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Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems (nextnewdeal.net)
367 points by rdp on Apr 16, 2013 | hide | past | web | favorite | 282 comments

Stepping back for a moment, this thorough debunking of Reinhart and Rogoff's flawed paper means that now there is NO evidence that government debt exceeding 90% of GDP somehow negatively impacts growth.

Let me repeat that: there is NO EVIDENCE that more government debt causes slower economic growth -- just theories.

I wonder what all the government deficit scaremongers will say to this!


PS. For reference, the often-cited paper by Reinhart and Rogoff can be downloaded at http://www.nber.org/papers/w15639.pdf and the new paper debunking it can be downloaded at http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki...


PS#2. An Excel typo was partly to blame for Reinhart and Rogoff's errors! Reminds me of the Excel typo that allowed the "London Whale" silently to rack up billions of dollars in unexpected losses at JP Morgan: http://baselinescenario.com/2013/02/09/the-importance-of-exc...

"there is NO evidence that government debt exceeding 90% of GDP somehow negatively impacts growth."

Correct, 90% is not the magical, universal debt/GDP:dGDP inflection point it was made out to be.

"there is NO EVIDENCE that more government debt causes slower economic growth"

Whoah, whoah. Try the refutation paper [1]. It finds "that average GDP growth tails off somewhat when the public debt/GDP ratio increases towards 120 percent."

There is no strong inflection point ("the scatterplot does suggest a non-linearity in the relationship, but that occurs in the change in the public debt/GDP ratio from 0 to 30 percent"). But there is a monotonically decreasing debt/GDP:dGDP relationship.

It is more subtle than previously characterised, and thus potentially mitigatable in the short term, but let's not take Einstein's refutation of Newtonian physics to mean gravity doesn't exist.

[1] http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki...

I don't think most people are arguing against the negative side effects of massive amounts of debt. The point this really drives home is that the budget theater that has been going on for the past few years is entirely unnecessary.

The reality of the budget drama in Congress is that it's almost entirely about the house majority stymieing any forward momentum by the current administration at just about any cost. This is why Congress has such a low approval rating.

> The point this really drives home is that the budget theater that has been going on for the past few years is entirely unnecessary.

Translation(?): the econometric models used to measure the length of the road were off by a little bit, we have more time to kick the can.

Econometric models are descriptive in any case (they are measuring quantities that are based on the human actions causing those metrics, those metrics are not controlling those behaviors), past performance is no guarantee of future behavior.

It's not just 'more time to kick the can', which still implies that not trimming debt immediately is irresponsible.

If you trim debt by a little and hurt GDP growth by a little, you wind up with the same ratio you had before. If you trim debt in a way that really hurts GDP, you'll likely increase the debt:GDP ratio.

The original paper implied that we'd wind up in a spiral of shrinking GDP, increasing that ratio, shrinking the GDP more, and so on. But it turns out it was complete bullshit.

which still implies that not trimming debt immediately is irresponsible

I don't get it. I was in sync with the Left when they decried George W. Bush's no-veto policy and ballooning of the debt. Now that "their guy" is in the WhiteHouse, they no longer agree that it's irresponsible to set the deficit meter on 11 and walk away like we have been.

Can't we all agree that this guy was totally correct? http://www.youtube.com/watch?v=1kuTG19Cu_Q

I guess I wouldn't be so against some amount of debt if it looked like we had it under control. It's funny that we're dissecting the results of a study on what 90% debt:GDP would do. Well that was back in 2010, we've blown way past 90%. We're at 107% as of 2012 and climbing.

It's not just about the debt's exact impact at a certain percentage. If it were just that, we could debate it and fine tune it. It's about our Government's complete inability to get it under control.

Maybe 90% Debt:GDP won't hurt too badly, but sooner or later as it rises, it will crater even our economy.

This is a common argument, but it's fundamentally flawed. We're in a very different economic regime right now than we were under GWB, and that makes all the difference.

I think you'd be hard pressed to find anyone on the left who understands the issues who is seriously arguing that deficits are never a problem, or never have to be dealt with. What a lot of us ARE arguing is that as long as we have an aggregate demand shortfall (everyone in the economy trying to save at once), paying attention to the debt is exactly the wrong thing to do, since the government is the only actor in the economy that has the freedom to act counter-cyclically and make up for the shortfall in private sector demand. The ultimate goal is to start a virtuous cycle of spending that gets us back toward full employment (and increases GDP). Then and only then does it make sense for the government to try to reduce debt through cuts.

There's decent evidence (see Delong & Summers 2012: http://delong.typepad.com/20120320-conference-draft-final-ca...) that trying to reduce debt through cuts in an economy like we have right now is counter-productive even on it's own terms (reducing the debt-gdb ratio) because any cuts you make further reduce aggregate demand and thus reduce the GDB side of that ratio even further.

It's not a democrat in the white house vs. republican in the white house thing that is causing people who were complaining about deficits under GWB to advocate against cutting short term spending now. It's all about the underlying economic conditions.

The ultimate goal is to start a virtuous cycle of spending

And where is that evidence? Included in that evidence, I'd like to see a model that predicted what actually DID happen when we tried the "stimulus" that Obama's economic advisers predicted would lower unemployment to <6% or better.

If you don't have a model that predicts things before they happened consistently, then it isn't Science. It's just guessing.

If we're going to guess, then we should fall back on models that we do understand and have a lot of data for, like how businesses and households manage debt. Common sense should be trumping guessing based upon esoteric economic models that haven't yet yielded reproducible results.

Most economics isn't science- we lack the data. That doesn't mean that the best model is derived from families or businesses; the characteristics and objectives deviate too dramatically to support that claim.

The government is a facilitator of commerce. It's not built to make a profit. It doesn't have the trust circle of a family. It is fundamentally political by mandate and by nature. It couldn't be less common!

I agree with you that it's necessary to look at evidence. But the evidence actually pretty overwhelmingly supports the general Keynesian framework for a financial crisis like this. Look at the data on austerity measures/spending vs. growth worldwide in this crisis (http://krugman.blogs.nytimes.com/2012/02/18/austerity-and-gr...), or any data on similar circumstances (the US "double-dip" in 1937 during the Great Depression, before WWII deficit spending brought us out of it, Japan in the 90s, etc.). The real question is, where is there ANY evidence/what is the model for the opposing view? Does it in any way match up with what really happened over the past 4 years? (because the AD-deficit/Keynesian view does)

Responding to the complaint about Obama's economic advisors being wrong is easy - they were wildly optimistic. However, plenty of economists including Paul Krugman were saying this at the time (http://www.nytimes.com/2009/01/09/opinion/09krugman.html?par... - note the date Jan 9, 2009, before Obama was even sworn in). The math is pretty basic - according to the aggregate demand view of the crisis you have a combined housing/financial shock that totaled at least 6% of GDB. The stimulus was MAYBE 1.5% of GDB, and that's being generous with assuming that high end tax cuts are just as effective as outright spending money (I would argue that they are not, since in a saver's economy, much of that money is just saved straight away). The Obama stimulus package was 4+ times too small to address the magnitude of the problem by this model; no one who has this view of the world is surprised that unemployment is still high (the only surprise was that Obama's advisors had such a rosy-eyed, not data-driven view of the world. They deserve a LOT of criticism for that).

