Rogoff-Reinhart debate, reprised

Usually an ivory tower controversy in economics fails to spill over into the public domain, but the Rogoff‑Reinhart debt modelling affair is the latest notable exception to this rule.

In 2010 noted economists Kenneth Rogoff and Carmen Reinhart produced a highly influential paper which showed that countries with a public debt to GDP ratio exceeding 90 per cent exhibited slower growth than less indebted countries.

Unsurprisingly, this paper has been cited widely by those favouring public sector budget deficit and debt reductions, however three researchers, including doctoral student Thomas Herndon, recently found that something was amiss with their efforts to replicate the Rogoff‑Reinhart empirical results.

Herndon and his colleagues contradict the Rogoff‑Reinhart findings for heavily indebted countries, and state 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.’

Rogoff and Reinhart initially presented a rather defensive response to this empirical challenge, stating that the Herndon study also found that countries with greater debt to GDP ratios have recorded slower growth rates and that research finding differences were informed, in part, to varied emphases and interpretations.

This week they followed up with an opinion piece in the New York Times. They acknowledged the coding error, but stridently defend the integrity of the remaining aspects of their work. Rogoff and Reinhart also made a telling remark about the public reaction to the recent controversy as follows:

Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. As career academic economists (our only senior public service has been in the research department at the International Monetary Fund) we find these attacks a sad commentary on the politicization of social science research.


It should be said that econometrics, as the empirical sub‑branch of the social science discipline of economics, is conducted by mostly intelligent, but nonetheless fallible, human beings, and this occasion will not be the last in which mistakes might be made in modelling.

In scientific endeavours, where theoretical constructs and empirical findings can be falsified by the presentation of superior alternatives, this occasion will not the last in which academic studies will come under challenge by others.

Academic and professional economists will no doubt eagerly await further responses about this matter in due course, but the more immediate question for everyone else is does this controversy matter in public policy terms?

The way in which certain commentators (of a particular political bent) have latched onto this issue, claiming that the challenges posed to the Rogoff‑Reinhart study altogether invalidates the rationale for fiscal consolidation measures throughout the Western world, suggests that it does matter.

However the controversy surrounding the Rogoff‑Reinhart work, especially the nomination of a numerical tipping point of debt leading to slowing growth, risks letting profligate governments off the hook by encouraging us to overlook the longstanding economic narrative of a negative association between public debt and growth.

Arguably the most well known aspect of this narrative is that greater public sector borrowings will tend to crowd out private sector investments, and this in turn will tend to dampen growth.

Individuals and corporations that have purchased government securities need have to have their loans repaid, and that means additional future tax burdens upon general taxpayers.

These extra tax burdens will tend to further depress other productive economic activities such as savings and work effort, again affecting economic growth.

Other things equal, public indebtedness sustains levels of government often greater than what is fiscally sustainable, artificially depressing the effective tax price of public goods today which encourages greater demands for larger, but more inefficient, government.

However, as suggested above, it is future generations of taxpayers who are largely stumped with the full tax burden arising from public debt, even though they were not in a position to give politically consent to today’s excess spending or tomorrow’s excess taxation.

For some economists, such as the late James Buchanan, public debt was not solely an economic issue but was also a moral one, in that public indebtedness is the manifestation of inappropriate legal plunder across the generations. If there is a more unprincipled, unethical practice conducted in the name of public sector financial management, it is difficult to find.

In empirical terms, the Rogoff‑Reinhart controversy should not be construed as the be-all-that-ends-all when it comes to the growth effects of debt.

A number of other empirical studies do suggest that higher levels of debts assumed by governments are associated with lower economic growth and other aspects of compromised economic performance.

For example, a 2010 paper for the IMF found an inverse relationship between initial debt and subsequent economic growth for advanced economies, including Australia.

Another study, by Simone Salotti and Carmine Trecroci, suggests that high public debt levels in twenty OECD countries, including Australia, have tended to reduce not only private sector investments but productivity growth.

For the sake of blog-length parsimony, I just refer to these two studies for now. There are plenty of others that can be found, courtesy of a Google search.

Whilst Australia’s overall general government gross debt to GDP ratio (comprising all levels of government) is relatively low in international terms, it has grown strongly from a pre‑GFC ten per cent in 2007 to 27 per cent last year.

As commonwealth and state budget papers in recent years have also made plain, governments during the GFC and beyond have expanded borrowings to cover for revenues which had not grown in accordance with prior expectations.

To put it more simply, Australian governments have written down their balance sheets to pump up recurrent spending even further.

While researchers relying upon the Rogoff and Reinhart debt data might have to go back to the empirical drawing board, this in no way suggests that concern about Australia’s accelerating public debts should be eased.

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117 Responses to Rogoff-Reinhart debate, reprised

  1. .

    Whilst Australia’s overall general government debt to GDP ratio (comprising all levels of government) is relatively low in international terms, it has grown strongly from a pre‑GFC ten per cent in 2007 to 27 per cent last year.

    What about now if you measure net positions and you take into account the “off balance sheet” items like the NBN and raiding of the future fund?

  2. Makka

    The risk here is that Govt’s will see the R&R discrepancy as license to go yet deeper into Debt as the “ceiling” can be lifted.

