anyone can come up with a good argument for why this evidence from trends in the average levels over time should be dismissed, then only the cross-national evidence about debt in one country compared to another would remain, which by itself makes debt look bad for growth. But we argue that there is not enough justification to say that special occurrences each year make the evidence from trends in the average levels over time worthless. (Technically, we don’t think it is appropriate to use “year fixed effects” to soak up and throw away evidence from those trends over time in the average level of debt around the world.)
We don’t want anyone to take away the message that high levels of national debt are a matter of no concern. As discussed in “Why Austerity Budgets Won’t Save Your Economy,” the big problem with debt is that the only ways to avoid paying it back or paying interest on it forever are national bankruptcy or hyper-inflation. And unless the borrowed money is spent in ways that foster economic growth in a big way, paying it back or paying interest on it forever will mean future pain in the form of higher taxes or lower spending.

There is very little evidence that spending borrowed money on conventional Keynesian stimulus—spent in the ways dictated by what has become normal politics in the US, Europe and Japan—(or the kinds of tax cuts typically proposed) can stimulate the economy enough to avoid having to raise taxes or cut spending in the future to pay the debt back. There are three main ways to use debt to increase growth enough to avoid having to raise taxes or cut spending later:
1. Spending on national investments that have a very high return, such as in scientific research, fixing roads or bridges that have been sorely neglected.
2. Using government support to catalyze private borrowing by firms and households, such as government support for student loans, and temporary investment tax credits or Federal Lines of Credit to households used as a stimulus measure.
3. Issuing debt to create a sovereign wealth fund—that is, putting the money into the corporate stock and bond markets instead of spending it, as discussed in “Why the US needs its own sovereign wealth fund.” For anyone who thinks government debt is important as a form of collateral for private firms (see “How a US Sovereign Wealth Fund Can Alleviate a Scarcity of Safe Assets”), this is the way to get those benefits of debt, while earning more interest and dividends for tax payers than the extra debt costs. And a sovereign wealth fund (like breaking through the zero lower bound with electronic money) makes the tilt of governments toward short-term financing caused by current quantitative easing policies unnecessary.
But even if debt is used in ways that do require higher taxes or lower spending in the future, it may sometimes be worth it. If a country has its own currency, and borrows using appropriate long-term debt (so it only has to refinance a small fraction of the debt each year) the danger from bond market vigilantes can be kept to a minimum. And other than the danger from bond market vigilantes, we find no persuasive evidence from Reinhart and Rogoff’s data set to worry about anything but the higher future taxes or lower future spending needed to pay for that long-term debt. We look forward to further evidence and further thinking on the effects of debt. But our bottom line from this analysis, and the thinking we have been able to articulate above, is this: Done carefully, debt is not damning. Debt is just debt.
Follow Miles on Twitter at @mileskimball. His blog is supplysideliberal.com. Follow Yichuan on Twitter at @yichuanw. His blog is SynthenomicsWe welcome your comments at ideas@qz.com.

Business Insider: "[P]ublic Construction Spending Is Lower Than Its Been In Over 20 Years." Joe Weisenthal at Business Insider reported on May 24:
The big news today is that a bridge in Washington collapsed, throwing cars into the water. Amazingly, nobody died. This may revive debate about the need to spend more on infrastructure, which would have multiple positive effects. Nothing is likely to happen, however. That being said, here's a chart of public construction spending (TLPBLCONS) as percentage of GDP. You can see, public construction spending is lower than its [sic] been in over 20 years.

[Business Insider5/24/13]
Washington Post: "U.S. Infrastructure Spending Has Plummeted Since 2008." According to Brad Plummer of the Washington Post, "Not surprisingly, the collapse of a bridge along Interstate 5 in Washington state yesterday has revived the long-standing debate over whether Congress should spend more to repair the nation's aging roads and bridges." After discussing the chart from Business Insider, Plummer continued:
So what if we just look at highways and roads? We get this chart:
Highway and Road Spending

