Let me repeat that: there is NO EVIDENCE that more government debt causes slower economic growth -- just theories.
I wonder what all the government deficit scaremongers will say to this!
--
PS. For reference, the often-cited paper by Reinhart and Rogoff can be downloaded at http://www.nber.org/papers/w15639.pdf and the new paper debunking it can be downloaded at http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki...
--
PS#2. An Excel typo was partly to blame for Reinhart and Rogoff's errors! Reminds me of the Excel typo that allowed the "London Whale" silently to rack up billions of dollars in unexpected losses at JP Morgan: http://baselinescenario.com/2013/02/09/the-importance-of-exc...
Correct, 90% is not the magical, universal debt/GDP:dGDP inflection point it was made out to be.
"there is NO EVIDENCE that more government debt causes slower economic growth"
Whoah, whoah. Try the refutation paper [1]. It finds "that average GDP growth tails off somewhat when the public debt/GDP ratio increases towards 120 percent."
There is no strong inflection point ("the scatterplot does suggest a non-linearity in the relationship, but that occurs in the change in the public debt/GDP ratio from 0 to 30 percent"). But there is a monotonically decreasing debt/GDP:dGDP relationship.
It is more subtle than previously characterised, and thus potentially mitigatable in the short term, but let's not take Einstein's refutation of Newtonian physics to mean gravity doesn't exist.
[1] http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki...
The reality of the budget drama in Congress is that it's almost entirely about the house majority stymieing any forward momentum by the current administration at just about any cost. This is why Congress has such a low approval rating.
However, if the economy stalls and GDP growth slows, that leads to lower tax revenues and higher transfer payments (unemployment, etc), which will contribute directly to the deficit.
The level of confusion one sees in most any discussion of government debt/deficits is really mindblowing sometimes.
Obviously someone is on the receiving end of those repayments, but if that someone is not putting money in the pockets of those same taxpayers and instead decides to finance a power plant in Thailand then GDP will inevitably suffer.
I'm not a government deficit scaremonger by any means. I think Krugman's (and others') argument that the U.S. government can borrow very cheaply and should therefore act in a countercyclical manner for the common good is plausible. I'm also convinced that the crowding out argument is bogus in an economy that suffers from too little demand whilst corporations are sitting on tons of cash.
But we should not lose sight of the fact that interest rates are a highly psychological affair. Once trust in the ability to repay debt gets eroded things can get out of control very quickly. So we should be scared at least a little bit.
That said, the U.S is probably the one entity on this planet that is furthest away from that point. Even Japan with it's 245% debt/GDP ratio can borrow at 0.5% for 10 years whilst their currency is crashing and the central bank is announcing a massive QE program twice the size of the U.S one.
But if the U.S ever gets to the point where Japan is now, that's when I'm starting read up on agriculture or the hunter-gatherer diet.
Businesses evaluate decisions based on whether the rate of return is greater than the rate of finance. Eg., if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow that money and make that investment. Doing so will always make your financial position better, regardless of the level of debt you are carrying.
Of course opportunity costs must also be taken into account: if you have cash in hand which you are are servicing debt at 15%, and have an opportunity to make an investment that returns 10%, then making that investment will worsen your financial situation; you should pay down the debt instead. Once again, this is true no matter how much debt you are carrying.
All public spending is an investment of sorts. Infrastructure, education, R&D, public health -- all of these produce measurable returns. Where those returns are greater than the cost of debt, your society will be better off for financing them by debt. Where those returns are lower than the cost of debt, it won't be. This sounds like an over-simplification, but isn't: accurately measuring those returns is no easy task even after the fact, much less predicting them beforehand. But that is what the public debate and decision-making process needs to be about, because that's what really matters. All this handwringing over imaginary debt ceilings and such has been nothing more than an incredibly destructive canard.
To elaborate a little bit: A monetarily sovereign government really only needs higher tax revenue to stave off demand-driven inflation. But in the case of demand-driven inflation, something has to be done anyway due to real constraints.
Now you might ask whether austerity now could help future real constraints in any way. The answer is typically no: austerity means that less is consumed today, but at the cost of less production today. Austerity does not cause stockpiles of real resources to be built for the future.
If you actually wanted to build real resources for the future (and such a plan would be dubious at best, because predicting future needs is tricky, especially in the face of changing technology), you would actually want to do the opposite of austerity: you would want to spend more now, in order to buy the real resources that are stored away in the stockpile.
