There were four posts yesterday. First up was “Grasping at Straw Men:”
OK, Reinhart and Rogoff have said their piece. I’d say that they’re still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates – but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the “eek! 90 percent!” rhetoric that was used to justify sharp austerity right now. Sorry, guys, but with so much at stake you have a responsibility not just to put stuff out but to make crystal clear what you think it implies for policy.
What was new in this piece, however, was the creation of a straw man. R-R:
The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.
Who are these “some liberal economists”? As far as I know, none of their prominent critics have made that particular argument. It has always been about the effects of sustained low growth, for whatever reason, on debt ratios.
Maybe an exercise I’ve been doing will help. I’ve put together what I think of as G7-decadal-RR. I take debt ratios for the G7 (to hold the size of the effort down, and also produce a cleaner graph) only once a decade, at 1950, 1960, etc., and look at growth rates over the following decade. When I do that it looks like this:
So there’s a clear negative correlation between debt and growth, although no cliff at 90 percent or actually anywhere. The absence of a cliff is crucial: whereas R-R like to say that debt going above 90 percent cuts your growth rate by 1 percentage point, what we actually find is that raising the debt ratio by 45 points cuts growth by 1 point, which is a very different implication.
As Brad DeLong has been pointing out, numbers like that, even if you take them as causal, are a very weak argument for austerity in a liquidity trap. Suppose you cut spending by 2 percent of GDP. This probably reduces GDP by about 3 percent, and reduces the deficit by only about 1 percent of GDP; meanwhile, if we believe in this relationship, it raises GDP a decade later by 0.23 percent. A slam-dunk case for austerity this isn’t.
But anyway, you should not consider this relationship causal. It’s driven by a few high-debt low-growth cases on one side, and a few high-growth low-debt cases on the other. Let’s label the countries involved:
So, the alleged relationship is driven by (a) fast growth in the former Axis powers, which had very little debt and were recovering from war damage, after World War II; and slow growth in Japan and Italy since 1990. The latter cases were clearly a matter of growth slowdowns leading to higher debt, not the other way around; the former a case of spurious correlation.
This is not stuff that should be having any influence on policy.
The second post of the day was “The Medium Term Is Not The Message:”
Ezra Klein tries to broker peace:
The more modest differences between the various participants in the broader austerity debate are covering up a real area of consensus: We could, and should, do more now, and we could, and should, couple that with policies that reduce deficits in the medium and, more to the point, long term.
The debate between most of the academic “austerians” and the “keynesians” is, in many ways, a fake debate: There’s no serious economic model in which $400 billion in stimulus spending — plus some principal reduction — over the next two years would destabilize the bond markets if it was coupled with $4 trillion in deficit reduction over the next 12 years.
Reinhart and Rogoff could have been doing much more to call out the inanity of this position, which has blocked both more short-term support for the economy and more long-term deficit reduction. That, for them, should be a lesson of this debacle: They got in bed with politicians whose policy agenda had little to do with their actual research, and so now they’re being blamed for that policy agenda.
OK, what I’d say is that it’s not the debate that’s fake; it’s the consensus, because it has nothing to do with actual political possibilities.
Look, we are not going to have a deal that trades short-term stimulus for medium-term deficit reduction. Na ga ha pen. And for a good reason, too: our political parties have fundamentally different visions of what kind of country we should have, and neither is feeling politically weak enough to agree to lock in any of the other side’s vision.This means that any decisions about short-term spending have to be taken along with an asterisk: “*to be offset by longer-run adjustments to be determined later.”
That’s the real world in which macroeconomic analysis plays a role. The question is whether you support austerity now or not — saying that you would oppose austerity if politicians simultaneously did something they aren’t going to do is, de facto, support for austerity. The reality is that as an economist, you’re either trying to calm deficit hysteria or you’re helping to ratchet it up.
And R-R were clearly helping to ratchet up the fear. If that’s not what they meant to do, well, it would have been easy for them to say, clearly, that despite the negative correlation between debt and growth they were opposed to spending cuts right now. They never did that.
This is, I’d say, part of a broader point: the responsibility of public intellectuals in general goes beyond talking about the ideal. I don’t mean that you have to draft legislation that can pass Congress, or whatever; I do mean that you need to make it clear where you stand on the actual decisions being made, as opposed to merely stating what we should do but won’t. And this is especially true when you know full well that many people are invoking your work to push for policies that look nothing like your ideal.
So yes, Ezra is right that my worldview is a lot closer to Reinhart and Rogoff’s than it is to Paul Ryan’s or Olli Rehn’s. So? R-R effectively lent aid and comfort to the Ryans and the Rehns, and knew that they were doing so. They need to own up to that fact.
Next up was “Debt and Growth Data:”
I’ve had some requests for data sources on debt and growth; good point. So, it’s all in the public domain. The IMF public debt database offers a downloadable spreadsheet of debt/GDP ratios going back in some cases to 1791. For GDP, the easy source for 1950 onwards is the Total Economy Database; you want the file on output, labor, and labor productivity. If you want to push further into the past, the Maddison Project has spreadsheets going back in some cases to the year 1000.
For my exercise I used the Total Economy Database; I used West German growth for pre-unification, total German growth thereafter. The data are here (xls).
The last post of the day was “Friday Night Music: More Luscious Lucius:”