Three posts yesterday. First up was “Another Attack of the 90 Percent Zombie:”
Mark Thoma points me to a post by Miles Kimball titled What Paul Krugman Got Wrong About Italy’s Economy. So I wondered what important features I got wrong — but to my great disappointment all I found was yet another invocation of the Reinhart-Rogoff claim that bad things happen when debt goes about 90 percent of GDP.
Look, this is just not an established result. It’s a correlation; but it could just as well reflect a pathway from slow growth to high debt, or from third factors like political and institutional dysfunction to both slow growth and high debt.
This last possibility becomes especially persuasive when you look at the full list of advanced countries that have exceeded the supposed 90 percent threshold in the past 50 years: Japan, Italy, Belgium, Greece. That’s it. So yes, Japan and Italy have had high debt and slow growth; do you really want to say that debt was the only reason for slow growth, or that the Japanese slowdown of the 1990s had no role in causing the rise in debt? Do you really want to say that debt is the only reason for Italy’s poor performance? If your answer to either question is no, you have just said that you don’t believe in Reinhart-Rogoff’s results.
So why do people imagine that this is a definitive result? That’s obvious. R-R on debt got picked up eagerly by deficit scolds, because it said what they wanted to hear. Then it became orthodoxy through what we might call the Scarborough effect: Very Serious People heard other Very Serious People citing the alleged finding, then repeated it themselves, and it became part of what Everyone Knows — after all, everyone they talked to said it was true.
Is Reinhart-Rogoff itself a zombie? Not quite — it could still be true, although I don’t think so. But the idea that the 90 percent threshold is a definite result, established beyond question, is very much a zombie idea, one that has been killed repeatedly but just won’t stay down.
And professional economists, at least, should know better.
But, but… The Very Serious People are very serious… Next up was “Bernanke of Hippo:”
In discussing fiscal policy, I’ve been fond of quoting St. Augustine: “Grant me chastity and continence, but not yet”. Trying to slash the deficit while the economy is still up against the zero lower bound is a really bad idea, because it will depress the economy further and hurt both growth and revenue.
What’s more, there really isn’t any huge urgency about deficit reduction. Borrowing costs are low, and current projections show only a modest rise in the debt-GDP ratio over the next decade. Beyond that there are bigger issues — but these issues don’t have to be solved right away, and should not be used to justify growth-killing austerity now.
But hey, I’m a crazy economic hippie, whom nobody agrees with — except, well, the chairman of the Federal Reserve. Allowing for the constraints of rhetoric that come with his position, Ben Bernanke’s testimony today was highly Krugmanesque:
Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015.8 As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.
However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery … Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
Of course, credentials aren’t dispositive here; Bernanke could be all wrong, failing to understand that if we don’t slash spending now now now we’ll turn into Greece, Greece I tell you. But these remarks should give pause to all the people who imagine that “nobody” except me and a couple of other crazies think that we’re paying far too much attention to short-term deficits.
The last post of the day was “Tomorrow Has Arrived:”
Tom Tomorrow, that is; he’s received the Herblock prize. Congratulations to Dan Perkins for a well-deserved honor, even if it required some violence to my cartoon alter ego: