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Linkage to one of many articles covering this recent revelation.

tl;dr...

Quote:
First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”
...
Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed.


...and, of course, those 'couple of economists' [edit: spelling] who made that assertion did so on entirely incorrect data.

So, in fact, nobody, anywhere, who knew what they were doing and used valid data, actually provided valid logic that led to the popularity of austerity measures.
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it seems that (in the UK at least) so called 'austerity' is not working, but then it's also not austerity.
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Also, the causation appears to go in the opposite direction anyway: slow economic growth is the reason countries have high debt loads, rather than the other way around.

http://www.slate.com/blogs/moneybox/2013/04/18/arin_dube_dem...
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What "austerity" measures are we really talking about anyway?

The financial manipulations (mainly government-initiated inflation and artificially low interest rates) aren't exactly austerity. It's a program to move (a lot of) money from one part of society to another.

Removing waste isn't exactly austerity either, though of course it makes things harder for people who had planned their lives around the old ways.

Bubbles move resources to the wrong places, and waste a lot of resources on the process. It takes a while for things to balance out again. Nobody has ever found a reliable way to direct the process ... but lots of people lobby to manipulate it so they don't pay their share of the bill.

All those loans on properties that weren't actually worth what the banks said they were - they're just like counterfeit money (except in quantity of course - even "best Korea" couldn't move that much in fake USD). When the Western world's governments have created as much synthetic inflation as the fake money that disappeared:

A. The relationship between money and the economic value of the "real world" will be back in balance
B. Natural processes for moving resources and ownership of them around will work better

Of course (A) is an intrinsically unfair process - people who on a lot of stuff will come out better than people who own nothing, or who can't protect their cash or income from the fake inflation.
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Trying to steer an economy by targeting arbitrary indicators seems daft to me. Like trying to redirect a hurricane by pushing on the weathervane showing which way it's coming from.
It's become more clear over the last few years that whatever approximations we're using to measure economic health be it GDP, any of the 4 different inflation figures, whatever, they are really not much use at telling the "real story". Either that or there's a schism somewhere between the economic realities they represent and the ones inhabited by the rest of us.
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wait.....someone, a real person no less, was trying to argue that austerity worked somewhere?


why would someone do that?

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GDP (accurately reported GDP anyway - sadly it's rare) tells you how big the "pie" is. It doesn't say anything about how the pie is distributed among the population.

The rate of change in GDP is quite "slippery" - it's mainly talked about as though it was a well-understood and highly useful proxy for whether the economy is in good shape or not. Unfortunately it's neither. Even more unfortunately, in a "sound-bite" world it's probably the best available number

Inflation is similarly slippery. Moderate inflation, exactly evenly spread across the entire economy, is potentially a good thing (a little "economic oil" to reduce the "friction" of resource exchanges and reallocation)

But there's also a point when inflation that's too high or too low can cause trouble, adding to rather than reducing the friction.

Inflation, even at "reasonable" levels is likely to affect different actors unevenly. Good or bad? It's hard to quantify. For example, "Quantitative Easing" is moving money around unevenly. "Strengthening the banking systems collective balance sheets" sounds great except when it means some of your money is being moved into someone else's pockets. Is it good overall though? Perhaps it makes sense to sacrifice some individuals' relative welfare for the good of the whole?

In a "real democracy" (which is something like a "true Scotsman , this would be discussed openly, and ways would be found to help everyone understand what was happening and why.


Back in the real world, inflation is not well enough understood by anyone except (perhaps) economics and finance professionals for the numbers to be useful for anything other than fooling people.
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Not liking high debt ratios only leads to serious austerity if you plan on never using monetary policy to keep NGDP up. Sadly for Europe, the ECB seems to be rather uninterested in moving away from a hard inflation target.

