Brad DeLong

Laura D'Andrea Tyson: Lessons on Fiscal Policy Since the Recession

Laura D'Andrea Tyson:

Lessons on Fiscal Policy Since the Recession: In late 2008, the United States economy was caught in the midst of what proved to be its longest and deepest recession since the end of World War II. Frightened by steep and self-reinforcing declines in output and employment, both the Federal Reserve and the federal government responded quickly and boldly. The Federal Reserve dropped the federal funds rate to near zero, where it remains today, and began its controversial “quantitative easing” purchases of long-term government securities to contain long-term interest rates. Fueled by the 2009 federal stimulus package, discretionary fiscal policy was also expansionary in 2009-10, adding to growth during the first year of the recovery at roughly the same pace that fiscal policy had achieved during previous recoveries. Then, in a sharp break with history, fiscal policy became a drag on growth in the second year of recovery, and since then the drag has intensified.

Guenter Grass DeLong Smackdown Watch: Monday Hoisted from Comments Weblogging

Brad DeLong : Thursday Dozen Hoisted from the Archives: Keepers from May 2005: Grebmörts said...

I see that you rethought part of your criticism of Guenter Grass shortly after posting it. The events that have happened since 2005 should make you rethink the rest. He complained that the "growing gap between rich and poor" had brought about "the impotence of politics", a political system that responds only to the interests of the elites. Democracy is being destroyed.

That sounds a lot like the situation in the US today. Washington is unable to end this depression because gridlock serves the interests of the overclass.

Grass was right. You owe him an apology.

Paul Krugman: Naive Fiscal Cynicism: It's Not That We Can't Manage Our Debt, It's That Right-Wing Republicans Seek to Break the Economy and the Government

Paul Krugman:

Naive Fiscal Cynicism: Expansionary austerity has been refuted… even the IMF says that short-run multipliers are big… 90 percent red line… was… fuzzy math… bond vigilantes remain invisible… the confidence fairy refuses to make an appearance… austerian economics has imploded…. Yet there remains immense reluctance to draw the obvious policy conclusion, which is not simply that we have too much austerity, but that right now we shouldn’t be having austerity at all.

Martha L. Olney and Aaron Pacitti: The Service Sector and the Business Cycle

Martha L. Olney and Aaron Pacitti:

More services means longer recoveries: Recovery from recessions takes longer than it has in the past. The current crisis aside, this change has not happened because recessions themselves are longer. Nor has it occurred because recessions are deeper than in the past. Instead this change is the result of slower economic growth following the end of a recession. And slower growth means longer recoveries. As shown below, the four longest recoveries in recent history, as measured by the number of months it took until the economy recovered all of the jobs lost during the recession, also have been the four most recent recoveries—those that followed the recessions of 1981, 1990, 2001, and 2007.

Saying More than "When the Storm Is Long Past the Ocean Is Flat"

Paul Krugman:

Keynes, Keynesians, the Long Run, and Fiscal Policy: One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run. Here’s the actual quote:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Bloomsbury Ballerina: Lydia Lopokova, Imperial Dancer and Mrs John Maynard Keynes

Judith Mackrell: Bloomsbury Ballerina: Lydia Lopokova, Imperial Dancer and Mrs John Maynard Keynes:

Psychohistorical Origins of Niall Ferguson's Bizarre Remarks About John Maynard Keynes

Henry Blodget writes:

Harvard Professor Niall Ferguson Reportedly Just Blamed Keynes' Economic Philosophy On Him Being Homosexual And Childless:

The source appears to be a rather remarkable screed by Gertrude Himmelfarb in a rather McCarthyite vein, that manages to get a lot about Keynes's economics and his family life substantially wrong in a very short space, which in turn appears to be based on the views of Joseph Schumpeter:

Doug Holtz-Eakin Turns to the Dark Side

One correspondent asks if perhaps Douglas Holtz-Eakin isn't an honest Republican worth engaging with--those whom Clive Crook claims are so thick on the ground and that Paul Krugman is so remiss in not engaging, but he can't remember any of their names.