USA Today: "Federal Highway Administration Study Shows 11% Of Nation's Bridges Are Structurally Deficient." According to USA Today on May 24:
In 2012, the Federal Highway Administration said 67,000 -- 11% -- of the nation's 607,000 bridges were structurally deficient. That means the bridges are not unsafe but must be closely monitored and inspected or repaired. That percentage is little changed since 2007 when 12% of the nation's bridges were listed as structurally deficient and the I-35 bridge collapsed in Minneapolis. [USA Today5/24/13]
USA Today: The American Society Of Civil Engineers Called For An Increase In Spending On Bridge Investment. From USA Today on May 24:
[F]unding repairs and replacements continues to be a problem, especially because bridges are getting older, says Andrew Herrmann, an engineer and past president of the American Society of Civil Engineers. The average bridge in the USA is 42 years old, Herrmann says.
The group gave the nation a C+ in its report card for maintaining bridges, saying federal, state and local governments need to increase bridge investment by $8 billion annually to meet the needs of deficient bridges. [USA Today5/24/13]

U.S. infrastructure spending has plummeted since 2008

By Brad Plumer, Published: May 24, 2013 at 11:37 amE-mail the writer

Not surprisingly, the collapse of a bridge along Interstate 5 in Washington state yesterday has revived the long-standing debate over whether Congress should spend more to repair the nation’s aging roads and bridges.

I-5 bridge collapse. (AP)

It’s worth being very clear upfront that the I-5 bridge in question wasn’t considered “structurally deficient” in any way — the bridge collapse is being blamed on a truck bumping an overhead girder. All we do know is that the bridge was sort of old. (Fortunately, no one died or was seriously injured.)

Here’s the AP: “The bridge was built in 1955 and has a sufficiency rating of 57.4 out of 100. That is well below the statewide average rating of 80 … but 759 bridges in the state have a lower sufficiency score.” The bridge was also classified as “functionally obsolete,” but that doesn’t mean it was unsafe, just that it was built according to earlier standards.

That said, infrastructure spending is in the news again, so here are a few ways to think about the topic. Joe Wiesenthal created this chart to show that U.S. public construction spending as a percentage of GDP has dropped to its lowest point in 20 years, after a big uptick before the recession:

Now, that’s a chart of all public construction spending, from highways to water projects to public hospitals to schools. So what if we just look at highways and roads? We get this chart:

There’s still been a big drop-off in recent years, although that also came after a big build-up in the late 2000s. (Sadly, the data series doesn’t extend back before 2002, so it’s tough to see what this looks like historically.)

How did this happen? States and local governments are the biggest part of the story here. They’ve historically provided the vast majority of spending for roads, highways and bridges, and they’ve been pulling back on spending since 2008 as a result of the economic downturn and requirements to balance their budgets. California’s transportation spending declined by 31 percent from 2007 to 2009, for instance. Texas’s fell by 8 percent.

At the same time, Congress hasn’t filled in the gap. There was a one-time $46 billion infusion of transportation spending in the stimulus bill. But that wasn’t enough to offset the drop at the state and local level. Meanwhile, the most recent highway bill out of Congress kept federal spending at current levels rather than increasing it.

The big question is whether Congress should be spending more — and if so, how much? We’ve seen various reports arguing that America’s infrastructure is in dire need of an upgrade. The American Society of Civil Engineers gave the nation’s bridges a C+ in its 2013 report card, and said that full repairs would cost $20 billion per year over the next decade, a 60 percent boost in spending. These estimates don’t always take a full account of costs and benefits, but the I-5 collapse will no doubt give these groups more ammo.

Another consideration, meanwhile, is that Congress can borrow money for remarkably low rates right now. And experts say it’s typically cheaper to fix roads and bridges early on rather than wait until they get truly decrepit. That suggests now could be an apt time to invest in repairs, rather than putting them off until later.

Saturday, May 25, 2013

Link: Steve Keen in Seattle, Evening Session

An audience of over 200 got vintage Steve Keen in his May 23 Seattle appearance. The video is at this moment lost in YouTube limbo, a link to the video of the luncheon session with Gerard Fitzpatrick and Steve Keen is below. We are immensely grateful to the people who were there, and to the supporters who showed up afterward. I think we have opened a real connection between Steve and Seattle, and I hope others who want to see Steve Keen become more of a presence in our Pacific Northwest neighborhood will contact us at SteveKeenInSeattle@live.com. Aside from being ten thousand miles closer to the action, Seattle has advantages in other respects, and the region, from Vancouver, British Columbia to Eugene and Corvallis, Oregon would expand its economics IQ by dozens of points by adding him, even if only for part of the year.

(video is at this moment lost in YouTube limbo)
Listen to this episode

KEXP with Mike McCormick, May 25


KVI with John Carlson, May 22

KIRO with Dave Ross May 22


"Money, Monetary Policy and Financial Repression," with Gerard Fitzpatrick of Russell Investments:

Steve's lost bet and trek to the top of the mountain yields swags for the homeless.

Here is the story promised in our introductions to Steve at Seattle's Town Hall May 23.

Being interviewed on Australian national television about his debt analysis, Steve was asked a side question about the Australian housing market.  He replied that house prices had dropped in Japan by 40 percent in real terms in the ten to fifteen years following the peak of their housing bubble, and Australia should not expect to be different.

The housing bulls went for him.

In a talk later at the library at Parliament House (Australia's national legislature), he was challenged by his co-presenter, banker and interest rate strategist Rory Robertson.  Halfway through Steve's talk, Robertson said (incorrectly) "You are most famous for your housing price call. You said house prices are going to fall by 40 percent peak to trough.  If they fall by less, you have to walk to Mt. Kosciusko (KOZ-ee-OSS-ko).  If they fall by less, I will walk."

(Full disclosure, Steve was appearing at Parliament House not for his fame in making housing calls.)

The month before the bet the government instituted the "First Time Vendor's Boost," which multiplied the subsidy for first-time home buyers by two to three times.  When house prices rose, Robertson declared that Steve had lost the bet.

In fact, he had never said that house prices would fall from the point of his statement, only that they would (or could) fall by 40 percent over a ten- to fifteen-year period.  But rather than litigate in the media, Steve chose to walk.  Starting from Canberra, Steve and thirteen supporters walked the 240 kilometers (160 miles) in nine days to the top of the 7,300-foot mountain in nine days.  They were joined for at least part of the trek by between 60 and 100 others (Steve is not sure the exact number).

Turning the experience into a kind of walk-a-thon, they raised $15,000 for "Swags for the Homeless."  A "swag" is a one-person tent or bivouac. See here.  They purchased and distributed 250 of the swags and turned the lost bet into a win for the homeless and a national media event.

Friday, May 17, 2013

Rogoff & Reinhart revisited

Apologizing for a mish-mash transcript:

Today's podcast, on the eve of Steve Keen in Seattle, two events at Town Hall may 23, see SteveKeenInSeattle.com for info and registration -- and a (by request) opportunity to contribute to the effort with a donate button at the bottom --Brought to you by the Seattle Economics Council and Demand Side Economics.... Now there is a subjunctive clause that doesn't seem to go anywhere.
Listen to this episode
Today, we get back to the markets with Vince Farrell and Tom Keene, no relation to Steve, and we dig around in the Rogoff-Reinhart debate with some defense, and some questions.  Like if the debt to GDP is not going to blow up the budget after all, why don't we do something to actually build the economy before it is too late?  That would be the Congressional Progressive Caucus budget.

Then we bring back the punch list.  Policy and fact correction in short terms.

First, from back in April, lets crib from Washington Blog:



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

The “Excel Spreadsheet Error” In Context

You’ve heard that an incredibly influential economic paper by Reinhart and Rogoff (RR) – widely used to justify austerity – has been “busted” for “excel spreadsheet errors” and other flaws.

Liberal economists argue that the “debunking” of RR proves that debt doesn’t matter, and that conservative economists who say it does are liars and scoundrels.
Conservative economists argue that the Habsburg, British and French empires crumbled under the weight of high debt, and that many other economists – including Niall Ferguson, the IMF and others – agree that high debt destroys economies.

RR attempted to defend their work yesterday:
Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

This view generally reflects the state of the art in economic research
Back in 2010, we were still sorting inconsistencies in Spanish G.D.P. data from the 1960s from three different sources. Our primary source for real G.D.P. growth was the work of the economic historian Angus Madison. But we also checked his data and, where inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and Spain’s monumental and scholarly historical statistics, had very different numbers. In our 2010 paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would have strengthened our results, since Spain had very low public debt in the 1960s (under 30 percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over that period.
We have never advised Mr. Ryan, nor have we worked for President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of the 2012 Economic Report of the President, recreating and extending the results.