Your "fall back on models that we do understand and have a lot of data for, like how businesses and households manage debt" is completely at odds with reality for two reasons. One is that it doesn't really imply what you say it does; most rational, not capitally constrained businesses/households (and the US is emphatically not capital constrained - bond yields are as low as they've ever been) invest when they have absurdly low interest rates - you're basically getting free money from the market, it's not a rational response to cut back in a situation like that. The second, and arguably more important, argument, however, is that the government occupies a fairly special position in the economy, since it alone among economic actors will never run out of money. Therefore, the government has the unique ability to act in a counter cyclical manner - it can counteract the collective saving of businesses/households to stimulate demand during recessions, and pull back when the private sector is roaring. (You give me 5% unemployment and 4-5%/yr GDP growth and I will be all for govt deficit reduction)

  The government... will never run out of money.
Um, isn't that because it collapses first? Or at least prints money and causes huge inflation? We'd like to avoid that.

QE1 ran from Nov 25, 2008 to Mar 31, 2010. QE2 ran from Nov 30, 2010 to June 30, 2011. QE3 started Sep 13, 2012 and hasn't ended yet.

(Honest question here) I'm curious when we should expect to see the huge inflation created by the QE program, and why we haven't seen it yet if it began nearly 5 years ago...

Am I missing something?

Hasn't the US government been printing vast amount of money over the last 3-4 years, with little appreciable increase in inflation?

Keyesians argue that money supply doesn't cause inflation on its own. Probably worth looking into that, since the predictions it provides seems to match reality pretty closely..

One reason for the current benign inflation may be that there is no alternative currency with which to trade for US derived goods. Neither the rmb, euro, ruble nor even Canadian dollar are valid mediums of exchange within the US.

Meanwhile hyper-inflation in Russia in the 90's used the dollar as a stable currency with which rubles were exchanged for dollars. Hyper-inflation in Poland, Yugoslavia, and Bulgaria occurred in part due to easily exchange and convertibility of the Deutschmark.

I don't get it. I was in sync with the Left when they decried George W. Bush's no-veto policy and ballooning of the debt. Now that "their guy" is in the WhiteHouse, they no longer agree that it's irresponsible to set the deficit meter on 11 and walk away like we have been.

Let me offer a crude analogy:

Before: 'Don't press down so hard on the accelerator (debt finance), or you will drive this car (economy) into the ditch (recession).'


After: 'You need to push down on the accelerator to get out of the ditch and back onto the road.'

That's Keynesianism in a nutshell. If/when the economy is again growing at a decent clip, then government spending should be reduced (as a % of GDP and revenue, not necessarily in absolute terms) and debt service increased. Of course, that doesn't always happen.

Maybe 90% Debt:GDP won't hurt too badly, but sooner or later as it rises, it will crater even our economy.

But the reality is taht the debt probably won't rise that much as time goes on, because it'll be offset by increased revenues from increased growth. The 2010 R-R paper argued (incorrectly) that such growth would never happen due to the high debt load.

A lot of Keynesian economists are arguing that now is not the time for austerity. The government's current mission should be to lower employment even if it means higher deficits (and debt) _for now_. Once we are out of this slump, the argument is that most of the deficit will take care of itself (since some of the deficit is lower tax revenue because of unemployment + cost of automatic stabilizers such as unemployment benefits). We still need to fix the rest of the deficit/debt problem after the crisis, though.

The second important argument is that (again, right now), this emphasis on austerity is actively making things worse.

government's current mission should be to lower employment

Well since we've exploded our debt to supposedly lower unemployment and the meter has barely moved, maybe we're doing it wrong? We've indulged the Keynesians quite enough over the last $6+ TRILLION dollars, tyvm.

I see people in this thread demanding evidence that more debt is bad for the country. Well where the hell is the evidence that shows that staggering debt is good for the country?

Maybe we should fall back on common sense "household" or "business" models until that evidence appears, huh?

this emphasis on austerity is actively making things worse.

What austerity? I've heard some talking about it, but we're not practicing it anywhere. Don't you dare use the word "sequester", because that was a joke.

The sequester is not a joke. A friend of mine knows postdocs whose NIH funded projects were cut 20%, immediately, when the sequester went into effect. Another friend of mine will be in next class to start with the FBI, but they've been put off until 2014. To be clear, the FBI is not training new agents right now.