But another correspondent writes, and I agree:

He was an honest and effective CBO director. After he left CBO… he was invited to set up what he called a 'conservative think tank'. That that was the way he decided to go. And then he went downhill: occasionally now he says something informative and interesting, but most of the time he is saying what he calculates all please his right-wing political masters. It's quite sad…

Demography: Twentieth Century Economic History Weblogging

Tyrannies throughout the world—dictators, sane or insane—for whom prosperity was not a concern or was even seen as a threat, were the principal cause of rising relative inequality around the globe. But the second cause were the demographic burdens placed on poor countries by the population explosion. These burdens are now, fortunately, ebbing as the demographic transition to low fertility and extended lifespan finish their spread across the globe.

Matthew Yglesias vs. Alex Tabarrok

Hey! Clive Crook! Here is one more reason why Paul Krugman is tired of trying to reason with you people

Matthew Yglesias:

Keynesianism today: Start by stating the argument correctly: This Alex Tabarrok post on growth in the face of fiscal austerity annoyed me as did his co-blogger Tyler Cowen chiming in to say Tabarrok had "nailed it"... the line "In the 1990s growth was strong even while 'austerity' was increasing."

That kind of thing is a dead giveaway that the author isn't even stating the argument for expansionary fiscal policy correctly.

Mark Thoma: David Romer and Joe Stiglitz on the State of Macroeconomics

Mark Thoma sends us to David Romer and Joe Stiglitz on the State of Macroeconomics.

This Is Brad Being Stupid and Slow... And, in Email, Robert Waldmann Delivers the Smackdown!

OK. The Baicker et al. (2013) NEJM Oregon Medicaid Lottery study…

The Long-Run and Short-Run Budget Picture

Opening statement at K-State Debate with Alan Reynolds:

How big a government should we have?

Right now the U.S. has a relatively small government: in a normal year the U.S. government as a whole spends something like 32% of total production. The U.S. government spends about ten percentage points less of GDP than the average rich, industrialized country spends. The U.S. government spends about 15 percentage points less of GDP than a never-Communist country as rich as the U.S. is today would be expected to spend. We are thus, in comparative perspective, a small-government country.

Aaron Carroll: Additional Thoughts on the New Oregon Medicaid Results

Aaron Carroll: Additional thoughts on the new Oregon Medicaid results:

1) This was a HUGE study. How can you say otherwise?

According to the paper, 12,229 people responded to the surveys and were analyzed. So, yes, for outcomes that effected everyone (think financial hardship), it’s likely they were super-powered. But for many of the outcomes that were more murky, that’s not the case. Take A1C for instance. Only 5.1% of the control group had an A1C>=6.5. Let’s assume that the starting prevalence was the same in the intervention group. That means that only 624 people (312 in each group) actually had a high A1C in the study. That’s not anywhere near as big. Especially when you’re talking about an indirect intervention like insurance as opposed to actual health care.

MCarson on the Oregon Medicaid Expansion

Robert Waldmann hoists this from my comments: mcarson:

I am one of the winners in the Oregon lottery [winners could get Medicaid]. Going from no insurance to insurance is very confusing. When you have no money every health question starts with "would I rather live with this problem and have electricity, or treat this problem and keep my milk in a cooler for a month or so?" Stepping back into healthcare was like hopping on a merry-go-round. The doctor wanted to do test after test to come up with baselines for me, and I had a hard time showing up at the lab.

Josh Barro: What to Make of the Oregon Health Study

I would say that we already knew that the Medicaid model is not a terribly productive way to create chronic conditions like high blood pressure and diabetes, and that we need to find better condition-management models pronto. But I would also say that the depression and financial security findings are better news than I expected. About what I would have expected (but worse than I might have hoped) on some welfare indicators, better than expected (and as good as I might have hoped) on others--net-net, goods news for the efficacy of Medicaid expansion.

And people who say otherwise aren't reading the study…

Oregon Medicaid Lottery Says: "Medicaid Expansion Definitely Worth It": Hoisted from Incidental Economist Comments Weblogging

Matt:

Two thoughts:

1. On your point #1 on sample sizes, note that the study is effectively even smaller than you’re saying. Thinking of the high A1C sub-sample as containing 624 people is correct for the intent-to-treat analysis (i.e. for estimating the effect of offering insurance). But (net) take-up was only about 25 percent. Thus, for the IV analysis (which provide the estimates of the effect of insurance per se), the point estimates and variance are scaled up by a factor of 4=1/0.25. This means that the “RCT-equivalent” sample size is only 156=624/4. That’s really, really small, even before you get to the fact that insuring people does not automatically get them the appropriate care (your point about direct versus indirect interventions).