In the campaign, we received great heat from the right for allowing our work to be used by others as a rationalization for the country’s slow recovery from the financial crisis. Now we are being attacked by the left — primarily by those who have a view that the risks of higher public debt should not be part of the policy conversation.
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.

Leading economists also say that failing to prosecute the fraud of the big banks is dooming our economy.  Prosecution of Wall Street fraud is at a historic low, and so the wheels are coming off the economy.
Moreover, quantitative studies provide evidence that private debt levels matter much more than public debt.  But mainstream economists on both the right and the left wholly ignore private debt in their models.
Finally, the austerity-verus-stimulus debate cannot be taken in a vacuum, given that the Wall Street giants have gotten the stimulus and the little guy has borne the brunt of austerity.

Steve Keen showed that giving money directly to the people would stimulate much better than giving it to the big banks.
But the government isn’t really helping people … and has  instead chosen to give the big banks hundreds of billions a year in hand-outs.
If we stopped throwing money at corporate welfare queens, military and security boondoggles and pork, harmful quantitative easingunnecessary nuclear subsidies,  the failed war on drugs, and other wasted and counter-productive expenses, we wouldn’t need to impose austerity on the people.
And it is important to remember that neither stimulus nor austerity can ever work … unless and until the basic problems with the economy are fixed.
Indeed, stimulus and austerity are not only insufficient on their own … they are actually 2 sides of the same coin.
Specifically, the central banks’ central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.
A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.
Instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.
And instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). This would be better for the economy as well.
Why aren’t we doing this?
Profits are being privatized and losses are being socialized.  So the big banks get to keep the mana from heaven being poured out of the stimulus firehose, while austerity is forced on the public who has to bear the brunt of Wall Street’s bad bets.
The big banks went bust, and so did the debtors.  But the government chose to save the big banks instead of the little guy, thus allowing the banks to continue to try to wring every penny of debt out of debtors.  An analogy might be a huge boxer and a smaller boxer who butt heads and are both rendered unconscious … just lying on the mat.   But the referee gives smelling salts to the big guy and doesn’t help the little guy, so the big guy wakes up and pummels the little guy to a pulp.
Economists note:
A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.
Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.
(Obama’s policies are even worse than Bush’s in terms of redistributing wealth to the very richest. Indeed, government policy is ensuring high unemployment levels, and Obama – despite his words – actually doesn’t mind high unemployment. Virtually all of the government largesse has  gone to Wall Street instead of Main Street or the average American. And “jobless recovery” is just another phrase for a redistribution of wealth from the little guy to the big boys.)
We noted in 2011:
All of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else.
Economist Steve Keen says:
“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.
And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.
The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …
… and ending up in the pockets of the fatcats.
In other words – underneath the easing-versus-tightening debate – this is not a financial crisis … it’s a bank robbery.

