Wednesday, May 1, 2013

Rogoff: Not An Austerian

. Wednesday, May 1, 2013

I haven't said anything about the Reinhart and Rogoff affair because I've been busy. It's certainly horribly embarrassing, and not just because of the errors: when your research method is finding means and medians among arbitrary clusters of units across disparate time periods by copy-and-pasting Excel, it doesn't say much about your methodological (or theoretical) chops. I never took the 90% threshold all that seriously, either as a causal relationship or a even a deterministic association. If you'd like to check, here's what I wrote about the paper at the time. I do now flinch at the part where I call R&R "very good empirical economists" but otherwise I think my tone is appropriately blasé concerning the central findings. And, from what I can gather, the follow-up studies make the 90% threshold go away but not the general relationship: high debt is associated with low growth at basically all levels, although it is not statistically significant at very high levels (almost surely because of the small number of observations at very high levels). This of course says nothing about the causal relationship which, I'm quite certain, runs in both directions.

At the same time, I thought then that anti-austerians were pushing R&R into a corner. I never felt that R&R were austerians, but then folks recently dug up some quotes, maybe out of context maybe not, where Rogoff said he thought that beginning to move towards fiscal balance is the right decision for the U.S. Doesn't necessarily make him an austerian, at least of the "expansionary" sort, but I had updated my beliefs accordingly with no regret (I've got nothing at stake here), only to be reminded -- by Robert Kuttner (of all people) in a positive review of David Graeber's book (of all things) in the New York Review of Books (of all places) -- that Rogoff is totally not an austerian:

Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, This Time Is Different: Eight Centuries of Financial Folly, was reviewed in these pages by Krugman and Robin Wells, are best known for demonstrating that the most severe downturns of the entire economy typically follow financial crashes. In passing, This Time Is Different mentioned a provocative concept, “financial repression.” The idea was that when debt is strangling an economy, it may make sense to hold down interest rates, and let inflation decrease debt, or otherwise constrain financial burdens on families and companies to help the rest of the economy realize its potential. The Federal Reserve, under Ben Bernanke, has kept interest rates exceptionally low, incurring criticism that it is risking inflation. Rogoff, formerly chief economist of the IMF, goes further. He would have the Fed deliberately set as a target an inflation rate of 4 or 5 percent as an open strategy of reducing debt burdens by inflating them away, an idea that horrifies the bond market.

Reinhart, in a subsequent paper co-written in 2011 with M. Belen Sbrancia,5 reviewed the experience between 1945 and 1980, and found that there had been continuing financial repression. Real interest rates (i.e., adjusted for inflation), they calculated, were negative on average for the entire period, helping to “liquidate” public debt, partly because the Federal Reserve had a policy of financing the large expenditures of World War II at low costs. During the same era, tight regulation limited speculation by large financial institutions and other investors, so that cheap credit could flow to the real economy without inviting financial bubbles. The 1933 Glass-Steagall Act, for example, prohibited commercial banks from underwriting or trading securities. Yet despite a controlled bond market whose investors suffered negative returns of -3 to -4 percent, the years between 1945 and 1980 were the era of the greatest boom ever.

These findings defy a core precept of conservative economics, the premise that economic growth requires financial investors to be richly rewarded, an idea disparaged by critics as trickle-down economics. The postwar era, by contrast, was an age of trickle-up. Some creditors lost in the short run, but broadly shared prosperity stimulated private business. Eventually, the rising tide lifted even the yachts.
This is not what the Confidence Fairy moralistas are demanding. It is not the position of the GOP. It's not what Alesina's advocating. It would hurt creditors and benefit debtors. It is the sort of monetary policy that center-left folks have been pushing for years. As Scott Sumner continually points out, using monetary policy to re-inflate the economy is a position that Krugman has advanced repeatedly, both in his academic work and in his punditry.

What's the point of this? The same point I've been trying to make in several other recent posts [1, 2] which I hope to extend in the future: if "austerity" is taken to mean anything at any time other than guns-blazing fiscal Keynesianism then it will ultimately lose its usefulness as a political economy concept and therefore its salience as an object of critique. I fear that this has already started to happen.

But more than anything else, I think the obsession with outing anyone to the right of Krugman as an austerian and therefore worthy of public ridicule of the highest sort is making us lose sight of the actual politics. I get the sense of satisfaction that comes from it, but is it really worth it? Krugman could be right about all the economics, although I'm not at all convinced... the US has been posting normal growth rates while he's been saying we're in the 1930s, but he's definitely got the politics wrong. At the end of the day which one is more important?


Vladimir said...

Rogoff I think has been quite clear that he prefers a higher inflation target in the short run in order to allow for faster adjustments.

Rogoff: Not An Austerian
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