DeLong, Neyman, Pearson, and Many Others Smackdown Watch: Medicaid Expansion Hoisted from Comments Weblogging

Robert Waldmann:

Heh, indeed.

I actually haven't read the whole [Baicker et al. NEJM Oregon Medicaid Lottery] paper, but I have read the abstract and a key table cut-and-pasted by Kevin Drum. It shows a more than four-fold increase in diabetes diagnosis due to Medicaid availability. This does not correspond to statistically significant decrease in the fraction of people with high hemoglobin glycosylation. So the paper does not contain proof that current therapy for diabetes is better than nothing.

I Am More Confident This Morning That Medicaid Expansion Is a Good Idea

Having read Katherine Baicker et al. (2013), "The Oregon Experiment — Effects of Medicaid on Clinical Outcomes", New England Journal of Medicine, I conclude that the study was--as natural experiments are--significantly underpowered, that the jury is still out on most of the effects, but that the success of the Medicaid expansion in reducing depression and improving financial security are rock-solid and nailed benefits, by themselves worth more than the net cost of the expansion.

Therefore I wish to withdraw my tweet from last night:

@tylercowen @petersuderman the case for Medicaid expansion is *marginally* less strong than I had thought...

— J. Bradford DeLong (@delong) May 1, 2013

And substitute for it, instead, the correct:

.@tylercowen @petersuderman CORRECTION: I have read the paper and evaluated its power, the case for Medicaid is stronger than I had thought

— J. Bradford DeLong (@delong) May 2, 2013

Debating Alan Reynolds: Good to Know My Memory Is Not That Wrong...

At last night's Kansas State's debate, I said that Alan Reynolds had been warning of an outbreak of inflation from Bernanke's monetary policies for 3.5 years now, and it had not happened. "Not me", he said. "You must be thinking of some other guy."

Paul Krugman appears, bringing the refreshments in the form of a reference…

Is a Higher Borrowing Trajectory Warranted or Not?

Carmen Reinhart and Kenneth Rogoff (2013):

Austerity is not the only answer to a debt problem: To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives. Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.

David Romer: Short-Run Fluctuations

David Romer: Short-Run Fluctuations (January 2013 version).

I Debated Alan Reynolds on Fiscal Policy at K-State in Manhattan Last Night...

Three things struck me of especial note last night:

• First, Reynolds's willingness to throw George W. Bush completely over the side--not even any of Nooners's "he was incompetent, and flawed, and a failure, but he was a regular guy--not somebody who thought he was smarter than you--and in a way we miss him". None of that.

• Second, Reynolds's praise for Bill Clinton--twelve years after Clinton left office. I now look forward to hearing Alan Reynolds praise Barack Obama for his attempts to start reining-in Medicare spending via the ACA and the IPAB come... 2029. But it would be nice if we could during that forward in time to the present--it would be really nice if we could have brung his praise of Clinton forward in time to 1993 when we really could have used it...

• Third, the extent to which those who don't know IS-LM are blind persons in the country of the one-eyed. Reynolds said: "In fiscal policy the government prints bonds, in monetary policy the government--the central bank--buys bonds, if one of these is stimulative, how can the other be?" And he was genuinely puzzled.

Ryan Avent: The Frankfurt Veto

Ryan Avent:

The euro crisis: The Frankfurt veto: AUSTERITY has been under fire from all corners, lately: from IMF reports showing painfully high multipliers on fiscal cuts, to challenges to the Reinhart-Rogoff debt-threshold research, to the European Commission, whose president, Jose Manuel Barroso, noted this week that austerity in Europea has "reached its limits". Even the data itself appears to be rebelling. Eurostat released updated figures this week on euro-area fiscal statistics, which show remarkably little progress toward fiscal goals; Germany was the only European Union economy to run a fiscal surplus in 2012. But despite this, yields on peripheral sovereign debt continued their long march down. Soaring borrowing costs apparently weren't about indebtedness at all, but about uncertainty over the European Central Bank's willingness to act as lender of last resort.

Understanding Karl Marx: Hoisted from the Archives from Four Years Ago May Day Weblogging

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and be followed by a Great Communist Social Revolution—greater than the political French Revolution—that would wash us up on the shores of Utopia.