    R&R did not grow Europe’s obcene debt levels- it was the European nations and their politicians greedy Socialist faith in getting something for nothing. Now chickens are coming home and the incompetent Socialist parasites are diving for cover, which includes hiding behind this R&R affair.

    Europe is in deep social and financial trouble and it’s banks are vastly undercapitalised. Very major upheavals are ahead.

  3. Julie Novak

    In response to the first comment, my figure on this occasion was taken from the IMF World Economic Outlook statistics.

    It is for the general government sector only (yes, I know there’s a genuine debate about how to appropriately classify heavily subsidised NBN undertakings). However, a more comprehensive coverage should be able to pick up the borrowings by non-general government sector entities (I have reported such statistics in the past).

    Makka, yes, I agree with what you say.

    A political debate might re-emerge soon enough about the federal statutory debt ceiling. If or when this happens I would like to see more than just rhetorical criticisms of past increases in debt which threaten the abridge the ceiling; I want to see a parliamentary veto of any proposed further increases to the ceiling.

    Someone, sometime, has to politically muscle up to those who wish to lump future generations with bills for wasteful governmental expenditures, and force government to cut spending.

  4. Tel

    What about now if you measure net positions and you take into account the “off balance sheet” items like the NBN and raiding of the future fund?

    Forget nett debt. Most of what the government nominally has available to sell either never will be sold to pay the debt, or couldn’t be sold to pay the debt. Thus, the entire gross debt will need to be paid (or else we just wave hands and default).

    Only gross debt is a meaningful figure, and it is the most difficult figure to scam their way around.

  5. stackja

    politicization of social science research.

    How scientific is social research?

    There are three kinds of lies: lies, damned lies, and statistics. Benjamin Disraeli British politician (1804 – 1881).

    To me the whole thing looks like the ‘man-made global-warming’ scam.
    How can we believe anyone?
    Once you could trust people and rely on a hand-shake.

  6. .

    I agree Tel but I think it might be even masking the true extent of the waste we see right now.

  7. Tel

    Dot, if you look at AOFM they have: Total Commonwealth Government Securities on Issue – $269,426m but if you look at the Australian Debt Clock they slightly overstate the CGSoI figure but then have another figure next to that “Government Debt with AFIs” which I am having trouble tracking down.

    The debt clock has a point though, when you throw state debt in with commonwealth debt, we have twice as much public debt for the same GDP… putting our debt to GDP ratio around 34%. However Trading Economics puts our debt to GDP ratio down at around 20% implying they have omitted some of the debt (or stupidly used nett debt and trusted the government’s assessment). Even this basic figure is not well defined.

    Mind you, if you take the USA and include all government obligations you get a mind blowing figure so someone, somewhere WILL MISS OUT on what they are expecting to get. Will. No doubt about it.

  8. .

    I believe the debt figure of 34% is probably around the correct figure, but it is definitely above 30%. Swan’s budget actuals are out from forecast.

    A change in the balance sheet will allow us to see how much they’ve pissed away.

  9. Julie Novak

    Hi Tel, yes I consider gross debt to be the better measure of debts forcibly owed by taxpayers in the name of their governments.

    Stackja, nah, this is not a Climategate analogue by any stretch.

    A couple of researchers at UMass sought to replicate the Rogoff and Reinhart data, found they couldn’t and discovered it was due to a coding error. My understanding is, when Rogoff and Reinhart were asked by the UMass researchers for their data they happily provided and did so quickly. The coding glitch was indeed found, and Rogoff and Reinhart have worked, or are working, to rectify that. No coverups, no nothing.

    For their part, Rogoff and Reinhart believe that the UMass researchers have misinterpreted some other aspects of their work, which will sort itself in due course. Based on my reading of the UMass paper, the UMass researchers also don’t contradict the notion that higher levels of public debt are associated with lower economic growth, anyway.

  10. .

    For their part, Rogoff and Reinhart believe that the UMass researchers have misinterpreted some other aspects of their work, which will sort itself in due course. Based on my reading of the UMass paper, the UMass researchers also don’t contradict the notion that higher levels of public debt are associated with lower economic growth, anyway.

    It is a non story drummed up by left wing journos praying for a green light for widespread Government largesse.

    Too curt to be in a journal, but common sense and the damned truth.

  11. Jarrah

    “Based on my reading of the UMass paper, the UMass researchers also don’t contradict the notion that higher levels of public debt are associated with lower economic growth, anyway.”

    A separate UMass analysis by Dube disputes the causal direction (although R&R say it goes both ways, with no hard and fast rule).

  12. “For example, a 2010 paper for the IMF found an inverse relationship between initial debt and subsequent economic growth for advanced economies, including Australia.”

    Errr, yeah, isn’t this the same as what Krugman is saying on causality?

  13. Jim Rose

    90%! There are no constants in human action. Trends can change.

  14. Jim Rose

    It is unusual to recheck the work of others in econometrics. New data is usually used to increade the chances of publication.

    If you torture the date for long enough, it will confess. If you torture the data again, it will recant.

  15. JC

    Of course Krugman destroyed its credibility soon after it was released.

    Yea, The krugster also thinks the stimulus should have been $3 trillion.

    You’re really just a tribal groupie, Marion.

  16. JC

    a person who values arguments on their merits, Marion, you sniveler.

    look you, idiot, the two academics have admitted to the error and a few days ago they came out and said the mistake doesn’t change their findings.

    So unless you have a concrete argument to suggest otherwise…. ie evidence, then fuck off and stop plasting the site with third rate crap.

    Who gives a flying shit what the NY Times thinks you moron.

  17. Gab

    Further JC, I know a co….blah blah blah

    Oh do shut up you sanctimonious twit.

  18. JC

    Fuck off Marion.

    Show the site a little respect FFS.

    Presemtimg the NYTimes here as some sort of evidence is the equivalent
    of getting a dog turd on your shoe.

    As I said,the dudes came back and said the error doesn’t change the view. If you have evidence to disprove that, show it, otherwise get lost.

    And stop the babbling too as its boring.

  19. JC

    Oh do shut up you sanctimonious twit.

    Lol… Kinda snap.

  20. Jim Rose

    The study was just anyone straw in the wind, especially to its initial detractors.

    When an error was found, its initial detractors elevated it to smoking gun status.

  21. JC

    Whare did this sniveling leftie groupie show up from?

    They really are getting worse.

    Marian makes Fatboy and partridge look like geniuses.

  22. JC

    In any event, the standard rule of thumb in bond world is that 100% debt to GDP puts any nation in the dog house.

    These two didn’t come up with anything really new.

  23. Gab

    Notice how it’s not talking about the topic of the thread anymore. Just pontificating about something or other.

  24. Taylor

    Rogerhard and Reitoff got a tremendous bollocking in the Financial Times as well JC.

    The evidence that debt reduction is not generally effective in the middle of a recession is plain to see in the UK.

    In three years all they have done is stall the economy.

    In mid-2010 there were a number of commentators on this site who held up the British Government’s policies as truly inspired. They need to face facts.

    Instead, the usual response is to say that cuts have not been deep enough. That response suggests that the R&R type theory cannot be falsified. If so, it is pointless even mentioning the issue on this site.

  25. JC

    No no Marian…….you have the respect thing all wrong.

    It’s me who shows you no respect.

    I couldn’t give a rats about yours either way.

    Fuckng NY Times as evidence… Have you ever

    It’s not as though the NYTimes link hasn’t been tried here before. metro , my carbon slave used to try and link crap from there.

  26. JC

    Wow the financial Times had a go at them too, taylor.

    Impressed much, because I’m not.

    That boring rag is more keynesian than Keynes himself, soit wouldn’t surprise me for a second that pinko rag went after them.

    Can’t say I’m hugely impressed with your link, doofus.

    Try another.

  27. Jim Rose

    The premiers plan worked well in the depression as did a similar fiscal consolidation in nz. Thatcher’s fiscal considation in 1981 saw an immediate return of economic growth.

  28. Jim Rose

    When has a fiscal stimus quicken a recovery from a recession.

  29. JC

    The evidence that debt reduction is not generally effective in the middle of a recession is plain to see in the UK.

    You dickhead. You plain old appalling dickhead. There has hardly been any retrenchment in the UK you pathetic little twerp.

    The UK is bordering on recession because the region they are in and trade with is fucked. … Totally fucked.

    In fact it’s a testament to the UK they aren’t lying on their back too .

  30. JC

    JC you keyboard hero you.
    You gotta love people who swear their head off and belittle people on the internet. You just know that in real life they’d never have the balls to say shit.

    Lol…. Yes I would. Now fuck off and stop derailing the thread, you fuckng idiot.

  31. JC

    Jim

    These leftwing groupies… Skunks like maid marian and taylor seem to think that nations like the PIIGS had a choice to retrench. It’s like they actually believe the debt markets would welcome them with open arms and lens them billions of euros.

    The left are truly retarded.

  32. Will

    The evidence that debt reduction is not generally effective in the middle of a recession is plain to see in the UK.

    In three years all they have done is stall the economy.

    Almost totally due to the anti-business environment and inflexible and over regulated markets in the UK.

    Even the Tory Party is left of centre and follows the greenslime agenda.

  33. JC

    Yes all of that is true will.

    However they aren’t as badly off as that rest of them across the channel lying in pigshit.

  34. Jim Rose

    Jc, many struggle with the notion that governments can go broke, despite the long history of sovereign defaults

  35. JC

    Oh christ Marian, shut up. Seriously, just go away.

    (By the way, do you stand or squat as I can never tell from that stupid name.)

  36. JC

    Jc, many struggle with the notion that governments can go broke, despite the long history of sovereign defaults

    Yea I know. It’s only in recent history that sovereign debt wasn’t considered seriously risky instead of risk free.

    I still can’t get my head around the fact that you can’t really take a government to court to get your money back while their debt trades at say better than Proctor and Gamble for example.

  37. stackja

    Based on my reading of the UMass paper, the UMass researchers also don’t contradict the notion that higher levels of public debt are associated with lower economic growth, anyway.

    I will bow your reading. My maths ain’t great.

  38. John Mc

    Here’s one think tank that seems to believe the UK will be buoyant during Europe’s slow demise:

    http://www.thewealthreport.net/The-Wealth-Report-2012.pdf

  39. Tel

    Yes, the two academics (it’s nice you tried to learn their names – a clear sign you’re up to date with this) said that the findings didn’t change their conclusions, but the simple fact of the matter is that they did, and the protests by Reinhart and Rogoff are little more than the predictable cries of those whose poor work has been found wanting.