It is only these real considerations that matter for a monetarily sovereign country. Monetary constraints only matter for countries that are not sovereign, e.g. the various members of the Euro area.
We always need empirical evidence. For your example, no, we don't know that, e.g. when the debt is monetized by the central bank. A bias towards sovereign debt elimination may be more dangerous than a bias towards sovereign debt accumulation - empirical evidence, not intuition, is how we validate the models that guide our trade-offs.
And yet ...
I have to ask: If not now, when? If we can convince ourselves today that we can keep putting off the eventual cutbacks until tomorrow, as we have been for ages, how will next time be any different? If we can't justify cutbacks when the outlook is grim, how will we be able to when people are optimistic instead?
If not now, when? If not our generation, which? If the current state does not move us to make the hard calls, then what state would so move us?
http://www.cepr.net/index.php/blogs/beat-the-press/how-much-...
This is one thing an overstretched fiat currency has strikingly in common with Ponzi schemes.
When interest rates on bonds remain at or below the rate of GDP growth, this is not an issue. For the U.S. (and other countries which issue floating-rate non-convertible currencies) interest rates on bonds are a policy variable of the central bank.
I think it's a good-faith concern. As much as I believe in data, the ability of the US to borrow cheaply enough to finance deficit spending is entirely up to the whims of investors. People are fickle. If the shit hits the fan and investors lose confidence in the USA for whatever reason, the deficit spending we currently rely on could become many times more expensive, and unsustainable.
EDIT: Downvotes? I doubt most people are even aware of this 90% number, but everyone knows about Greece. If you ask an average tea partier, I am willing to bet they are more concerned about Greece than exceeding 90% debt/GDP. If this is nonsense, refute it (I'd like to hear, and believe, that refutation).
To pay back its debt all the US government needs is dollars, and hey, look, the US government controls the supply of dollars.
To pay back its debt, the Greek government needs euros, and, oh, the ECB controls the supply of euros. Oops.
If you say the US can't print money because it will cause inflation - well, in the current climate you'd still be wrong, but let's address one issue at a time. The bottom line is that the US and Greece are fundamentally different, and comparisons between them are simply wrong.
So do I, but I also think it's wrong. As for the inflation concern, Weimar Germany was the loser of a highly economically destructive war on awful armistice terms. Even with the long and arguably inconclusive wars the US has been involved in over the last decade, its position as the #1 world power isn't really in question.
1. Interest payments typically do not replace other government spending. This is simply not how politics works: Politicians, at least at the highest level of government, typically do not look at the budget in terms of how much is available, but in terms of how much should be spent.
2. From the perspective of the macroeconomy, interest payments are a zero-sum game. The money goes to other actors in the economy who spend it.
3. Government is always able to spend the money on programs in addition to interest payment. After all, the government runs the monetary system (I realize that this is hard to grok because it is so different from our own, private, experience with how money works, but the difference is significant.)
It's easy to see how slow growth can increase debt: expenses grow through inefficiency, inflation, or whatever, but revenue fails to keep up. So we get low growth driving up debt. I can buy that.
If you have a big mortgage to pay off, will that slow down your salary increases? How? Why? You may lament the fact your salary goes to paying interest on your mortgage, but if anything you're more motivated to increase your salary (the proportional benefits from raises are greater!)
When the data doesn't fit the model, it doesn't matter how pretty the model is, the model is wrong.
The right way to answer these questions is to say "The data contradicts my intuitions. How could my intuitions be wrong?"
Example: 30 billion, at say, 2% interest per year (which a government could easily get, and the US can currently do much better then) is only 600 million interest repayments. And remember, this is before accounting for inflation, since the loan can be repaid with much cheaper dollars in the future (i.e. inflation usually sits at around 2%, and a government can tweak that as needed).
US debt servicing currently compromises about 7% of the annual budget. So there's no imminent risk that interest payments couldn't be paid for out of general revenue.
Even if the US really needed 600 million per year of some service, it would _still_ make more sense to take out the 30 billion loan, plough 28.8 billion into infrastructure or other investments, then spend 600 million on those services, 600 million on financing the interest, and repay the entire thing with simultaneously cheaper dollars in the future _and_ the new revenue they've generated from growth.
The only _real_ danger, is the risk you may have to run a larger fraction of your annual revenue into debt servicing if you can't refinance. But you can put money aside to account offset that contingency, and still borrow.