The mature Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. This project as carried forward by others ran dry. Sometimes--as in, say, Eric Hobsbawm's books on the history of the nineteenth century--this works relatively well. But sometimes it led nowhere. The writing of western European history as the rise, fall, and succession of ancient, feudal, and bourgeois modes of production is a fascinating project. But the only person to try it seriously soon throws the Marxist apparatus over the side, where it splashes and sinks to the bottom of the sea. Perry Anderson's Passages from Antiquity to Feudalism and Lineages of the Absolutist State are great and fascinating books, but they are not "Marxist". They are Weberian. The key processes in Anderson's books concern not “modes of production” but rather “modes of domination.”

Stanford Talk: Understanding Karl Marx.pdf

George Soros Leaves a Weblog Comment for Hans-Werner Sinn

George Soros:

George Soros Comment On Hans-Werner Sinn: Hans-Werner Sinn has deliberately distorted and obfuscated my argument. I was arguing that the current state of integration within the eurozone is inadequate: the euro will work only if the bulk of the national debts are financed by Eurobonds and the banking system is regulated by institutions that create a level playing field within the eurozone.

Olivier Blanchard: Rethinking Macroeconomic Policy

Olivier Blanchard:

Rethinking Macroeconomic Policy: Rethinking and reforms are both taking place.  But we still do not know the final destination, be it for the redefinition of monetary policy, or the contours of financial regulation, or the role of macroprudential tools. We have a general sense of direction, but we are largely navigating by sight. I shall take six examples….

Risks of Debt?: Hoisted from Comments Tuesday DeLong Smackdown Weblogging

imon van Norden said...:

Brad: R&R, Hamilton, and many other serious, bright, empirical economists that are not part of your "faction" frequently argue "interest rates may be low now, but they could rise quickly." (Similarly, stock prices may be high now, but they could fall, particularly if long-term interest rates rise.) And in the next breath, they argue that because debt levels are slower and more costly to adjust than asset prices, the prudent course is to slow the growth of debt now.

What say you to this? In your title, you speak of "Risk". Theirs is (I think) a risk-management argument. Surely it deserves acknowledgement.

Jared Bernstein: The War Against the Pointless Pain Austerity Caucus: Not the End, Not the Beginning of the End, But Perhaps the End of the Beginning?

Jared Bernstein:

What Debt Crisis, Indeed? Things that Make You Go Hmmmmm…: OK, I know that what’s happening in the debt debate is more complicated than a grad student found some mistakes in a spreadsheet and the spell that had bewitched the nation was broken. But that’s kinda what seems to be happening. This Politico piece tells of some Democrats coming around to the view that “[t]here’s no short-term deficit problem…and there isn’t even an urgent  debt crisis that requires immediate attention.”… You gotta love the incredibly juicy irony of what’s going on.  Nobel laureates [that's Krugman], former Treasury officials [that's me], think tankers [Josh Bivens and John Irons of EPI], yours truly, and zillions of others have been trying to break through on this for years. Some bespectacled twenty-something [Thomas Herndon] comes along, and for a term paper--a term paper!--tries to replicate Rogoff and Reinhart’s study, he perseveres, gets some solid guidance from his profs, who happen not to genuflect at either the alter of austerity or the academic hierarchy (I’m afraid other profs might have shut the young man down)--and BOOM! Somebody really needs to make a movie out of all of this someday.

What Have We Learned About Fiscal Policy as Stabilization Policy since 2007?

Laura Tyson and I gave a presentation to the IMF Fiscal Forum on Wednesday the 17th. A draft of our paper. I talked about changing perceptions of fiscal policy. Laura talked about changing perceptions of multipliers.

Here is my part of our talk:

---

For the past five years, each year I have begun talks by saying that I thought in the previous year that the crisis was at its peak, and that each year I turned out to be wrong, as the crisis revealed itself as even deeper and more of a crisis than it had been the year before.

We are now six years in. The natural thing to do, therefore, is to compare 1929-1935 with 2007-2013. 1929-1933 saw much larger output declines and unemployment increases than 2007-2011--between two and three times as large. But by 1935 the tide had turned nearly everywhere except France, which was still on the gold standard (but about to elect a Popular Front government and drop its link). There had been substantial gap closing between 1931 or 1933 and 1935. The Great Depression was clearly not over by 1935, but the global economy was clearly on the mend.