7 million new jobs in one year
$4.4 trillion in deficit reduction
We’re in a jobs crisis that isn’t going away.  Millions of hard-working American families are falling behind, and the richest 1 percent is taking home a bigger chunk of our nation’s gains every year. Americans face a choice: we can either cut Medicare benefits to pay for more tax breaks for millionaires and billionaires, or we can close these tax loopholes to invest in jobs.  We choose investment.  The Back to Work Budget invests in America’s future because the best way to reduce our long-term deficit is to put America back to work.  In the first year alone, we create nearly 7 million American jobs and increase GDP by 5.7%.  We reduce unemployment to near 5% in three years with a jobs plan that includes repairing our nation’s roads and bridges, and putting the teachers, cops and firefighters who have borne the brunt of our economic downturn back to work.  We reduce the deficit by $4.4 trillion by closing tax loopholes and asking the wealthy to pay a fair share.  We repeal the arbitrary sequester and the Budget Control Act that are damaging the economy, and strengthen Medicare and Medicaid, which provide high quality, low-cost medical coverage to millions of Americans when they need it most.  This is what the country voted for in November.  It’s time we side with America’s middle class and invest in their future.
The Economic Policy Institute Policy Center provided technical assistance in developing, scoring, modeling, and analyzing the Back to Work budget. EPI’s analysis can be seen here: The ‘Back to Work’ budget: Analysis of the Congressional Progressive Caucus budget for fiscal year 2014
Job Creation
Infrastructure – substantially increases infrastructure investment to the level the American Society of Civil Engineers says is necessary to close our infrastructure needs gap 
Education – funds school modernizations and rehiring laid-off teachers
Aid to States – closes the recession-caused gap in state budgets for two years, allowing the rehiring of cops, firefighters, and other public employees 
Making Work Pay – boosts consumer demand by reinstating an expanded tax credit for three years 
Emergency Unemployment Compensation – allows beneficiaries to claim up to 99 weeks of unemployment benefits in high-unemployment states for two years 
Public Works Job Programs and Aid to Distressed Communities – includes job programs such as a Park Improvement Corps, Student Jobs Corps, and Child Care Corps
Fair Individual Tax  
Immediately allows Bush tax cuts to expire for families earning over $250K
Higher tax rates for millionaires and billionaires (from 45% to 49%)
Taxes income from investments the same as income from wages 
Fair Corporate Tax
Ends corporate tax bias toward moving jobs and profits overseas 
Enacts a financial transactions tax 
Reduces deductions for corporate jets, meals, and entertainment 
Returns Pentagon spending to 2006 levels, focusing on modern security needs
Health Care
No benefit cuts to Medicare, Medicaid, or Social Security 
Reduces health care costs by adopting a public option, negotiating drug prices, and reducing fraud
Prices carbon pollution with a rebate to hold low income households harmless 
Eliminates corporate tax subsidies for oil, gas, and coal companies GETTING AMERICANS BACK TO WORK
The Back to Work Budget creates nearly 7 million jobs in its first

Friday, May 10, 2013

Transcript: Thomas Herndon, hero, Niall Ferguson, Idiot

The Computer ate my podcast (Transcript is not precisely accurate)
Listen to this episode

That was Thomas Herndon and Stephen Colbert.  Herndon is the University of Massachusetts Amherst grad student whose work exposed the poor job done by Harvard University economists Ken Rogoff and Carmen Reinhart in their work on sovereign debt as it relates to growth.  We'll play the entire Colbert interview of four and a half minutes in just a moment.

Then we'll look at Rogoff and Reinhart's continuing attempt to minimize their error.  A "Scholarly debate."  The errors identified by Herndon refute the premise of "This Time It's Different."  This is not just that two Harvard economists made a mistake on a spreadsheet that dilutes their conclusions.  The mistake is such that their conclusions are not valid, wrong, the opposite of the truth.

And finally today, Idiot of the Week returns with a vengeance.  A HARVARD UNIVERSITY economic historian who has himself had a tough time with facts and competence.

So, here's audio of Thomas Herndon with Stephen Colbert


Is that cool or what?  Humble, clear, articulate, gives a shout out to his girlfriend.  Thomas Herndon should make you proud to be an economist.

Rogoff and Reinhart, on the other hand ....  Well, here's Arthur Levitt -- full disclosure, his podcast A Closer Look is often very good and not coincidentally Levitt is not a graduate of HARVARD -- here he is missing the boat entirely.  Cribbing from the April 25 NY Times defense by Rogoff and Reinhart.


Just a day or so ago R&R released an errata to their 2010 paper, acknowledging more errors in the figures, but defending their conclusions.  Wow.  This was AFTER being called to account for continuing the errors in the April 25 op-ed.

As the Financial Times says,

"The original paper was widely cited as an argument for fiscal austerity in 2010, and the fight over their figures has become a proxy for broader battles about deficits."

Like whether they lead to slower growth or not.

It is not only that their figures are wrong -- let us be clear -- it is also the arbitrary method of weighting and the omission of some key data.  The corrected numbers in the errata weaken their argument.  A robust methodology eliminates it.  Rogoff and Reinhart are wrong.  Their continued failure to come clean eliminates the need for us to defend them as objective economists.  One might say that their advocacy of writing down debt as a way to eliminate its burden separates them from the austerians.  But we won't say that, because they are locked in on their slavish devotion to an error.


So we have one Harvard grad passing off the presidency to another Harvard alum, and keeping the same banker-centric policies.  The second Harvard alum calls in a former Harvard president to help him do too little.  Of course, that second Harvard alum has an additional burden, being a University of Chicago grad as well.  In any event, along come two Harvard professors making elementary mistakes in their spreadsheets and employing sophomoric methodology to prove the point they started out with.  Who can top all that?  All that bad economics and bad results?  Hint.  He has to be from Harvard


Niall Ferguson,


Yes. Niall Ferguson elevating Rogoff and Reinhart's amateurish 90% debt blunder to a quote "Law of Finance."  But Ferguson  had the class to apologize.

Apology:  ‘I had been asked to comment on Keynes’s famous observation ‘In the long run we are all dead.’ The point I had made in my presentation was that in the long run our children, grandchildren and great-grandchildren are alive and will have to deal with the consequences of our economic actions.’

He added: ‘I should not have suggested – in an off-the-cuff response that was not part of my presentation – that Keynes was indifferent to the long run because he had no children, nor that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’s wife Lydia miscarried.’”


What was he apologizing for?

“Ferguson asked the audience how many children Keynes had. He explained that Keynes had none because he was a homosexual and was married to a ballerina, with whom he likely talked of ‘poetry’ rather than procreated. The audience went quiet at the remark. Some attendees later said they found the remarks offensive.

Ferguson, who is the Laurence A. Tisch Professor of History at Harvard University, and author of The Great Degeneration: How Institutions Decay and Economies Die, says it’s only logical that Keynes would take this selfish worldview because he was an ‘effete’ member of society.’”
William K. Black observes :

We have just witnessed a variant of what economists call “revealed preferences.”  Economists are skeptical of what people tell pollsters they would do in terms of economic actions in response to hypothetical financial incentives.  We teach that it was people actually do in response to the incentives that reveals their true preferences.  Ferguson’s great problem is that he spoke what he believed – and what he believes is false and bigoted.  Begin with what should have been the most obvious point that Ferguson’s apology ignores.  If Ferguson’s “obvious[ly]” incorrect claim was based on the “stupid” premise that adults who do not have children do not care about future generations – why did he raise Keynes’ sexuality?  It would have sufficed for Ferguson to simply make the “obvious” and “stupid” claim that because Keynes had no children he did not care about future generations.  Keynes’ sexuality is irrelevant and gratuitous to Ferguson’s obvious and stupid claim about the purported reason that Keynes was childless.
For our part, we accept Ferguson's apology for what it is, an attempt to limit damage, as his remarks are clearly in character and consonant with what he believes.

We remember Larry Summers from Harvard when we remember economics mixing with questionable bias.  But we didn't resurrect Idiot of the Week for any bush league idiot.  Harvard's Niall Ferguson has made a professional career of it.

Last August on Bloomberg

Well, that’s not really a part of the argument I made in the piece. The point I made in the piece was that the stimulus had a very short-term effect, which is very clear if you look , for example, at the Federal employment numbers there’s a huge spike in early 2010 and then it falls back down.


Ferguson's spike was census hiring, making Harvard's Rogoff and Reinhart look almost professional by comparison.

The big claims and conclusions Ferguson has offered in recent years, with the extra authority of his academic standing, have been attention-getting and mostly wrong. 

 For instance:

   - U.S. budget deficits were going to lead to a US-China breakup. They didn't.
   - U.S. budget deficits were going to drive bond rates sky high. The opposite has occurred.
   - U.S. budget deficits would make us like Greece. They have not.
  - A year ago, Ferguson warned that we were on the verge of a damaging new round of inflation. We were not.

So being wrong, incompetent, and ... biased ... Ferguson still has his place at Harvard.  Skulls and bones.  Boneheads and numbskulls.

Niall Ferguson, Idiot of the Week.


On the other hand, a man who has been right theoretically and pragmatically throughout this whole affair, whose competence is without question, and whose command of theory and history demonstrable, does not get a good hearing.  That is Steve Keen, whose latest world tour starts here in Seattle on May 23.  Two events, noon and evening.  See Steve Keen in Seattle dot com for complete information and registration links.