    Not wanting to dull the slanging, but if you bother to check, the only difference due to calculation error was Belgium, and not many people care about Belgium to start with, but really it’s only a small country, in the midst of the EU supergovernment (I mean Belgium hasn’t even had a government of its own for a few years and no one noticed). The difference can’t be hugely significant.

    Besides, as I’ve already pointed out, Rogoff & Reinhart were advocating reduced debt to GDP ratio, and since that has not happened in the USA, nor Australia they can hardly be said to have had any influence on policy. The “Progressives” can own this economic crash, all of it.

  40. Makka

    Julie,

    “Someone, sometime, has to politically muscle up to those who wish to lump future generations with bills for wasteful governmental expenditures, and force government to cut spending.”

    100% agree and NOW is as good a time as any.

  41. Samuel J

    The attacks on Rogoff & Reinhart have been outrageous. The work is supported by the BIS and in any case even if 90% of GDP for debt was wrong, it doesn’t mean that debt can be unlimited. Any student of history will know that most civilisations have died because of fiscal profligacy. Second, these recorded debt levels do not include contingent liabilities which can be substantial and are just another form of government debt. Stated debt levels underestimate total government debt (since we can reasonably assume that contingent assets are less than contingent liabilities).

  42. Samuel J

    If people think the level of government debt doesn’t matter, why worry about Greece?

  43. Tel

    I still can’t get my head around the fact that you can’t really take a government to court to get your money back while their debt trades at say better than Proctor and Gamble for example.

    Why is this a difficult concept? In the USA at least, the game is blatantly rigged. The Federal Reserve purchases enough treasury bonds to guarantee any outcome they feel appropriate. The rates mean nothing. They are completely disjoint from the market.

    In effect, all asset prices can be adjusted by Central Planning at any time, for any reason. Now they are adjusting the mortgage market.

    In Australia it isn’t quite as bad, but our dear old Reserve Bank did pretty much the same thing purchasing mortgage debt back in 2008 to help liquidity and all that…

    http://www.dailyreckoning.com.au/residential-mortgage-backed-securities/2008/04/23/

    At least the RBA tried to make the minimum intervention at the time. They have at least done a plausible job of keeping the financial system stable (which is their real job, not propping up reckless government spending).

  44. JC

    Hey here is the intro by Colbert, check it out, if you dont take yourself too seriously.
    https://www.youtube.com/watch?v=2Oa-Bfdkg3w

    FFS, Marian now links to a clown with a cable program to somehow suggest the two academics are wrong.

    What’s next Maid, linking Michael Moore eating 30 pizzas at a sitting while discussing macro economics?

  45. JC

    Someone, sometime, has to politically muscle up to those who wish to lump future generations with bills for wasteful governmental expenditures, and force government to cut spending.”

    100% agree and NOW is as good a time as any.

    Notice how to the left, the future generations crap and wheeling out da children is selective when it suits.

    They wheel out the kids when it’s to do with da global warming and then they’re hurried back into the playpen and discarded when it’s to do with saddling them with debt.

    Fisk Doctrine. Now!

  46. Makka

    Marion supports my concerns; Leftards will seize on a cell error in an excel spreadsheet to put hundreds more Billions onto Public Debt.

  47. Tel

    … lump future generations with bills for wasteful governmental expenditures …

    Bob Murphy covered the intergenerational debt thingy, and inevitably there comes a generation who just doesn’t pay. It’s a brinkmanship game, someone blinks and someone loses, we are just waiting to figure out who.

    http://consultingbyrpm.com/blog/2012/01/future-generations-will-be-indebted-to-me-for-the-clarity-of-this-exposition.html

  48. JC

    by Martin Wolf. Last I heard he is no bleeding heart lefty.

    Wolfe is a Keynesian, you fucking moron. What would a Keynesian to say?

    Moron.

    You’re not metro, my boofheaded carbon slave are you?

  49. Tel

    They wheel out the kids when it’s to do with da global warming and then they’re hurried back into the playpen and discarded when it’s to do with saddling them with debt.

    Sadly, it’s worse than we thought.

    As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Bill Gates’ children may own all the debt — but that is within generations, not between generations.

    http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/

    They can just declare it impossible that any future generation will ever be harmed by debt. The argument is rubbish (and that’s exactly what Bob Murphy pointed out) but the rubbish argument is good enough to fool enough people for government to keep right on growing.

  50. Gab

    Nah stuff ‘em. I say spend up big today, keep borrowing and borrowing and let the future generations deal with it. I’m in tune with gillard/Swan on that one.

  51. Taylor

    Good one JC.

    Post your tax returns up and we’ll tell you how successful your theory is.

    Make it quick though as we don’t have all day to waste on this.

    And go have a rest after that – I’m worried about your health.

  52. Gab

    You’re a magnet for the loons, JC. Change your aftershave.

  53. John Mc

    Nah stuff ‘em. I say spend up big today, keep borrowing and borrowing and let the future generations deal with it. I’m in tune with gillard/Swan on that one.

    I think there’s something in this theory. Keep your investments diversified and conservative, and relocate to where the going is good.

    Australia is a great place to be right now. Enjoy it. When it turns, move on.

  54. JC

    I love this vid. I bring it up every 3 months or so when a leftwing moron shows up and starts prattling about da Austerity.

    Stigliz who has absolutely no understanding of macro and monetary economics was spinning for cash on Greece’s behalf (no kidding, he was being paid by the Greeks to spin for them) and gets an absolute pasting from hedge fund manager, Hugh Hendry.

    This marian, is funny. Not that clown Colbert.

  55. JC

    Good one JC.

    Post your tax returns up and we’ll tell you how successful your theory is.

    Lol, what eggactly does my tax return have anything to do with the fact that the pinko Times has the credibility in financial markets equal to the Lying Slapper with the Australian electorate.

    Make it quick though as we don’t have all day to waste on this.

    Fuck off.

    And go have a rest after that – I’m worried about your health.

    Lol… look, look JC the Financial Times said this… look JC the Financial Times said that.

    Reach your own conclusions and stop relying on scribes who have nothing to lose, you dickhead Taylor.

    Make an argument or STFU.

  56. JC

    As for me making money on my opinions Taylor… Yes I do. In fact beginning mid December last year to Friday close it’s been my best trading year ever by a Texas mile. Envy that douchebag.

  57. Taylor

    Make an argument or STFU.

    Fuck off old mate, time’s up.

  58. Samuel J

    Marion – yes I did read it. If Wolf means that another industrial revolution would mean that level of debt of 200% of GDP or so should not be concerning, I agree.

    But do you seriously think that the UK government’s war with France led to the industrial revolution? That the UK government’s high debt level caused the industrial revolution?

    The UK was saved by the industrial revolution. But to build up public debt in the hope that another industrial revolution will save the State is rather foolhardy.

    I repeat – if not 90% of GDP – what is the upper level which would inhibit economic growth? 200%? 1000%, 200000%? Will markets continue to lend to the government at the ex ante risk-free rate when the debt continues to increase? If so, why is there a spread between government issuers?

    Finally, the 364 economists (was MW one of them?) were wrong.

  59. JC

    Look, look JC, The Pinko Financial Times said….

    lol

    You can’t make this shit up if you tried. In fact Larry David would have a hard time trying. On the other hand it comes naturally to leftie twats.

  60. John Mc

    The UK was saved by the industrial revolution. But to build up public debt in the hope that another industrial revolution will save the State is rather foolhardy.

    Well, there’s a small but non-negligible bunch of economists who are claiming the last few hundred years are quite extraordinary in terms of technological advancement and productivity increases, and this is not going to be the dominating factor in the next few hundred years.

  61. Pedro

    LOL, who was saying that debt reduction’s been happening in the UK?
    http://www.themoneyillusion.com/?p=20823

  62. Gab

    Hey marion, how about you answer Samuel’s questions, if you can that is. GO!

  63. Will

    O

    h JC at 5.50, you are such a scream, just proves you get away with saying anything here.
    And hey, lighten up and look at the clip, you never know, you might have a sense of humor after all.

    There is nothing funny about that video. It is stupid puerile mindless mockery.

    Getting back to the central question, at what point does government debt retard economic growth?

    Perhaps if you think the R-R paper should be mocked, you can provide some more intelligent comments?

  64. .

    Good one JC.

    Post your tax returns up and we’ll tell you how successful your theory is.

    You would cry if you saw his tax returns. His theory must be somewhat successful.

  65. Will

    Well, there’s a small but non-negligible bunch of economists who are claiming the last few hundred years are quite extraordinary in terms of technological advancement and productivity increases, and this is not going to be the dominating factor in the next few hundred years.

    Interesting. Why? I see no reason why technical advances should suddenly dry up, except if greenslime policies become the new normal.

    I am optimistic that this will continue, as I see no reason why not.

  66. Carpe Jugulum

    Geez JC must be catnip for loons.

    Cudos for your restraint.

  67. Gab

    Gotta be his aftershave, Carpe. I told him but he won’t listen.

  68. .

    look you, idiot, the two academics have admitted to the error and a few days ago they came out and said the mistake doesn’t change their findings.

    BOOM

    This is all that matters. Give up lefties you have no excuse to rack up trillions in debt.

  69. JC

    Here’s another point for leftwingers to explain.

    The US has been mildly cutting their deficits for the past few years… or since the Republican house has basically forced the Kenyan to do so.

    The US deficit is expected to be around 6.5% of GDP this year when in 2010 it was around 10.5% of GDP.

    Since that time the US economy has experienced some growth despite the headwinds emanating for this horrendous White House.

    Now how could that happen eggsactly? How could the US be experiencing mild growth when all of you idiots, Krugman included, have been suggesting that cutting the deficit would sink the economy and cause a depression?

    you fuckers really need to get the story straight as consistency has never been a strong point with the left.

  70. Gab

    Hey, ya don’t suppose Taylor and his Maid think Gina wrote the paper, and that’s why they’re so animated?

  71. John Mc

    Interesting. Why? I see no reason why technical advances should suddenly dry up, except if greenslime policies become the new normal.

    I don’t know whether the theory is right or wrong. I think the point is the last few hundred years were the introduction of the age of reason, so it was kind of a step function type of jump. There will be linear increases from here on, in that regard. The next great jump will come from something else.

    My personal bet is some form of clean, limitless energy supply. Probably some form of nuclear fusion or something. That’s just my personal opinion. I (personally) believe human knowledge is in a kind of plateau, which still means some growth, but we will need to devise another way of managing information – almost a form of transhumanism – before we get another step jump in the application of knowledge.

    Just my personal opinion.

  72. JC

    Hey, ya don’t suppose Taylor and his Maid think Gina wrote the paper, and that’s why they’re so animated?

    It always boomerangs back to Gina in the end. Always. Sharing almost the same name would be sending the freaking crazy.

  73. John Mc

    Does anyone here wear Old Spice? Be honest.

    I sometimes wear Old Spice at home. I thought the Old Spice ads were cool, and my better half bought some (yes, the advertising worked as intended). I enjoy wearing it at home. Being a somewhat sweaty, heavy-set type of guy I believe an artificial scent is probably in my interests at all times!

  74. JC

    My personal bet is some form of clean, limitless energy supply. Probably some form of nuclear fusion or something.

    I reckon it’s in fabrication and cheap as shit manufactured products that will send the Greenslime fucking batshit crazy. The genesis is 3D imaging and or related stuff like that.

    I envision a time, not to far, perhaps two or three decades when say cars will cost perhaps 500 bucks in today’s dollars.

  75. JC

    Does anyone here wear Old Spice? Be honest.

    You think we’re a bunch of barbarians here John Mc :-)

  76. John Mc

    I think that will be huge JC.

    I also think construction is about to be revolutionised. Basically, for much of an onsite construction there won’t be builders, it will be a series of robots on a matrix on a cement slab. That will, for a fraction of the time and cost, build you a great home that just needs finishing (by the builders).

  77. Samuel J

    Yet the 364 can make one counter claim. While GDP growth rebounded after 1981, it took a long time for unemployment to come down. In the Keynesian years from 1956-81, it averaged 3.7% of the labour force. From 1981 onwards, unemployment has never again approached that level, and has averaged a horrible 8.3%. Even after a decade and a half of expansion under the last two governments, the jobless rate has never once reached the levels that were achieved on average in the previous quarter century.

    So the monetarists were right that inflation could be brought down by the control of demand, rather than by direct controls over prices and incomes. They were probably right that output would recover after a demand shock, though perhaps not “automatically”, as they claimed. But where they were really wrong was in claiming that the cost in terms of unemployment would also be temporary: 25 years in which it averaged 8.3% was one heck of a price to pay for their monetarist experiment.

    But that isn’t a counterclaim. The alternative policy they proposed would have led to even higher unemployment for an even longer time. Unemployment is a policy decision related to IR regulation not to monetary and fiscal policy.

  78. Carpe Jugulum

    Does anyone here wear Old Spice? Be honest.

    We are modern manly men here. Only 4711 Ice Cologne is good enough.

  79. WhaleHunt Fun

    Surely if govt debt is equal or greater than the GDP divided by the interst rate so that it takes the entire GDP to pay the loan repayment, then with nothing left for food or shelter, then surely the death toll would exceed the procreation rate and the nation would all die. So surely that is an upper bound to the debt to GDP ratio, and since interest rates would appear to increase with debt to GDP ratio, the limit must be stable or even tending to decline. I cannot see how a limit cannot exist. From that, there must be a ratio where the economy is not instantly dead, but merely dying. So the ratio that R’nR talk about must exist, even if it is not 90. So sayeth a totally ignorant observer.
    I think John wayne was maybe Marion rather than Marian. So presumably Marian is more commonly feminine?

  80. Tel

    Surely if govt debt is equal or greater than the GDP divided by the interst rate so that it takes the entire GDP to pay the loan repayment, then with nothing left for food or shelter, then surely the death toll would exceed the procreation rate and the nation would all die.

    I’m glad you asked. Study the units carefully. GDP is measured in dollars per annum, while total debts is measured in just plain dollars. Thus, the debt to GDP ratio divides dollars by dollars per annum and gets a result in years.

    Of course, economists annoyingly throw away most units and just express everything as a percent. This helps obfusticate their art, but when you see debt to GDP expressed as a percentage it is really deep down a percentage of a year.

    Putting this in other words, if the debt-to-GDP ratio is 50% then should the entire GDP be devoted to paying back public debt then it would take 6 months to pay the debt. Needless to say, it is totally impossible for the entire GDP to be raked as tax, but at any rate, that’s what the number means.

    100% debt-to-GDP ratio is one year, 200% is two years, etc.

  81. John Mc

    I think what WHF is saying is that a nation has to service the interest on their debt, and if the interest on that debt is linked to your growth in GDP, then your additional productivity is consumed in servicing the debt and growth stagnates.

  82. Tel

    Yes, point taken, the interest… I missed that bit.

    There will come a point where the interest is no longer sustainable and the debt cannot be rolled over. Which is exactly what happened to Greece, and yeah I agree it will kick in suddenly (but the Aus government could print money to cover the interest if they wanted to, a soft default by inflation).

    Whether those interest payments get looped around and fed back into the economy depends very much on who owns the debt. If it is Australians owning the debt then they will presumably spend their interest payments.

  83. wreckage

    Putting this in other words, if the debt-to-GDP ratio is 50% then should the entire GDP be devoted to paying back public debt then it would take 6 months to pay the debt.

    As meaningless as gross-income-to-debt for an individual or business.

  84. JC

    (but the Aus government could print money to cover the interest if they wanted to, a soft default by inflation).

    However we owe foreigners money and if the markets caught a whiff that the monetization was simply to pay off debt the Aussie would be crushed to cents in the buck and the bond market would collapse possibly taking the banking system down too.

    This would not be fun place to be in.

  85. Jim Rose

    would these critics changed their minds and supported fiscal conservatism if these result were instead corroborated? would they have published their results?

    Economics got on just fine before the attack of the econometricians and their data mining and publication bias. They well may torture the data until it confesses, but not one really cares about the contents of the confessions:

    I invite the reader to try and identify a single instance in which a “deep structural parameter” has been estimated in a way that has affected the profession’s beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test.

    From ‘The Scientific Illusion in Empirical Macroeconomics’, Lawrence H. Summers, Scandinavian Journal of Economics 93, No. 2, Proceedings of a Conference on New Approaches to Empirical Macroeconomics. (June 1991), pp. 129-148.

  86. Makka

    On the debt to GDP ratio, the ratio is morally and economically flawed. It assumes that 100% of GDP can be somehow utlilized for Debt repayment or GDP belongs to Govt. This ratio itself serves to minimise the perception of the National Debt.

    The CORRECT ratio IMO is Debt to Govt Revenue, if you want a true picture of the nature and impact of the Sovereign Debt load. When looked at in that light, the load of debt some OECD countries are carrying equates to 5+ years of Govt revenue. Bloody appalling!

  87. Tel

    the Aussie would be crushed to cents in the buck…

    Every time the RBA pushes down interest rates, the only way they can do that is by injecting money into the system, which amounts to printing for all intents and purposes. So printing money is not outrageous.

    Admittedly, there’s printing a bit here and there, and there’s outright monetization of debt, but they are just shades of the same thing, so it comes down to how much we can get away with (or how much inflation the Australian people will tolerate). The bigger problem is when inflation expectations become built in, then we get the price/wage spirals of the 1970′s when everyone was trying to outdo everyone else.

    I might further point out that enforcing Capital Gains Tax in a highly inflationary environment essentially just creates an asset tax which in turn forces Australian citizens to pay back that debt. Thus, a bit of inflation pays double for the government of the day (no wonder Krugman loves inflation).

  88. Tel

    As meaningless as gross-income-to-debt for an individual or business.

    Well it is some sort of metric, useful for comparative purposes. The Rogoff‑Reinhart conclusion was only that certain correlations existed, not that these correlations have a guaranteed cause.

    In business there are many different types of income and many different types of debt (e.g. debt on a building or capital equipment isn’t so bad if you can sell the item in question). I think perhaps there’s a presumption that all the world’s governments operate the same type of business — tax the citizens, run the military and police to ensure stability, transfer wealth to politically connected constituents. From that perspective, all government debt is future tax rake, so as a comparative metric public debt to GDP is useful, and the proper unit happens to be years.

  89. Tel

    The CORRECT ratio IMO is Debt to Govt Revenue, if you want a true picture of the nature and impact of the Sovereign Debt load.

    You are right that not all governments around the world have equal ability to collect tax from their citizens. It would also bring it more in line with gross-income-to-debt to make a rough comparison with private entities.

  90. mundi

    If you look at all historic collapses and hyperinflation incidents – debt didnt matter, it was revenue that mattered. as long as the government has revenue it can continue to pay out interest on bonds, and the bond holders can continue for another year before they figuring they will be paid out before the government is broke.

  91. Makka

    Tel,

    It would frame the performance of Govt spending relative to Govt income (something NO govt wants to answer for these days), highlighting front and centre Govts management abilities and NOT bring into the equation the nations hard earned GDP – which Govt has no hand in creating anyway.The ratio is an economists spin assuming access by Govt to 100% of GDP which is ludicrous – “look at that unicorn over there” type of deal.

    The Debt to GDP ratio is a meaningless but damaging metric and should be done away with.

  92. .

    You reckon?

    You’ve been had Makka. Look at Barro or the Maastricht treaty.

    Barro concluded that 5% debt to GDP was borderline unsustainable and the EU originally agreed to a 3% limit for member states, as tom protect the integrity of the Eurodollar.

    Then of course we have Greece currently at 156% debt to GDP with GDP falling continuously during and since 2009.

    Don’t abuse the metric, abuse those who come up with dumb ideas like “35% debt to GDP isn’t dangerous”.

  93. Makka

    ” abuse those who come up with dumb ideas like “35% debt to GDP isn’t dangerous”.”

    Using the wrong metric, don’t you see? If that 35% is actually 100% of Govt revenue, the perception and response is altered significantly. When you are talking 5, 6, 10 years of Govt revenue as Debt it sits differently. No, I havent been had. Those who view this as a viable or effective metric have been duped into accepting this inane metric that measures debt against something that just is not available to Govt- 100% of GDP.

    Pereptions matter enormously, especially now when so many Euro economies are Debt toilets. The full horrible mess needs to be put in proper proportions.

  94. .