By contrast, today we have had a slower decline. But we have seen no signs of anything we could call gap-closing, no sign of any returns back to what we used to think of as normal levels of activity. Here at the IMF we speak of a "three speed recovery". In the North Atlantic plus Japan, at least, the speeds are "reverse" in Europe--the proportion of the population at work is dropping--and "neutral" in America--the proportion of the population is stable. Thus it is no longer clear that, when this is over, people will look back and classify it as a smaller worldwide event than 1929-1939. Another five years of the last two years' trends, and it will be 2007- rather than 1929-1939 that will seize the name of "The Great Depression".

Risks of Debt?: Extended Version

A country that spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he'd together by thin monetary ties to a very small web solidified by social bonds of trust and obligation--and a small division of labor means low productivity. All of this is bound to happen. Eventually. If a government spends and spends and spends but does not tax sufficiently.

But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued. My faction of economists--including Larry Summers, Laura Tyson, Paul Krugman, and many many others--believe that it will not. As long as stock prices are buoyant, business leaders are not scared of future taxes or of policy uncertainty. As long as interest rates remain low, there is no downward pressure on public investment. And as long as inflation remains low, the extra debt that governments are issuing is highly-prized as a store of value, helps savers sleep more easily at night, and provides a boost to the economy as it assists deleveraging and raises the velocity of spending.

Risks of Debt?

And we are live at Project Syndicate: http://www.project-syndicate.org/commentary/the-impact-of-public-debt-on-economic-growth.

And see:

• J. Bradford DeLong and Lawrence H. Summers (2012), Fiscal Policy in a Depressed Economy, Brookings Papers on Economic Activity.
• J. Bradford DeLong and Laura d'A. Tyson (2013): Discretionary Fiscal Policy as a Stabilization Policy Tool: What Do We Think Now That We Did Not Think in 2007? (Washington, DC: IMF).

---

The piece:

A country that spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he'd together by thin monetary ties to a very small web solidified by social bonds of trust and obligation--and a small division of labor means low productivity.

All of this is bound to happen.

Eventually.

If a government spends and spends and spends but does not tax sufficiently.

But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued?

Jon Hilsenrath: Tame Inflation to Keep Fed on Course

Jon Hilsenrath:

Tame Inflation to Keep Fed on Course - WSJ.com: Federal Reserve officials are likely to continue their easy-money policies at the central bank's policy meeting on Tuesday and Wednesday, in part because several recent inflation measures have fallen well below the Fed's 2% target.

With inflation now lower than the Fed wants, officials are likely to conclude their policies show no sign of overheating the economy. That allows them to maintain their $85 billion-a-month bond-buying program, which the central bank is employing to ease credit conditions and spur spending, investment and hiring.

Fed officials after their March policy meeting talked about tapering off the bond purchases later this year if the economy continued to gain strength. But inflation readings have since slipped, and employment numbers have been disappointing.

The Commerce Department reported Friday that its personal consumption expenditure price index—one of the Fed's favored measures of consumer price inflation—was up 1.2% in the first quarter from a year earlier, well below the central bank's target. It was the weakest annual reading since the third quarter of 2008, when the U.S. was consumed by the financial crisis.

Barry Eichengreen: The Europeans Are Less Insane than I Feared...

Barry Eichengreen:

The world wisely edges away from talk of a currency war: The diplomatic communiqués that follow international summits are rarely noteworthy. They have to be acceptable to everyone, so tend toward the lowest common denominator. But the Group of 20’s most recent communiqué, following its meeting on the sidelines of the spring meetings of the International Monetary Fund and World Bank, contains one sentence of consequence. “Monetary policy,” it reads, “should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks”.

The significance of this addition should not be overlooked. It means that the Bank of Japan is to be applauded, not criticised, for the aggressive asset-purchase programme it has adopted in the effort to hit its 2 per cent inflation target.

It also implies that the Federal Reserve’s heavy use of quantitative easing and forward guidance are entirely appropriate given its dual mandate to pursue low inflation and high employment – more so now that other instruments that could be used to achieve those goals, notably fiscal policy, are currently unavailable.

This is a significant advance from the “currency war” rhetoric that prevailed earlier this year. Back then, the BoJ's new policies were impugned as an effort to depreciate the yen and gain an export advantage. The BoJ and Fed were criticised for unleashing a torrent of capital flows into emerging markets. Now, in contrast, officials in other countries, while still less than fully comfortable about the consequences, realise that they would be even worse off had the Fed and the BoJ responded to them. Capital inflows and local currency appreciation may be uncomfortable for emerging markets but renewed recession in the US and Japan, which could be induced by premature abandonment of easing, would be worse.