The sequester is real, but it may take more time for the effects to reverberate throughout the country.

The sequestration has only been painful because the Administration wants to make an example of any efforts to reduce the size of the government. Funny how NIH projects could have a 20% cut when the $44 Billion reduction this year as a result of sequestration is 1% of the actual budget. Where did that other 19% come from? Further, the sequestration only reduced the increase on the baseline budget. We're still going to be spending more this year than we did last year.


Funny how NIH projects could have a 20% cut when the $44 Billion reduction this year as a result of sequestration is 1% of the actual budget. Where did that other 19% come from?

That is a complete non-sequitur. The amount a grant from one federal entity is reduced is not limited to the same percentage as the total federal budget.

Totally true, if as a politician you want to manipulate your power base into believing that a small reduction in your power is a really bad move, you should make every possible administrative move to maximise the direct pain they will feel from that reduction.

Keep the fat and cut the muscle makes great sense when you are commanded to drop 1.5% of mass and you want to make the case you're going to lose a ton of strength.

That really doesn't help your case.

The idea that this pain is a joke is pretty unfounded. It is based upon the idea that there is waste and waste and waste everywhere. If that is the case, then it should be pretty easy to target such wasteful spending, but that isn't exactly the case at all.

Also, these cuts aren't even close to what are desired by a certain segment of law makers. If that desired austerity were to be put in place, and you think agencies at trying to make an examples now, their current examples would pale in comparison to what we would see.

If it is so easy to say an agency doesn't need to cut X when they can cut Y, then pass a bill cutting Y.

It is based upon the idea that there is waste and waste and waste everywhere

I don't know how educated people concerned about politics and the economic health of this country could not read these kinds of stories that come over the wire and know that there's an extraordinary amount of waste in the Federal government that could easily be cut.


Unfortunately, so many voters have their heads in the sand and don't know what's going on - or worse yet, they're doing like you are here and propagating misinformation.

If only there had been a few Republican presidents in power some time in the last couple of decades to do something about all this waste.

And there's a large part of the problem - your team, my team politics. Democrat, Republican, doesn't really matter. What matters is people who not only understand economics but have our best interests in mind and don't create a mess.

Right. We blow a crater in our economy, and begin to listen to Keynes when he says that government dirt should be shoveled in as a land-filler of last resort. We shovel-in a fraction of what was lost and then freak out when the hole is not refilled and ready for pavement.

First, most of the debt racked up was not even remotely related to stimulus. So it's not like we have $6tn in stimulus. But mostly, even if it was, the hole we blew in our economy was much larger than even that $6tn.

What Keynesian 6 trillion dollars are you talking about?

> Well since we've exploded our debt to supposedly lower unemployment and the meter has barely moved, maybe we're doing it wrong?

Many, if not most, Keynesians agree with this -- that the current US policy has been all wrong, even while it some elements were correct in very broad outline. And they were saying that when the policies were proposed, not just when they failed to work.

> We've indulged the Keynesians quite enough over the last $6+ TRILLION dollars, tyvm.

No, what we've done is adopted incoherent policies that are driven by some impulse toward Keynesian with some directly contrary impulses (in part, this is a consequence of different branches of government having different preferences.)

You speak of a "meter [that] has barely moved," yet the economic consensus is that were it not for the stimulus, unemployment would be even worse than it is now.

Well since it's mostly the people who spent the money as well as the people who advised us to spend the money who are telling us this - are you surprised? When the press tends to not ask the masterminds of that spending uncomfortable questions, then why should we be confident in our knowledge based upon what they have told us so far?

Shouldn't we be instead be giving more credence to those who said that the stimulus wouldn't accomplish what the Administration was selling? Since those contrarians were right?

You say that it would have been "worse", but how much worse? The justification for adding such a huge amount to our debt was the big return. If the stimulus got us to 7.7% unemployment right now, but without it we'd be at 7.9%... then maybe we should have not incurred so much more debt?

Going into debt to pay your medical bills is very different than going into debt to buy a yacht.

No one thinks a ballooning deficit is good, some of us just think it's less bad than cutting social security and medicaid in the middle of a recession.

We're in the middle of a recession?

Going by one technical definition, no.

If you look at the whole picture you have to either say that this extended period of higher unemployment is the new 'natural rate of unemployment' or admit that something might be off.

> I was in sync with the Left when they decried George W. Bush's no-veto policy and ballooning of the debt.

The Left never decried Bush ballooning the debt, the Left decried Bush ballooning the debt by cutting taxes in a manner which disproportionately favored the rich and focussing massive additional spending on unnecessary war -- that is, he was decried by the left for the <i>distribution</i> of taxation and spending as the debt was being ballooned, not for the balance of taxes vs. spending.

(Secondarily, the Republican Party as a whole was decried by the Left at that time for ballooning the debt to advance those policies after having recently previously taken the position that budget balance was a pre-eminent government priority, a position which Republicans surprisingly returned to embracing once they no longer controlled the White House.)

I think the issue (or at least my issue as a card-carrying member of The Left) was that (a) at the time, we had a very different economic situation, and (b) objections to what the money was spent on. A lot of that debt came about because of things like not negotiating prescription drug prices in Medicare D and spending hundreds of billions and trillions in Iraq and cutting taxes in a way that disproportionately benefitted the well-off. If we were in a deep situation like we're in now or Bush was proposing spending that money differently, I think there would have been fewer Democratic comments about the debt.

>Maybe 90% Debt:GDP won't hurt too badly, but sooner or later as it rises, it will crater even our economy.

Nobody's suggesting that an infinitely high Debt:GDP is a good thing, but a lot of people were using R-R to argue that we had to prioritize debt reduction now as an emergency even at the expense of stimulating the economy or else we'd wind up as some sort of hybrid Greece/Zimbabwe mess within 5 years.

>It's about our Government's complete inability to get it under control.

I don't really know that that's clear. We've had a period of time where the budget deficits were run up to pay for a major (Cold) war and the tax reforms, and then we ran very low deficits and surpluses in the 1990s. We were basically set such that we'd run a surplus during strong economic years (as the Tech Bubble was) and a slight deficit in weaker ones. We made a series of policy decisions that harmed the budget balance (Iraq, tax cuts, bad policy in Medicare D) but even then, our deficits were still in the neighborhood of nominal GDP growth. So we're actually doing kinda OK, though obviously not great. Then we have the mini-depression, which (a) reduced GDP well below potential, (b) reduced tax revenues due to people making less money, and (c) caused automatic stabilizer payouts (food stamps, unemployment, disability) to rise. It's not like we've been pushing through un-offset new annual spending this last half-decade, beyond the original TARP and ARRA. So if the economy recovers, we'll probably start to level off back into 2005-era deficits, where the deficit/GDP < nominal GDP growth, causing the debt/GDP to shrink.

I didn't say we shouldn't get the deficit under control. I said that we should calibrate our responses to avoid hurting the economy while doing so. In 2009, debt was not the problem, economic collapse was. In 2013, we should start working on the debt but be careful not to hurt the economy while doing so.

Regardless of 'who's guy' is in the White House I maintain there's a difference between inheriting a surplus and turning it into a deficit (during the dotcom bust), and inheriting a trillion dollar deficit and not fixing it right away (during the worst crash since 1929).

Now that "their guy" is in the WhiteHouse, they no longer agree that it's irresponsible to set the deficit meter...

Um, no.

Speaking as a proud member of The Left, we objected to blowing the Clinton era surplus by slashing revenue, starting one (or two) unnecessary war(s), and huge wet sloppy kisses to corporations (eg scripts under Medicare Plan-D).