    Those who view this as a viable or effective metric have been duped into accepting this inane metric that measures debt against something that just is not available to Govt- 100% of GDP.

    Utter bullshit. You didn’t even read what I wrote.

    Otherwise you are arguing over semantics. I don’t care.

  95. Makka

    You obviously don’t get how economists use standards to spin perceptions. That you don’t get the point is something I don’t give a shit about, frankly.

  96. .

    Okay fuckwit where is your degree and work experience?

    I’m not going to be told by some random fuckwit on the internet that I actually gainsay everything I hold dear because they don’t actually pay attention to the data points I refer to regarding to a metric which they think is somehow a scandalous conspiracy itself.

  97. Jim Rose

    the notion that this or that number of a threshold is a nonsense because tax smoothing in wars and recessions can lead to large spikes in borrowings.

    the alternative of random increases and decreases in taxes is worse.

  98. .

    Jim

    I thought it was implicit it was a peacetime threshold – viz Ricardo and bond rates.

  99. Will

    I repeat – if not 90% of GDP – what is the upper level which would inhibit economic growth? 200%? 1000%, 200000%? Will markets continue to lend to the government at the ex ante risk-free rate when the debt continues to increase? If so, why is there a spread between government issuers?

    Every $1 of public debt would decrease economic growth EXCEPT where it is spent on goods and services and contribute to future productivity. Many, but by no means all, infrastructure projects would satisfy this definition. Compare road tunnels that reduce traffic congestion with an NBN that provides nothing more than already available from the market.

    Governments borrowing money for transfer payments provides a short term stimulus but fails to contribute to GDP growth, as it does not stimulate investment.

  100. sdfc

    Will

    Around 60% of Aussie GDP is household consumption.

    Transfer payments are household income.

  101. Jim Rose

    I thought it was implicit it was a peacetime threshold

    what about the defence build-up in the cold war. all them reds up the bed types calling for a strong defence.

  102. .

    That doesn’t require deficit spending.

  103. sdfc

    It does, otherwise it is not stimulatory.

  104. .

    Why does defence spending “need” to be stimulatory?

    We have a defence force to deter potential enemies for the most part, not to prop up falling aggregate demand.

  105. Jim Rose

    an ability to fund wars through borrowing was a key strength of England

  106. .

    Yes Jim, and which countries can borrow the most?

  107. sdfc

    Dot

    I didn’t see Jim’s comment and thought you were replying to me. I’m so self absorbed.

  108. Jim Rose

    the US funded world war 2 mostly by borrowing; the korean war by taxes.

    the result was much lower output and welfare relative to tax smoothing.

  109. Mantaray

    Makka (10.09am) You are correct. The only valid comparison between countries is Interest on Debt to Income, as it is with every entity operating on “Fixed, interest-only” financing.

    Example; Country A has 1000 Billion GDP, but only 200 Billion Taxation revenues, vs Country B also with GDP 1000 Billion but with 400 Billion in taxes. If Country A is also paying three times the interest on it’s debt as Country B, then it can only afford a sixth the debt of Country B.

    I don’t know why Dot (9.42am) is so vehement. All of us are discussing total debt accumulated over several years, whilst Dot is referring to a single year’s Deficit.

    Dot is an habitual drunk by the looks of things.

  110. .

    What a load of prescriptive garbage.

    “The only valid comparison”

    Nonsense.

    …and anyway I was talking about a sustainable level of deficits. My original conflation was even more conservative than what anyone said here.

    So you think like your little mate that economists dream up statistics to fool the poor schmucks that don’t read any economic data anyway?

    Simply more nonsense.

    You think Governments pay a fixed amount of interest?

    Even more nonsense.

    Like your little mate, you seem to think that even Barro is wrong on fiscal conservatism. Be realistic you twit. A Government that incurs a one off 3-5% deficit and pays it off over 3-5 years (medium run) is not going to face crushing interest rates which take up all of their tax revenues.

  111. JC

    the US funded world war 2 mostly by borrowing; the korean war by taxes.

    the result was much lower output and welfare relative to tax smoothing.

    The US won WW2. However living standards there were worse at the end of the war than the beginning.

    War is destructive. Period.

  112. Pyrmonter

    @ Jim et al – aren’t expectations of future deflation important to the wartime analyses?

    The UK deflated in 1815, didn’t really go to war again until 1914, and then partly deflated again – arguably (at least, I think this is implicit in Keynes’ critique of Churchill) – insufficiently. The US slowly deflated (while growing in real terms) to restore something very close to antebellum price levels over about 15 or so years following the Civil War.

    The big change since c. 1930 is that no investor now expects a country to deflate – although political rhetoric too a while to catch up, I recall reading that Menzies campaigned in ’49 on the basis of “restoring value to the pound”, before presiding over the Korean War debasement.

    My interpretation – I don’t think this is novel – is that wars need to be treated carefully, because they’re “different”. Rather contra to some of the Higgs re-interpretation of US performance wartime though.

  113. Jim Rose

    There is a literature on postwar deflations such as by bordo.

  114. Tel

    The US won WW2. However living standards there were worse at the end of the war than the beginning.

    Living standards were even worse for the people who didn’t survive the war.

    Remember always to adjust by “Potential GDP” because Krugman does.

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