Why Oh Why Can't We Have a Better Press Corps? Yes, David Ignatius of the Washington Post, We Are Looking at You

You do Mervyn King a very bad service indeed, David, when you claim that he understood the economy he was dealing with as Governor of the Bank of England, and backed the Tory-Salad austerity coalition anyway.

David Ignatius on April 24, 2013:

Mervyn King’s hard lessons in Keynesian economics: King is… one of those mild-mannered Englishmen who can dominate a room the moment he begins to speak, with a wry humor that can amuse, charm and eviscerate at will…. King… said events have shown that “purely monetary stimulus will not be enough…. Monetary policy is pushing on a string. It has some effect but less than we might have thought.”… For King, the past decade reinforced the lessons Keynes drew from the 1930s… the psychological quirkiness of investors… monetary policy could not persuade frightened people to spend and invest…. King couldn’t fix the British economy, but he did understand it.

Global Inequality: Saturday Twentieth Century Economic History Weblogging

Those economies relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer, but for the most part slowly. The relative gulf between rich and poor economies has grown steadily over the past century. Today it is larger than at any time in humanity’s previous experience, or at least larger than at any time since only some tribes knew how to use fire. The gulf across which the world’s rich and poor regarded each other exists in every dimension: how much people consume, whether they can read, what tools they use, and how they make their living.

Josh Bivens: (Final?) Notes on the Reinhart/Rogoff Saga

Josh Bivens:

(Final?) Notes on the Reinhart/Rogoff Saga: As pointed out elsewhere, the claim that the UMASS paper actually supports R&R’s alleged core finding of a significant relationship between high debt and slow growth is flat wrong.[1] Yes, the midpoint average growth rate of high-debt countries (over 90 percent of GDP) is lower than the average growth of lower-debt countries, but the differences are not statistically significant…. More importantly, the real argument all along has been two-way causality: data showing that there is lower growth at high debt levels does not show that high debt causes low growth…. Arin Dube demonstrated this very well in his note on Reinhart and Rogoff’s entire data-set, and for the U.S. John Irons and I did the same with Granger causality tests on the U.S. data in July 2010, nearly three years ago. Paul Krugman kindly referred to our results in his blog saying “John Irons and Josh Bivens have the best takedown yet of the Reinhart-Rogoff paper (pdf) claiming that debt over 90 percent of GDP leads to drastically slower growth.” So the causality problem has been well known for some time.

By the way, we compiled the data we used ourselves because emails to Reinhart and Rogoff requesting their data went unreturned. Perhaps if they had shared their data at that time their actual weighting procedure would have become clear much sooner and even their spreadsheet error could have been corrected. Kudos to the UMASS authors for being more persistent than us and for the work they did.

Lastly, Reinhart and Rogoff argue against the thesis that slow-growth causes debt rather than vice-versa based simply on the fact that high-debt episodes are often long-lived…. [T]he simple point is that “downturns in the business cycle” seems to be an intentionally narrow claim being put forward by Reinhart and Rogoff…. [O]ne could argue (if one was feeling tendentious) that budget deficits in 2010, 2011 and 2012 were not driven at all by the economy being in outright recession in those years (hence not driven by “downturns in the business cycle”), since the economy wasn’t in an official recession. Yet these deficits were certainly driven by a shortfall of aggregate demand. A clue that this is indeed what is going on in lots of the Reinhart and Rogoff data is their other persistent finding that the slower growth associated with (again, associated with, not caused by) high-debt in their data is not durably associated with high interest rates….

Finally, I’d just like to add that another problem with the larger R&R narrative that both their book and their paper have constructed. This narrative  presents  financial crises as consigning economies to slow growth through some iron law of nature—and their 90 percent debt threshold is clearly intended to imply that efforts to use fiscal stimulus to combat this slow growth in the wake of the U.S. housing bubble’s burst will be thwarted. But this narrative is wrong…. [P]olicy failure, not “debt” or “financial crisis” should be clearly identified as the stumbling block to full recovery.

[1] I say “alleged core finding” because the real core finding was the claim that a 90 percent debt/GDP ratio was a clear tipping point over which growth slowed. This is obviously the finding that stuck in the public debate, and the authors themselves just helped to push this impression.

