Monthly Archives: April 2013

How it Works—Five points from Krugman

It’s not always like this, where I advocate increased government spending. Nor do I agree with everything Paul Krugman in spite of the fact I will never achieve or even approach his credentials. He has held his position since the start of this recession. He as been critiqued, contradicted, and misquoted. As the dust clears, he is proven correct. Unfortunately there are still a few quibblers.

This morning Mr. Krugman posted five points in his Blog titled The Ignoramus Strategy as reply to some of the quibbles. The five points below from his blog today are the foundation of the argument. They are not always true, but they fit this situation and time…he makes that point too. If you’re new to the issue or want to shore up your discussion points, these few short paragraphs are the summary of how the economy works differently than our families’ budget, what should be done, and why. Paul Krugman, enjoy:

“1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.”

“2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.”

“3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.”

“4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

“5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.”

 

Business Insider-Krugman Has Won

Business Insider Henry Blodget has posted a great piece titled: The Economic Argument is Over–Paul Krugman Has Won.  A worthy, very quick read of the debate and evidence as to what happens when austerity is applied. Pretty much all points Paul Krugman has been making for five years now. Couple quotes here:

“So the empirical evidence increasingly favored the Nobel-prize winning Paul  Krugman and the other economists and politicians arguing that governments could  continue to spend aggressively until economic health was restored. And then, last week, a startling discovery obliterated one of the key premises  upon which the whole austerity movement was based.”

 

“And in the meantime, for the sake of the country, it would be nice if our  government came together and agreed to restore full funding for basic  services. Because the current state of government dysfunction in  the United States is not just economically harmful. It is also embarrassing,  depressing, and based on a premise that is now demonstrably false.”

Keep Kicking This Horse

A short look back at post recession jobs in a continued effort to keep the R-R discussion alive. Perhaps surmise over what worked well in the past, diffuse a couple myths regarding past policy, and ponder at what could have been without the misguided effort to cut budgets at perhaps the worst time.

BUSHvOBAMA_jobsREVFirst one from my own archives…the comparison of public sector and private sector job growth between the current and last administrations. Pretty surprising given current conservative rhetoric about how much smaller they prefer government.

 

Next we have a look at what happened to federal growth during the Reagan Administration. Again conservatives grew government.

 federal-employment-1981-1984-Reagan

And here is an interesting one again from the pre-election americanmoneylies archives, a comparison of where unemployment would be IF the current (Obama) administration had spent and retained government at the same rate as the Bush Administration.

Unemployment if Government Remained at Bush Levels

Unemployment if Government Remained at Bush Levels

Oh what a recovery it might have been with all those folks working and paying taxes in lieu of being cut, then held from a complete fall under our social safety nets…costing the feds additional spending anyway. With the R-R theory in shambles there is still time to frame a reasonable response. And a response demonstrated acceptable to the GOP when it was “their guy” in office.

Reinhart and Rogoff…the Comedy

Last night Comedy Central Stephen Colbert took aim at the now debunked study done by Karmaen Reinhart and Kenneth Rogoff. He busts the Austerity movement with his satire, backed by quotes, facts, and an interview with the PhD student who has disproven the two Harvard professors much quoted work.

Colbert not only interviews student Thomas Herndon who obtained the spreadsheet, but put together an editorial piece with video clips of the significant numbers of government “experts” quoting the R-R study in support of their efforts to cut government. Great infomercial punctuated with a real American sales pitch, humor.

Rogoff and Reinhart claimed countries with debt to GDP ratios exceeding 90% suffered negative growth of -0.1%. Herndon found within R-R’s own data set countries actually posted positive growth of 2.2%.

Indeed laying off government workers and reducing spending is bad in a time of recession. So if we don’t lay them off and push them to the safety net roles like unemployment and food stamps, the economy gets better…at the rate of roughly $1.50 for every $1 of government spending. A no brainier if we can set aside political party. I bet most of the Austerity movement can’t. We’ll be watching Paul Ryan as he’s been mighty quiet this week. Perhaps he’s been in the back room reworking that budget proposal of his?

Unequal Growth

For more on gross income inequity we see today the report, released by the Pew Research Center which found that the mean net worth for the 7 percent of American households at the top of the wealth distribution rose by 28 percent between 2009 and 2011.

Pew-wealth-recovery-0-3

Here’s a look at how the net worth has changed relative to wealth groups

On the other hand wealth for the remaining 93% fell by 4% for the same period.