Now, even without taking the error into account, the original paper doesn't seem to look at the right thing. High debt, by itself, is no relevant. What is relevant is how much you have to pay to finance all your debt. Owing 50% of your gdp at a 20% interest rate just has to be far wose than owing 90% at 0.5%

And there's also taking into accout private debt. Spain was pretty sick economically during the bubble because the private sector was awfully leveraged, and anything that affected housing would sent NGDP tumbing down, barring monetary policy the ECB was not going to follow. Would the country really have been healthier if, instead of incurring in a lot of debt to pay for unemployment programs and social security, the country just cut benefits on day 1, leaving the country with a government surplus but a plummeting RGDP?
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The paper and its argument were stupid even if the math were correct. There can't be a magic debt ratio threshold that somehow applies to all sorts of countries in all sorts of circumstances, regardless of whether they are borrowing in their own currencies or in foreign currencies, whether their economies are growing or shrinking, etc., etc. Economists love to do these kinds of calculations, because they think it makes their work "scientific", but it should really just be laughed out of the room.
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http://www.cyniconomics.com/2013/04/22/hap-vs-rr-vs-the-pund...
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And the most amazing thing about the past week may be how many people became instant experts on exactly how RR described their research to policymakers all over the world...But in the process of using the critique as an opportunity for political chest banging, they made clear errors in articles that were written to heap scorn on someone else’s errors. And they should own up to their mistakes exactly as RR did.

http://www.econbrowser.com/archives/2013/04/reinhartrogoff.h...
Quote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth in the postwar advanced economy data set, just as they were in the postwar emerging economy data set, just as they were in the centuries-long individual country data sets, and as also was found to be the case in separate analyses of yet other data sets by Cecchetti, Mohanty and Zampolli (2011), Checherita and Rother (2010), and the IMF (2012), among others.

A quite separate and in my mind much more legitimate question is whether this correlation can be given a causal interpretation-- is it high debt levels that cause slower growth, or slow growth that causes debt to accumulate? One can (and should) be persuaded that the correlation is real, but still be in doubt as to what it signifies.
 
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In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that. If that's all you wanted to say then there would be no point in the RR paper at all. All things being equal, you would rather have less debt rather than more debt. The problem is that all things aren't generally equal.
 
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DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that.


Krugman says "Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But 'economic research' showed no such thing; a couple of economists made that assertion, while many others disagreed."

But as the piece says:

Quote:
RR never presented 90% as a magic number – where 89.9 is a clear, sunny day and 90.1 a class 5 hurricane – nor did they neglect to recognize that correlation is not causation. I’ve cited the paper on several occasions and never saw it in the way that their critics claim it was presented. Marginal Revolution – probably the most heavily trafficked economics blog – recently republished a 2010 post that likewise didn’t consider 90% to be either “sacred” or “stable.” I doubt that any of those who read RR carefully saw 90% as more than the upper limit on one of their buckets and a reasonable marker to use in their conclusions.
 
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I doubt that any of those who read RR carefully saw 90% as more than the upper limit on one of their buckets and a reasonable marker to use in their conclusions.

The whole idea of "buckets", or of comparing the debt level of one country to that of another country in terms of percentage of GDP, is obviously flawed and worthless. Again, if you want to support the conclusion that more debt is worse than less debt, all else being equal, you don't need statistical studies. And if you do want to do a statistical study, then grouping countries into "buckets" based on GDP ratio, and trying to derive anything of value from that, is obvious garbage.
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eknauer wrote:
DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that.


Krugman says "Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But 'economic research' showed no such thing; a couple of economists made that assertion, while many others disagreed."

But as the piece says:

Quote:
RR never presented 90% as a magic number – where 89.9 is a clear, sunny day and 90.1 a class 5 hurricane – nor did they neglect to recognize that correlation is not causation. I’ve cited the paper on several occasions and never saw it in the way that their critics claim it was presented. Marginal Revolution – probably the most heavily trafficked economics blog – recently republished a 2010 post that likewise didn’t consider 90% to be either “sacred” or “stable.” I doubt that any of those who read RR carefully saw 90% as more than the upper limit on one of their buckets and a reasonable marker to use in their conclusions.


As noted in the OP link, though:

Quote:
But, in any case, what really matters isn’t what they meant to say, it’s how their work was read: Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.


Regardless of whether or not RR actually believed the 90% number was a 'magical tipping point', they sold the importance of it strongly enough that others DID come to that conclusion, and RR didn't then do anything refute those ideas once bad decisions started being made based on that assumption.
 
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XanderF wrote:
eknauer wrote:
DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that.


Krugman says "Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But 'economic research' showed no such thing; a couple of economists made that assertion, while many others disagreed."

But as the piece says:

Quote:
RR never presented 90% as a magic number – where 89.9 is a clear, sunny day and 90.1 a class 5 hurricane – nor did they neglect to recognize that correlation is not causation. I’ve cited the paper on several occasions and never saw it in the way that their critics claim it was presented. Marginal Revolution – probably the most heavily trafficked economics blog – recently republished a 2010 post that likewise didn’t consider 90% to be either “sacred” or “stable.” I doubt that any of those who read RR carefully saw 90% as more than the upper limit on one of their buckets and a reasonable marker to use in their conclusions.


As noted in the OP link, though:

Quote:
But, in any case, what really matters isn’t what they meant to say, it’s how their work was read: Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.


Regardless of whether or not RR actually believed the 90% number was a 'magical tipping point', they sold the importance of it strongly enough that others DID come to that conclusion, and RR didn't then do anything refute those ideas once bad decisions started being made based on that assumption.


How did they sell it strongly? As the article makes clear, the idea of correlation is widely accepted by the profession.

Quote:
That higher debt loads are associated with higher interest rates has been found by many different researchers using many different data sets and methodologies. For example, Hibiki Ichiue and Yuhei Shimizu (2013) found these effects in a panel of 10 advanced economies over 1990-2010, of which Germany is the only eurozone member. Vincent Reinhart and Brian Sack (2000) found them in the experience of the G7 before establishment of the euro (1981-2000). Thomas Laubach (2009) noted that higher CBO projections of 5-year-ahead debt levels for the U.S. are associated with higher 5-year-ahead forward rates over 1976-2006. And Greenlaw, Hamilton, Hooper and Mishkin (2013) found a relation between debt levels and borrowing costs in the last decade's data from 20 advanced economies. There is also evidence of nonlinearity in this relation, with debt levels mattering more as they get bigger and as the country's current-account deficit grows; see for example Ardagna (2004), Baldacci and Kumar (2010), and Greenlaw, Hamilton, Hooper and Mishkin (2013).




 
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eknauer wrote:
How did they sell it strongly?


Their paper uses the word "threshold" three different times, just in the abstract.

http://www.nber.org/papers/w15639
 
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DaviddesJ wrote:
eknauer wrote:
How did they sell it strongly?


Their paper uses the word "threshold" three different times, just in the abstract.

http://www.nber.org/papers/w15639


Right, regarding a "relationship between government debt and real GDP."

Quote:
They had no comment whatsoever on the very first result cited in RR’s 2010 paper – the finding that the median return is about 1% lower when debt rises above 90% of GDP. And they also failed to comment on the first result cited in RR’s 2012 paper, which also referenced a return difference of about a percent. Instead, they focused exclusively on arithmetic averages over a single time period and calculated a revised return difference of, well, about 1%. In other words, we’re being asked to cross out RR’s 1% and replace it with the more “accurate” 1% that’s been reported by HAP. Can someone please remind me what we’re arguing about? Overall, HAP certainly offered some analysis for people to consider, while pointing out weaknesses in the 2010 paper, as should be expected of a critique. But they’ve just as certainly failed to disprove RR’s thesis that high debt tends to be associated with lower growth. (Note that I’ve not claimed causation, and nor did RR in their papers.)




 
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DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that. If that's all you wanted to say then there would be no point in the RR paper at all. All things being equal, you would rather have less debt rather than more debt. The problem is that all things aren't generally equal.


Is this true? I thought there was a point where debt was better.

I.e. If you can get a higher "return" from the investment today than the debt will cost.

I don't know what that debt level is... 10%, 50% but I thought debt served as economic grease too by allowing us to transact today when we might otherwise not transact.
 
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maxo-texas wrote:
DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that. If that's all you wanted to say then there would be no point in the RR paper at all. All things being equal, you would rather have less debt rather than more debt. The problem is that all things aren't generally equal.


Is this true? I thought there was a point where debt was better.

I.e. If you can get a higher "return" from the investment today than the debt will cost.


Did you misread "all things being equal"? If you got a benefit from the accumulation of debt, all things are not equal. RR are combining, in their "study", all sorts of governments, including ones that may have borrowed money and spent it very well, and ones that may have borrowed large amounts of money and squandered it through graft, corruption, and waste. If they compare two countries with different levels of debt, and conclude that the one with more debt has slower growth, that doesn't mean that it's despite some valuable investment of the money that was borrowed, because they don't study what was done with the money. From the point of view of their comparison, it's just as likely that all of the money was squandered. That obviously has no relevance to our particular situation where we have to decide whether to borrow more money and spend it on some particular purpose. In that case, you have to decide whether the value of the money you borrow is worth the cost. The observation that there is some cost is obvious and trivial.
 
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eknauer wrote:
DaviddesJ wrote:
eknauer wrote:
How did they sell it strongly?


Their paper uses the word "threshold" three different times, just in the abstract.

http://www.nber.org/papers/w15639


Right, regarding a "relationship between government debt and real GDP."


So, they tried to sell a threshold effect, by selling it very strongly in their paper. And the threshold effect is obvious bullshit. QED.
 
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The main problem with debt is not so much that it costs money to service it - as pointed, that cost can, in principle, be lower then the returns on investment.

Main problem with public debt is that it defers the costs of spending beyond the time-frames relevant to the decision makers.

Politicians have great deal of incentive to heavily discount future beyond one or two terms of office meaning that although it is perfectly possible to have deficit-funded projects that are actually in public benefit over long term there is bound to be many more such projects proposed which are detrimental in long term but beneficial over the electoral window period.

This is why the great public vigilance over proposed deficit financing is very much called for.
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bramadan wrote:
Main problem with public debt is that it defers the costs of spending beyond the time-frames relevant to the decision makers.


Of course, for some kinds of spending, the main virtue of debt is that the benefits of an investment that we make today are born by the beneficiaries, i.e., the people in the future who derive benefits from that investment. That's why none but the most rabid anti-government libertarians would argue against debt altogether. The important question is, what is it used for, and the lack of any attention to that is what make the RR work worthless even if it were correct.
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DaviddesJ wrote:
maxo-texas wrote:
DaviddesJ wrote:
In any case, as seen in the table above, which ever number you used, you would still conclude that higher debt loads are associated with slower growth

Well, duh. Even Paul Krugman would accept that. If that's all you wanted to say then there would be no point in the RR paper at all. All things being equal, you would rather have less debt rather than more debt. The problem is that all things aren't generally equal.


Is this true? I thought there was a point where debt was better.

I.e. If you can get a higher "return" from the investment today than the debt will cost.


Did you misread "all things being equal"? If you got a benefit from the accumulation of debt, all things are not equal. RR are combining, in their "study", all sorts of governments, including ones that may have borrowed money and spent it very well, and ones that may have borrowed large amounts of money and squandered it through graft, corruption, and waste. If they compare two countries with different levels of debt, and conclude that the one with more debt has slower growth, that doesn't mean that it's despite some valuable investment of the money that was borrowed, because they don't study what was done with the money. From the point of view of their comparison, it's just as likely that all of the money was squandered. That obviously has no relevance to our particular situation where we have to decide whether to borrow more money and spend it on some particular purpose. In that case, you have to decide whether the value of the money you borrow is worth the cost. The observation that there is some cost is obvious and trivial.


Irrelevant observations.

The OP wrote that "those 'couple of economists' who made that assertion did so on entirely incorrect data", the "assertion" being that "terrible things happen once debt exceeds 90 percent".
 
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eknauer wrote:
The OP wrote that "those 'couple of economists' who made that assertion did so on entirely incorrect data", the "assertion" being that "terrible things happen once debt exceeds 90 percent".


That seems entirely true; such a claim is entirely incorrect and worthless on its face. It's like arguing that people are overweight if they weigh more than 160 pounds, regardless of how tall they are. Or that $29 is too much to pay for a board game, regardless of its components. The claim that some threshold effect happens at a 90% GDP ratio is obvious garbage. Whether or not the math is correct (but especially when it turns out to be wrong).
 
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DaviddesJ wrote:
eknauer wrote:
The OP wrote that "those 'couple of economists' who made that assertion did so on entirely incorrect data", the "assertion" being that "terrible things happen once debt exceeds 90 percent".


That seems entirely true; such a claim is entirely incorrect and worthless on its face.


An assertion involving causality was never made.
 
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