Carmen Reinhart and Ken Rogoff: Debt, Growth and the Austerity Debate

Carmen Reinhart and Ken Rogoff:

Debt, Growth and the Austerity Debate - NYTimes.com: IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.

Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.

Paul Krugman (2012): Economics in the Crisis

Paul Krugman (2012): Economics in the Crisis:

To say the obvious: we’re now in the fourth year of a truly nightmarish economic crisis. I like to think that I was more prepared than most for the possibility that such a thing might happen; developments in Asia in the late 1990s badly shook my faith in the widely accepted proposition that events like those of the 1930s could never happen again. But even pessimists like me, even those who realized that the age of bank runs and liquidity traps was not yet over, failed to realize how bad a crisis was waiting to happen – and how grossly inadequate the policy response would be when it did happen.

And the inadequacy of policy is something that should bother economists greatly – indeed, it should make them ashamed of their profession, which is certainly how I feel. For times of crisis are when economists are most needed. If they cannot get their advice accepted in the clinch – or, worse yet, if they have no useful advice to offer – the whole enterprise of economic scholarship has failed in its most essential duty.

Matthew Yglesias Watches Keith Hennessy Give a Non-Denial Denial of George W. Bush's Non-Involvement in 2008

Matthew Yglesias:

Keith Hennessy on Bush and the financial crisis: How Involved Was George W. Bush in the Fall of 2008?: As most of us recall, George W. Bush was president of the United States during the crucial year of 2008 when the economy slid into recession and a series of panics and runs gripped the shadow banking system. As we also recall, Bush did not play a significant public-facing role in the response. Presidential candidates Barack Obama and John McCain said a lot, Federal Reserve Chairman Ben Bernanke was visible, America got to know the previously obscure figure of New York Fed President Timothy Geithner, and Treasury Secretary Hank Paulson was frequently on television. But Bush was president, and one assumes he was doing something. But what, exactly?

There Are Two Unit Roots and Strong Mean Reversion in U.S. GDP per Capita

We have:

• highly-persistent shocks to the long-run level of GDP/Pop
• highly-persistent shocks to the long-run growth rate of GDP/Pop
• short-run transitory shocks to the level of GDP/Pop driven by changes in labor and capacity utilization

Univariate ARIMA just does not cut it as a description…

Highlighted for Today: Mark Thoma and Stephanie Kelton on Weblogging and Standard Ivy-Covered Academia: Kauffman Foundation 2013 Economic Webloggers' Forum (Highlighted for April 25, 2013)

http://delong.typepad.com/sdj/2013/04/weblogging-and-standard-ivy-covered-academia-kauffman-foundation-2013-economic-webloggers-forum.html

Panel discussion – Economic and Financial Weblogging and Standard Ivy-Covered Academia (Speaker: Mark Thoma; Discussant Stephanie Kelton; Moderator: Bob Strom)

Abba Lerner (1943): "Functional Finance"

Abba Lerner (1943): "Functional Finance":

The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes….

Mike Konczal: Reinhart-Rogoff a Week Later: Why Does This Matter?

Mike Konczal:

Reinhart-Rogoff a Week Later: Why Does This Matter?: Well this is progress. We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote:

The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune. (h/t QZ.)

Yes, Italy and Japan Have Low Growth and Have High Debt. So?

Paul Krugman:

Reinhart-Rogoff, Continued: About the slow growth/debt connection: I’ve done a quick and dirty mini-RR for the period 1950-2007 (starting 1950 because that’s where the Total Economy Database starts), focusing only on the G7. If you look at the scatterplot, there does seem to be an association between high debt and slow growth. But I’ve coded the points by country — and if you look at it, you see that most of the apparent relationship is coming from Italy and Japan; Britain didn’t seem to suffer much from its high debt in the 1950s. And it’s quite clear from the history that both Italy and (especially) Japan ran up high debts as a consequence of their growth slowdowns, not the other way around.

The Colbert Treatment...

Kenneth Thomas:

Middle Class Political Economist: Reinhart/Rogoff Gets the Colbert Treatment: Via Paul Krugman, Steven Colbert takes on Reinhart and Rogoff. Also be sure to check out his interview with Thomas Herndon.