We don’t have to read too deep into the report to see where the differences are. We talked about the distinct advantage those who simply invest have over those who work within the tax system. In this Pew report we see again where investing (i.e. already having enough not to have to work) verses working resulted in another large bound ahead.

Pew Share of wealth-recovery-0-2

And here is the change in shares from 09 to 2011

 

The American Dream has become less of how hard one works and more of how the tax structure is weighted toward those who already have over the have-nots.

Austerity Change Needed

Aftermath of the Rogoff and Reinhart; Growth in a Time of Debt is indeed causing a stir. I am hopeful …far from optimistic.

Economists continue to cite the major errors of the R-R study and resulting missteps of the financial leadership. Mitchel got right to the point stating how Elementary misuse of spreadsheet data leaves millions unemployed  Followed by almost everybody who’s anybody in the economics world. The iterations are evolving to sound similar as in what could be, or could have been, if we’d avoided all the cuts this error filled research helped drive.

One catching my eye is yesterday’s print by Paul Krugman, The Non-Secret of our Non-Success.  His usual style parks responsibility squarely. Here a quick look at his data comparing the historical post-recession average with what it is after all the missteps for both the EU and US.

Average vs Current Policy-krugman

Here’s real primary (non-interest) spending, from the IMF’s latest World Economic Outlook, with the blue lines representing the historical average in recessions and aftermath, the red lines representing current policies:

The question remains as to what if anything, the folks in Washington and the IMF do. Will they continue holding to the wrong note and the hope it gets right (like a classic blues progression) or will they understand they have been lied to and misled and make the right choice?  History makes a loud statement. Here’s to hoping legislators are reading and listening.

Rogoff and Reinhart Farce

Doubling down on the economic effort today. Another takedown/article brought to us by a friend on the Rogoff and Reinhart lie. These words first from my buddy “k“:

“From the Laboratory of History at Palmas del Mar. There has been a huge dust up in the Economist world. A paper and book by economists Carmen Reinhart and Kenneth Rogoff that political leaders in the U.S., U.K. and the Euro Zone used to justify their austerity push has been shown to be nothing less or more than an intentional lie. Reinhart and Rogoff intentionally took correlation for causation.

In other words, they claimed results were causes and causes were results. Then, they cherry picked their data and over and under emphasized their data sets to get the results they wanted. Their work was a farce. Economic reality works in the opposite way they say it did. Nonetheless, political leader’s that shared Reinhart and Rogoff’s ideology used their work to push for austerity.

Democrats and Republicans in the U.S. Obama included, the leaders of the Euro Zone counties and the U.K. all used Reinhart and Rogoff to claim there was a government “debt crisis” and that austerity would thereby produce economic growth. It was all hogwash and their policies have caused or maintained massive unemployment and poverty. However, do not expect the neoliberal political elites to change course. They will not. Their paycheck and status depends on their not understanding reality. They worship at the altar of corporate finance. As Max Planck said, “Science advances one funeral at a time.” The same holds true for economists and politicians. We must hope and wait for one political death at a time.

There are many articles about this revelation circulating in the economist blogosphere. We present one by L. Randall Wray below as our article du jour.” k

NO, ROGOFF AND REINHART, THIS TIME IS DIFFERENT! SLOPPY RESEARCH AND NO UNDERSTANDING OF SOVEREIGN CURRENCY, By L. Randall Wray,  April 17th, 2013  · Excerpts follow:

“Carmen Reinhart and Ken Rogoff came as close to celebrity status as an economist can ever come, with their book, This Time Is Different. They claimed that 800 years (!) of financial history proves that high government debt ratios lead to low economic growth. Governments all over the world took heed and downsized, adopting austerity that cost millions upon millions of workers their jobs.

But it was all a lie. Yes, a lie. They screwed up their data analysis. Like so many times before—think Larry Summers at Harvard, Chicago’s Gene Fama, or Charles Plosser at the University of Rochester—the economists reach results counter to intuition and the real world…….”
” ….Rogoff and Reinhart committed the cardinal sin of academics: while their purported results fit their theory, the data they supposedly used does not. Either they fudged or they erred. It really doesn’t matter. Their results were completely, utterly wrong. And their own data proves it.”
“Their results were completely, utterly wrong. And their own data proves it.

You can read a summary of the expose here: http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems. The academic paper is here: http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/

The paper confirms what we suspected: the Rogoff and Reinhart research is crap. They threw out all the high debt, good growth countries. If you put those back in, it simply is not true that high government debt leads to low growth.

Was it intentional? Who cares. Motive is not the issue. Crappy research is the problem. And this was one of the most cited papers in recent economic research. Here’s the abstract from the critical analysis of their work:

“We replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower. We also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.”

Me: You’ve got to read the whole takedown article if you’re at all interested in how the money and lies came through this time Faulty, apparently deliberately faulty, research being cited at the pinnacles of federal financial decision making. All at the cost of lost economic opportunity, idle capacity, and continued unemployment. Excellent pick and summary, thank you “k“.

Austerity Flaws

While our legislators in Washington (and other countries) cite Rogoff and Reinhart; Growth in a Time of Debt arguing for budget cuts like the newly proposed reduction in Social Security, we learn the study data is dead wrong. Coding and spreadsheet errors when corrected show an entirely different conclusion. So much for credibility.

Addressed this week by Mitchell, Krugman, and many others it appears these errors were pretty elementary stuff…except through these “elementary” data weighting and spreadsheet coding errors it changed the entire cause-effect relationship. When the data is corrected the Rogoff and Reinhart conclusion not only falls, but the data substantiates an opposing cause-effect. Austerity measures (cutting budgets) do NOT promote economic growth.

 “It turns out that when they revised their multiplier estimates exactly the opposite was the case. Now they acknowledge that spending multipliers are in range of 1.5 1.75, meaning that increasing government spending adds at least 150 cents in the dollar spent extra to the economy.”

 

Ah, so it is indeed bad to cut the budget right now. I think we heard that before—besides all the really smart economists have been saying this for a long time. Will our legislators now read and head or simply dig in their heels?

Frivilous Lawsuit won by Koch…but he’s Against them

Money lies. Big money lies even larger and here is a great example.  Bill (William) Koch, one of the wealthy Koch brothers, is against frivolous lawsuits, yet just won a lawsuit over 24 bottles of wine, or should I say whine? Punitive damages awarded: $12 Million dollars.

After the 2012 election cycle we all should know of the Koch brothers and at least a little something of their involvement in trying to elect pro business GOP candidates. In this case William gave huge amounts of money to GOP candidates over the years. Restore our Future, a PAC decidedly pro Romney, GOP and other right wing efforts, as well as John Boehner  were recipients of millions. Both groups object to what they call “frivolous lawsuits”. For example Boehner has voted consistently for “Restricting Frivolous Lawsuits”, “Limiting Attorney’s Fees in Class Action Lawsuits”, “Prohibiting Lawsuits about Obesity against Food Providers”, and he pledged to bring to the floor the “Common Sense Legal Reforms Act” which would limit punitive damages and stem liability litigation. Lets see how that position, Bill Koch’s position fits his own lawsuit.

It appears Mr. Koch bought a lot of 24 bottles of wine at a price of $320,000. It also appears one of the bottles in the lot was counterfeit, a detail of which neither Koch nor the seller were aware. When this detail became evident the seller offered to refund the entire purchase price to Koch. Instead of accepting the offer of a complete and full refund Mr. Koch sued. On Friday, the court awarded Mr. Koch his full purchase price and tacked on a punitive award of $12 Million. Yes $12 million in punitive damages for being accidentally misled regarding the authenticity of 24 bottles of wine.

It appears the effort, by in this case some of the biggest money in the country; to limit frivolous lawsuits really just means lawsuits which may penalize their own corporate interests. Of course it wouldn’t apply to them. American Money Lies, Big money makes the lies a bit larger and the influence broader.

Economic Vandalism

After last weeks post – Nonplused Friday where I hit on the negative impacts of budget cutting now, I received a note from a friend directing me to this piece by Billy Mitchel US President engaging in economic vandalism”. Billy describes the impact of austerity measures already being applied, with more proposed, in the US budget.

“The data is signaling a fairly poor outlook and hardly the time for the President to be submitting austerity budgets. But in the same week that the data came out, the President did just that. The latest budget submissions from the Administration, designed to placate the mad Republicans, is an act of economic vandalism.”

Since Billy puts it in such direct term and is well supported with factual research, I will not delve into the article itself. I just don’t understand what Mr. Obama is trying to do, perhaps placate some imaginary reasonable politicians? I’m not sure there are any, besides now both parties are attacking.

If you’re not yet convinced this is a terrible time to be cutting the budget…you certainly will be after reading. The option is to kill what little semblance of recovery exists and plunge back just as we did in 1937.