If your government owes IOU's that it can print itself (fiat currency), it can never default on those IOU's.
If your government owes IOU's printed by another government or sovereign body, then it can most certainly run out of them and must buy them at market rates.
People like to repeat this as if it's somehow insightful and helpful to the discussion, but it's vacuous. Yes, you can always just print away debts denominated in a currency you control. That says nothing about how much you fuck up the economy by doing so. That's why some countries that could print their way out of debt (Russia '98) default anyway, because even a default might not be as bad as (the risk of) triggering complete collapse of the currency.
I'd go further. Lets lay down the gauntlet here and proclaim: there is no long term deficit problem in the USA.
These two sentences do not say the same thing. There is evidence that debt results in slower economic growth. There is not evidence that it negatively impacts growth, to with that it results in economic shrinkage. I'm with your general sentiment but don't throw the baby out with the bathwater in your enthusiasm.
What this means is, instead of slashing budgets in a recession because you think debt slows growth, instead invest in a recession, because the alternative is no benefit to growth plus putting more people out of work.
Moreover, government spending doesn't vanish into a blackhole. If I tax a dollar from you, and then build a highway or launch a GPS satellite or educate a child, I not only put your money back into the economy, I also left lasting changes that improve efficiency.
Oh my goodness, no. That's the least of it. They took all Commonwealth countries, found the periods where they had over 90% debt-to-GDP ratio, and EQUAL WEIGHTED them regardless of length or country.
I won't do a better job of explaining this than the article: "U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally."
Wow.
They also subjectively ignored the post-WW2 period for most countries; coincidentally when countries had high debt and grew like crazy.
I bet that if you started with the desired results in mind for a study like this, you could create a list of variables to try and pick the combination that maximizes your metric.
Then provide a post-hoc justification for each choice.
For example: * debt-to-gdp 80%, 85%, 90%, 95%
* Ignore years after ww2 (the war was an externality)
* Don't ignore years after ww2 (why would we? they're years.)
* Ignore years after ww2 for countries that got aid from US (removing an externality)
* Ignore years after ww2 for countries that did not get aid from US (most countries did, don't want to mix the sample)
* Ignore years after ww2 for countries that were in the European theater (removing an externality)
* Ignore years after ww2 for countries that were not in the European theater (not affected by war like rest of globe)
* Ignore years after any war (externality)
* Weigh by population of country at time of study (lazy way to account for size of industry)
* Weigh by population of country by year (better way to accounts for size of industry)
* Equal weight for all countries (easy to explain)
* For each country, take periods of high debt-to-gdp and compare against periods without high debt-to-gdp; then compare countries equally (easy to explain-ish)
* Take each period of consecutive years with a high debt-to-gdp ratio and call each period one sample point. Average these inequal-length points together and compare against all years of low debt-to-gdp (Come on! Nobody would believe-- oh no.)
> According to their C.V.s [2], it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.
So I really don't know why anyone listened to this in the first place other than it furthered their pre-existing political agenda.
This is why any paper should be required to release:
- the raw data supporting it;
- the assumptions, exclusions and weightings made to produce the final data; and
- any code used for a model.
All of these issues are particularly problematic when it comes to climate science.
[1]: http://www.nextnewdeal.net/rortybomb/no-90-percent-debt-thre...
This is news. "We can't replicate" a landmark study (yes, it was an intercontinental landmark study) is very different from "we have found the specific errors that make this study faulty".
Maybe because this seems to be standard for research publications.
http://www.gwern.net/DNB%20FAQ#flaws-in-mainstream-science-a...
e: downvote with comments please
Or would it?
http://climateaudit.files.wordpress.com/2009/12/mcintyre-grl...
Regardless of what side you come down on w.r.t. this particular issue (and I realize it's a sensitive one), the fact that global policy was influenced by a paper that used secret, buggy Fortran code to manipulate a data set is extremely concerning. This is not good science.
Publishing data and source code should be a requirement these days.
"The test in science is whether findings can be replicated using different data and methods. More than two dozen reconstructions, using various statistical methods and combinations of proxy records, have supported the broad consensus shown in the original 1998 hockey-stick graph"
You should see how bad it is in my field of study - biomechanics. It's a pure black box. We have total cronyism, where one reviewer has disproportional power since he was the first to publish much of the modern stuff. Therefore, people will do anything to have him review their papers, and his papers are pushed through despite what many feel are seriously glaring errors in methodology and collection.