• http://www.colbertnation.com/the-colbert-report-videos/425748/april-23-2013/austerity-s-spreadsheet-error?xrs=share_copy
• http://www.youtube.com/watch?v=GgMV4KV6Qw0
• http://krugman.blogs.nytimes.com/2013/04/24/the-snicker-factor/

Marking My Beliefs About Which Economists Mark Their Beliefs to Market to Market

Jonathan Portes reminds me that his which (macro)-economists are worth listening to? piece is from last June--and that I noticed it at the time. Clearly I need to recognize that my internal memory is full, and need to Google everything in order to find out what I know…

Jonathan came up with a small (and gratifying to me) whitelist of economists whom one should presume are to be taken seriously--because they have a coherent framework for looking at the world, and have broadly been correct in their forecasts since the world changed in 2007. It consists of:

• Paul De Grauwe
• Brad DeLong
• Richard Koo
• Paul Krugman and http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/
• Adam Posen
• Martin Wolf
• Simon Wren-Lewi

And he sets forth a very small greylist of people whose analytical framework is neither clear nor transparent:

• Ken Rogoff
• Nouriel Roubini

And he presents a blacklist of institutions: "[those] writing editorials at the Financial Times, macroeconomic forecasters at the OECD, the European Department at the IMF (up until recently - their recent stuff on both UK and eurozone has been pretty good), the senior leadership at the Bank of England and the Treasury, and probably worst of all senior economic policymakers at the ECB and European Commission. Oh, and the credit ratings agencies."

But he does not present a blacklist of individuals--a list of economist-goats, of people using a badly-flawed framework who have been repeatedly proven wrong since 2007 and have failed to mark their beliefs to market, whether because they do not believe in marking their beliefs to market, because they are seeking high office, because they are playing to a base that they hope will reward them, or for some other reason.

He suggests that readers come up with such a list.

So here is my start: a few people who, when I see their byline at the head of a piece, I now tend to presume that they are likely to get something badly wrong. In the order in which they have crossed my desk recently: Niall Ferguson, Allan Meltzer, Peter Schiff, Tim Geithner, Wolfgang Schäuble, Robert Lucas, Anders Aslund, John Taylor, Michael Boskin, Alberto Alesina.

Others?

UPDATE: Commenters add: John Cochrane, Glenn Hubbard, Alan Greenspan, Casey Mulligan, Eugene Fama, Hans-Werner Sinn, James Bullard, David K Levine, Luigi Zingales, Robert Barro, Douglas Holtz-Eakin,

And there are some commenters add who I would deny are really economists at all: Ed Prescott, Steve Landsburg, Robert Murphy, Robert Samuelson,

And I would transfer from the commenter-added-blacklist to the greylist: James Hamilton, Raghuram Rajan, Gregory Mankiw,

What Economists to Listen to? And Why?

I really wish that Jonathan Portes had written this before I had to give my talk on economists as public intellectuals yesterday…

Jonathan Portes:

Not the Treasury view...: Which (macro)-economists are worth listening to?: [W]hen economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?… I [had] pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite". 

Noah Smith: KrugTron the Invincible: What Is His Secret Weapon?

Noah Smith:

Noahpinion: KrugTron the Invincible: If you grew up in the 80s you probably remember Voltron. Although the show often had convoluted plotlines, it would somehow always end with Voltron (a super-powerful robot formed from five mechanical lions) facing off against a monster called a "Robeast"…. [T]o a four-year-old, it was pure gold.

In the econ blogosphere, a similar dynamic has played out over the last few years. Each week a Robeast will show up, bellowing predictions of inflation and/or soaring interest rates. And each week, Paul Krugman… I mean, KrugTron, Defender of the Blogoverse, will strike down the monster with a successful prediction of… low inflation and continued low interest rates. Goldbugs, "Austrians", New Classical economists, and harrumphing conservatives of all stripes have eagerly gone head-to-head with KrugTron in the prediction wars, and have been summarily cloven in twain…. [H]ere's a quick (partial) episode guide: Krugman vs. Peter Schiff (see also here)… Krugman vs. Ron Paul… Krugman vs. Robert Murphy… Krugman vs. Niall Ferguson (see also here)… Krugman vs. Allan Meltzer… Krugman vs. a giant hive-mind of goldbugs.

Yes, There Is No Growth Cliff at a 90% Debt-to-Annual-GDP. It Is an Artifact of Reinhart and Rogoff's Analysis. Why Do You Ask?

Owen Zidar: Debt to GDP & Future Economic Growth: