Two Harvard economists whose widely-cited research on austerity was called into question last month have published a formal correction.
Read the original here: Austerity economists correct errors
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Two Harvard economists whose widely-cited research on austerity was called into question last month have published a formal correction.
Read the original here: Austerity economists correct errors
Christine Lagarde’s inspectors should see that Britain is crying out for investment, not more austerity
Dear IMF officials,
Don’t be blinded by a single ray of sunshine. Britain may have avoided a triple-dip recession, but all the other economic news is weak at best.
At the heart of the problem are the country’s ultra-conservative banks and building societies. Either they are short of funds or reluctant to lend to all but the most financially secure borrower. As Vince Cable put it yesterday, they are working on a “pawnbroker business model” demanding “heaps of collateral” that he likened to a gold watch.
The result is that few small and medium-sized businesses can access the cheap credit on offer from the Bank of England.
Homebuyers are in a similar fix. Some estate agents report that cash buyers make up almost 50% of the house purchases in recent months. Housebuilding remains at levels not seen since the 1920s.
As you pointed out on your visit last year, the Treasury has room for manoeuvre should it want to promote growth. The trouble is that all the fiscal loosening this year will just go to overstressed hospitals, a bigger pension bill and a school system coping with a baby boom. There was little extra in the last budget for investment.
Among the voices over here calling for a more cautious approach to austerity are the former City regulator Lord Turner, who warned yesterday that the slowdown caused by aggressive cuts could trigger a cycle of debt.
“I think the difficulty is that when the public debt levels go up in the crisis you feel you’ve got to get that under control
When even the IMF’s free market ideologues recoil from the UK chancellor’s austerity politics, democracy itself is at stake
George Osborne and his Treasury officials are gearing up for a fight. They’ve promised to make life difficult for the other side for the next two weeks. The unlikely opponents are the team of economists visiting from the IMF for a regular policy review.
Why has this routine meeting, which would hardly be noticed outside professional circles, become a confrontation? Because the IMF has recently dropped its support for the chancellor’s austerity policy and repeatedly urged him to rethink it. It even said he was “playing with fire” in refusing to change course.
This is an astonishing development. For in the past three decades the IMF has been the standard-bearer for austerity. Back in 1997 it even forced South Korea – with an existing budget surplus and one of the smallest public debts in the world (as a proportion of GDP) – to cut government spending. Only when the policy turned what was already the biggest recession in the country’s history into a catastrophe, with more than 100 firms going bankrupt every day for five months, did it do an embarrassing U-turn and allow a budget deficit to develop.
Given this history, being told by the IMF to go easy on austerity is like being told by the Spanish Inquisition to be more tolerant of heretics. The chancellor and his team should be worried.
If even the IMF doesn’t approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is “in reality instituted for the defence of the rich against the poor“. Dead right.
Current policies in the UK and other European countries are really about making poor people pay for the mistakes of the rich. Millions of poor people have lost their jobs and the support they received through welfare, but how many of those top bankers who caused the crisis have suffered – except for a cancelled knighthood here and a partially returned pension pot there? If anyone has suffered in the financial industry, it is its poorer members – junior analysts who lost their jobs and tellers who are working longer hours for shrinking real wages.
In case you were wondering, it wasn’t Karl Marx who wrote the words that I quoted above. He would have never put it so crudely. His version, delivered with typical panache, was that the “executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie”. No, those damning words came from Adam Smith, the supposed patron saint of free-market economics.
To Smith and Marx, the class bias of the state was plain to see. They lived at a time when only the rich had votes (if there were elections at all) and so there were few checks on the extent to which they could dictate government policy.
With the subsequent broadening of suffrage, ultimately to every adult, the class nature of the state has been significantly diluted. The welfare state, regulations on monopoly, consumer protection, and protection of worker rights are all things that have been established only because of this political change. Democracy, despite its limitations, is in the end the only way to ensure that policies do not simply benefit the privileged few.
This is, of course, exactly why free-market economists and others who are on the side of the rich have been so negative about democracy. In the old days, free-market economists strongly opposed universal suffrage on the grounds that it would destroy capitalism: poor people would elect politicians who would appropriate the means of the rich and give handouts to the poor, they argued, completely destroying incentives for wealth creation.
Once universal suffrage was introduced, they could not openly oppose democracy. So they started criticising “politics” in general. Politicians, it was argued, would adopt policies that maximised their chances of re-election but damaged the economy – printing money, handing out favours to powerful monopolies, and increasing social welfare spending for the poor. Politicians needed to be prevented from making important policy decisions, the argument went.
On this advice, since the 1980s, many countries have ring-fenced the most important policy areas to keep politicians out. Independent central banks (such as the European Central Bank), independent regulatory agencies (such as Ofcom and Ofgem) and strict rules on government spending and deficits (such as the “balanced budget” rule) have been introduced.
In particularly difficult economic times, it was even argued, we need to insulate economic policies from politics altogether. Latin American military dictatorships were justified in such terms. The recent imposition of “technocratic” governments, made up of economists and bankers who have not been “tainted” by politics, on Greece and Italy comes from the same intellectual stable.
What free-market economists are not telling us is that the politics they want to get rid of are none other than those of democracy itself. When they say we need to insulate economic policies from politics, they are in effect advocating the castration of democracy.
The conflict surrounding austerity policies in Europe is, then, not just about figures on budget, unemployment and growth rate. It is also about the meaning of democracy.
As José Manuel Barroso, the president of the European commission, has recently recognised, the policy of austerity has “reached its limits” in terms of “political and social support”. If European leaders, including the British chancellor, keep pushing these policies against those limits, people will inevitably start asking: what is the point of democracy, when policies serve only the interest of the tiny minority at the top? This is nothing less than crunch time for democracy in Europe.
Britain is in a depression. Cuts won’t cure it. And there’s so much we could be spending money on
The government and the nation desperately require a Plan B. If our obstinate chancellor is not prepared to own up to the need, then he should have words with his prime minister about his interest in another cabinet post and leave the door
Slumping prices and record unemployment bolster the case for Europe to ease up on austerity and cut interest rates to inject life into its stagnant economy.
The rest is here: Europe’s joblessness at new peak, prices plunge
A general strike against tough austerity measures is under way in Greece, with trade unions calling for “mass mobilisation” of protesters.
Go here to read the rest: Greeks stage anti-austerity strike
Centre-left politician Enrico Letta appears set to become Italy’s prime minister, and pledges a change of direction on austerity.
Read the original: Letta set to become Italy’s next PM
If Reinhart and Rogoff’s ‘error’ has discredited the prevailing policy dogma, now is the time for an alternative that works
The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a “debt-to-GDP ratio” will always, necessarily, lead to economic contraction – and who had aggressively promoted it during Rogoff’s tenure as chief economist for the IMF –, had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession.
Will we, then, see a reversal of policy? A sea of mea culpas from politicians who have spent the last few years telling disabled pensioners to give up their bus passes and poor students to forgo college, all on the basis of a mistake? It seems unlikely. After all, as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement. True, it’s never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.
The morality of debt has proved spectacularly good politics. It appears to work just as well whatever form it takes: fiscal sadism (Dutch and German voters really do believe that Greek, Spanish and Irish citizens are all, collectively, as they put it, “debt sinners”, and vow support for politicians willing to punish them) or fiscal masochism (middle-class Britons really will dutifully vote for candidates who tell them that government has been on a binge, that they must tighten their belts, it’ll be hard, but it’s something we can all do for the sake of our grandchildren). Politicians locate economic theories that provide flashy equations to justify the politics; their authors, like Rogoff, are celebrated as oracles; no one bothers to check if the numbers actually add up.
If ever proof was required that the theory is selected to suit the politics, one need only consider the reaction politicians have to economists who dare suggest this moralistic framework is unnecessary; or that there might be solutions that don’t involve widespread human suffering.
Even before we knew Reinhart and Rogoff’s study was simply wrong, many had pointed out their historical survey made no distinction between the effects of debt on countries such as the US or Japan – which issue their own currency and therefore have their debt denominated in that currency – and countries such as Ireland, Greece, that do not. But the real solution to the eurobond crisis, some have argued, lies in precisely this distinction.
Why is Japan not in the same situation as Spain or Italy? It has one of the highest public debt-to-GDP ratios in the world (twice that of Ireland), and is regularly featured in magazines like the Economist as a prima facie example of an economic basket case, or at least, how not to manage a modern industrial economy. Yet they have no problem raising money. In fact the rate on their 10-year bonds is under 1%. Why? Because there’s no danger of default. Everyone knows that in the event of an emergency, the Japanese government could simply print the money. And Japanese money, in turn, will always be good because there is a constant demand for it by anyone who has to pay Japanese taxes.
This is precisely what Ireland, or Spain, or any of the other troubled southern eurozone countries, cannot do. Since only the German-dominated European Central Bank can print euros, investors in Irish bonds fear default, and the interest rates are bid up accordingly. Hence the vicious cycle of austerity. As a larger percentage of government spending has to be redirected to paying rising interest rates, budgets are slashed, workers fired, the economy shrinks, and so does the tax base, further reducing government revenues and further increasing the danger of default. Finally, political representatives of the creditors are forced to offer “rescue packages”, announcing that, if the offending country is willing to sufficiently chastise its sick and elderly, and shatter the dreams and aspirations of a sufficient percentage of its youth, they will take measures to ensure the bonds will not default.
Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money-creation, we may well discover that none of this is ever necessary to begin with. In conjunction with the Levy Institute at Bard College, they propose an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain “money good” even in the worst of crises – since even if they weren’t doing business in Ireland, and didn’t have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall back from 4-5% to a manageable 1-2%, and the cycle of austerity would be broken.
Why has this plan not been adopted? When it was proposed in the Irish parliament in May 2012, finance minster Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who quickly pointed out existing bonds could easily be given the same legal status, or else, swapped for tax-backed bonds). No one is quite sure what the real reason was, other than perhaps an instinctual bureaucratic fear of the unknown.
It’s not even clear that anyone would even be hurt by such a plan. Investors would be happy. Citizens would see quick relief from cuts. There’d be no need for further bailouts. It might not work as well in countries such as Greece, where tax collection is, let us say, less reliable, and it might not entirely eliminate the crisis. But it would almost certainly have major salutary effects. If the politicians refuse to consider it – as they so far have done –, it’s hard to see any reason other than sheer incredulity at the thought that the great moral drama of modern times might in fact be nothing more than the product of bad theory and faulty data series.
The past week has been a particularly bad one for George Osborne and advocates of the Reinhart-Rogoff approach
Over the past week, a series of blows have been dealt to George Osborne’s reputation. First, the IMF’s chief economist warned that the chancellor’s austerity programme was “playing with fire”. Then the latest unemployment figures indicated that the jobs market may be about to turn significantly for the worse. The week ended with another credit rating agency stripping Britain of its AAA rating. While all this was going on, a row raged about academic research that had been cited by the chancellor in support of his austerity.
In 2010, the Harvard economists Carmen Reinhart and Ken Rogoff produced a paper arguing that countries with public debt above 90% of their annual income hit a tipping point, experiencing much lower growth. The study had been used by the Treasury as a key excuse for its spending cuts. Except that on closer examination by economists at the University of Massachusetts Amherst, the Reinhart-Rogoff research was found to be riddled with errors, from inappropriate weighting of the statistics to a howler over the use of an Excel spreadsheet. As if to rub in the schoolboy nature of some of these errors, the key researcher in the Massachusetts trio was a 28-year-old graduate student yet to complete his PhD.
It would be tempting to describe this as a terrible week for Mr Osborne, were it not for the fact that that phrase now seems to fit most weeks with a decent amount of economic news. Still, the past week has been particularly bad. The IMF is normally too respectful of diplomacy to take a stick to powerful member-states. And it is usually far too mindful of its own reputation to publicly repudiate a strategy that very recently commanded its emphatic support. Visiting London last summer, IMF boss Christine Lagarde gave even stronger support to the chancellor: “When I look back to 2010 and what could have happened without fiscal consolidation I shiver.” Not immaterial in all of this is that Ms Lagarde counts Mr Osborne as a friend: he was the first major finance minister to back her bid to be head of the IMF. In the course of just a few days, the chancellor has decisively lost one of his key personal and institutional allies. He must now prepare for a showdown next month when Fund economists visit London to make their annual inspection.
We can imagine just how embattled the government will be this summer. Take this coming week; it may be that the GDP figures on Thursday show that the UK has narrowly avoided a triple-dip recession – a result that would once have provided rhetorical ammo for the Treasury but will now be easily deflected by any TV interviewer toting a couple of choice quotes from the IMF. Then there will be next month’s local elections. And the setting of a spending review for June is bound to provoke months of mutinous muttering from ministers in charge of unprotected departments (see Vince Cable, Theresa May and Philip Hammond). But the events of the past week also show up the rottenness of our economic policymaking process. The Reinhart-Rogoff argument about a tipping point for debt was influential around the world. Yet the idea that there could be a natural cap for debt, which, when breached, would usher in sharply lower growth, is absurd.
Such mechanical explanations don’t fit with history: in 1945, Britain had debt of 220% of GDP but no economic disaster struck. Nor do they fit with commonsense: why should high debt produce low growth rather than, as is happening now, low growth lead to higher debt? Yet this study and others of similarly murky worth were cited by everyone from Paul Ryan to the austerity crowd in Brussels, and heeded by institutions such as the IMF. Put all this together, and a picture emerges of academics overselling a simplistic argument that is conducive to ministers’ yen for austerity and so gets further simplified for political purposes. The past week has dented Mr Osborne’s reputation; but it should be a chastening one for economic policymakers in Brussels, Frankfurt and Washington, too.