This is the walled garden crap that turns me off to "peer-reviewed research."
For a much fuzzier field like economics, where the line between knowledge and opinion is extremely blurry, this "bending over backwards" to show how you might be wrong should be applied 100x .
This is in part why I am a programmer now and why my Poli Sci degree is sitting in a drawer.
It's pretty common in medical research.
If a conclusion is only provable with one specific data set, then it can hardly be considered a universal objective truth of nature.
By analogy: if I drop a hammer and tell you that gravitational acceleration is 9.8 meters per second squared, you don't need to come over to my house and borrow my hammer to test it.
Sharing data and code is helpful for error checking, as it was in this case.
I don't know about the particular stat the article is talking about, but they give plenty of data here.
Can anyone imagine Paul Ryan or Cameron/Osborne coming out and admitting their policies are based on nothing more than gut feelings unsupported by anything? What about the countless pundits who've spent years squawking about austerity? The notion is laughable.
Which is why I personally put more trust in the irrationality of markets and business over the irrationality of elected lawyers who gain power via rhetoric (and not production).
http://www.livescience.com/18132-intelligence-social-conserv...
/sigh
I used to believe that if only we all just talked things out, we'd come to an agreement. No more.
Now I focus on better organizing. Rallying the troops.
I wonder what you'll conclude with that data.
austerity -> cuts to social programs -> more poor people with less resources -> labor market who will work cheaper
What a charitable perspective.
Many of these organizations rely on private data to support their policy decisions, or rely on private analysis from similar organizations. That's hard to criticize because at least some of it would cause serious harm to the folks who provided it, or enable high finance players to front run policy actions to huge profit.
But what to make of an insider like that refusing to release data that had no market risk or legal restrictions in place. It's not hard to imagine that his primary goal was support of an economic philosophy and would have been just as happy to publish a paper that claimed high debt/gdp rations promote growth.
It certainly makes me wonder if this kind of approach is part of the culture in some of these policy and international finance organizations. If the data relied on by the IMF/ECB/etc as they've effectively reformed governments and imposed major budget changes can't be made public, then you're highly reliant on them to be ethical and extremely diligent.
If there's any significant amount of philosophy trumping science in the european restructuring, one begins to wonder if some of the weaker euro members are still actual democracies.
Sadly, ponies are a finite resource until such time as the government figures out how to print more of them. Debt still has a multiplier less than 1 - far less, for large amounts of debt.
All this article means is the magic number where debt starts to cause deep hurting is somewhere above 90% of GDP.
edit: And this may be because I don't know where the money comes from to begin with. If I keep getting bigger and bigger loans and there's no way my income will allow me to pay these loands back in the foreseeable future, then won't everyone just cease doing business with me at some point? Does "debt" in a government context act differently, and if so, why?
http://en.wikipedia.org/wiki/File:USDebt.png
The US national debt during WWII was around 120% of GDP. In the years that followed, that ratio fell to below 40%. However, we didn't appreciably pay off our debts, the real dollar amount stayed a little over $2 trillion. We accomplished this feat, of course, by substantially increasing the GDP. It is easy to realize that it is fine for debt to continuously grow, so long as the GDP grows faster.
Also, the only president to entirely pay off the national debt, Andrew Jackson, triggered one of the deepest depressions in US history.
Both options sound good to me, in that if people manage to keep eating and living in houses and raising their children after this happens, we will have officially entered a post-scarcity economy.
Not any more. This is a career killer. I wouldn't be surprised to see them accepting posts with the American Enterprise Institute or Cato in short order.
EDIT: also, Barry Ritholtz is generally perceived as an honest broker on these things, and his commentary is here: http://www.ritholtz.com/blog/2013/04/did-reinhart-rogoff-scr...
There's always room for disagreement because economics is the dismal science (as one famous line put it, Harry Truman wanted to find a one-handed economist - so they wouldn't always answer "X could happen, on the other hand, Y could happen), and answers aren't as binary as they sometimes are in the hard sciences. I'm curious to see what Rogoff and Reinhart respond to this with.
Edit: thanks for the Ritholz piece - hadn't seen that. I certainly am not claiming that there's no mistake - I just want to see what the defendants in this have to say, so to speak.
http://www.slate.com/blogs/moneybox/2013/04/16/reinhart_and_...
Reducing the problem to a personal level, you borrow money to buy a good car which enables you to work a higher paying job. This scenario makes the case that debt causes growth. From a policy standpoint if you borrow money for long term infrastructure and growth opportunities you could easily see debt as a net positive.
OTOH, you run up your credit cards to buy a better TVs or to buy 'friends'. In this instance debt can only lead to eventual poverty and ruin.
Which type of spending do you think is happening more often at a federal level?
It's also sort of the heart of Keynesianism. The counterpoint is the more intuitive certainty that if times are tough, everyone should tighten their belts, including the government. That's sort of what drives the austerity efforts.
spinonthird has already pointed out the Paradox of Thrift. I would add that a lot of confusion surrounding this particular topic comes from the widespread inability to distinguish between real tough times and monetary tough times.
By monetary tough times I mean: bank collapses, loan defaults, low available income.
By real tough times I mean: lack of available resources, natural disasters destroying infrastructure.
In real tough times, it is true that everybody should tighten their belt. Typically, they are forced to do so via inflation, and if the government refuses to listen there will be hyperinflation.
In monetary tough times, tightening your belt personally is your only choice due to the constraints that you have. But it is exactly the wrong response for government to tighten its belt as well. Rather, government - especially monetarily sovereign government - should use its unique position in the economy to get the economy going again, to enable the real capacity available to be used.
Observe how a simple confusion of these scenarios can lead to incorrect predictions, similarly to how so many people predicted back in 2009 that raging hyperinflation should have happened by now. They were obviously wrong, and I posit that underlying their wrongness is the inability to properly distinguish between real and monetary phenomena.
I can't find a more evenhanded and clear statement of the problem than his.
What's amazing to me is that no one, until the researchers spotlighted here, apparently thought to ask to see the data? Isn't this part of peer-review?
Things like this is why I love being part of the open-source community. People may brag about and diss each other's code performance to an unnecessary degree of hostility, but at least we can all check the code and run it for ourselves.
iirc, the paper wasn't published, let alone peer-reviewed. it was "discovered" and used as a justification by people who may or may not understand the deeper issues involved.
For example, perhaps the US and Euro governments wanted to justify some tough measures of fiscal restraint and increase public support, and they wanted to keep it from being delayed until collapse was impossible to avoid. (See, I'm not totally jaded. But I can think of plenty of worse scenarios too.)
The "flaws" seem to be too large (and some deliberate) to be unintentional, but maybe I give too much credit. I've just noticed too much misinformation being spread by those who should know better, and coincidentally seem to benefit the most from it. I'm suspending my judgement until I learn more, but anyone else have any insights?
http://www.nextnewdeal.net/rortybomb/researchers-finally-rep...
and the paper (including the data and code files upon which the results are based!) is:
http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04dea...
concluding paragraph makes so much sense:
"More than five decades ago, Abba Lerner gave the answer to this question. If there are involuntarily unemployed (we would add underemployed) people it means the deficit is too low. The government should either cut taxes or increase spending. It is certainly debatable which one is a better policy, but that’s beyond the scope of this paper. When is the deficit too large? When it’s over 3%, 7%, 10%? Again, there is no magic number and anyone who comes up with a universal number simply misunderstands the modern monetary regime and macroeconomics. In opposition to magic, Lerner proposed “functional finance”—the notion that the federal government’s budgetary outcome is of no consequence by itself, but rather, what is important is the economic effects of government spending and taxing. When total spending in the economy, including government spending, is more than what the economy is able to produce when employed at full capacity, the government should either lower its spending or raise taxes. A failure to do so will lead to inflation. So inflation is the true limit to government spending not lack of financing. Government debt is merely the result of government deficit and hence the same applies to debt as well."
Did real economists always consider these results provisional/dubious/bogus and the fact that they were used as the basis of policy is to the shame of our policy makers and press, or is the field of economics so messed up that research based on schoolboy errors can become the accepted view within the field?
Reinhart and Rogoff may reach exactly the opposite conclusion, given the embarrassing publicity. For me this is an illustration of why publishing just your conclusions without data (or code, or whatever details are germane to your field) is so common.
That conclusion is quite a jump from Reinhart-Rogoff is flawed.
0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%
Tangentially related: I've been thinking recently about how hard it would be to teach a real programming language to Excel users. They would already have some grasp of functions, arrays, and variables. I think the analogues might have some pedagogical value.