If Bush The Lesser had maintained full employment, deficit or not, The Left would have loved him.

you are wrong in every way. 1) you only need deficit spending during a recession. during good times, like pre-crash bush, that's when you pay down debt. 2) it depends on what you spend the money on. if you invest in infrastructure, research, etc that's great. if you invest in bombing iraq and graft to your cronies, no so much.

People focusing on the excel error and rebuttals such as this one are missing the point. The R/R argument fails because the causal inference itself is bunk. There are few plausible reasons to believe that higher public debt --> slower growth, but many reasons to suggest that slower growth --> higher dGDP. Public debts are private sector financial assets, and they are the result of deficits that represent a net flow of income from the government to households. The risk there--excessive inflation--is almost the opposite of the one suggested by R/R.

However, if the economy stalls and GDP growth slows, that leads to lower tax revenues and higher transfer payments (unemployment, etc), which will contribute directly to the deficit.

The level of confusion one sees in most any discussion of government debt/deficits is really mindblowing sometimes.

Right, but the core idea that high public debt leads to negative growth is not correct.

And that's a big deal. Even if you want to claim that high debt slows growth, your economy won't implode, and the political arguments have used the concerns over implosion as the dire necessity to deal with the public debt.

There may not be empirical evidence for the magical 90% level, but we don't need empirical evidence to know that at some point interest payments will require highter tax revenues which will reduce disposable income and hence consumption.

Obviously someone is on the receiving end of those repayments, but if that someone is not putting money in the pockets of those same taxpayers and instead decides to finance a power plant in Thailand then GDP will inevitably suffer.

I'm not a government deficit scaremonger by any means. I think Krugman's (and others') argument that the U.S. government can borrow very cheaply and should therefore act in a countercyclical manner for the common good is plausible. I'm also convinced that the crowding out argument is bogus in an economy that suffers from too little demand whilst corporations are sitting on tons of cash.

But we should not lose sight of the fact that interest rates are a highly psychological affair. Once trust in the ability to repay debt gets eroded things can get out of control very quickly. So we should be scared at least a little bit.

That said, the U.S is probably the one entity on this planet that is furthest away from that point. Even Japan with it's 245% debt/GDP ratio can borrow at 0.5% for 10 years whilst their currency is crashing and the central bank is announcing a massive QE program twice the size of the U.S one.

But if the U.S ever gets to the point where Japan is now, that's when I'm starting read up on agriculture or the hunter-gatherer diet.

There's always a lot of voodoo in economics; doubly so when partisan politics are involved. But to believe that there is a ceiling beyond which more debt should not be accumulated requires a special type of magical thinking.

Businesses evaluate decisions based on whether the rate of return is greater than the rate of finance. Eg., if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow that money and make that investment. Doing so will always make your financial position better, regardless of the level of debt you are carrying.

Of course opportunity costs must also be taken into account: if you have cash in hand which you are are servicing debt at 15%, and have an opportunity to make an investment that returns 10%, then making that investment will worsen your financial situation; you should pay down the debt instead. Once again, this is true no matter how much debt you are carrying.

All public spending is an investment of sorts. Infrastructure, education, R&D, public health -- all of these produce measurable returns. Where those returns are greater than the cost of debt, your society will be better off for financing them by debt. Where those returns are lower than the cost of debt, it won't be. This sounds like an over-simplification, but isn't: accurately measuring those returns is no easy task even after the fact, much less predicting them beforehand. But that is what the public debate and decision-making process needs to be about, because that's what really matters. All this handwringing over imaginary debt ceilings and such has been nothing more than an incredibly destructive canard.

>if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow...

No, I think if we have learned one thing in the recent crisis it is that highly leveraged entities carry cumulative risk that is more than the sum of the parts. Also, the government is not one company of many. It is a monopoly that must be in a position to act countercyclically even when everyone else decides based on risk adjusted returns that it is best to sell everything, fire everyone and hide in a hole in the ground.

If the government is levered up like everyone else and therefore exposed to the same self reenforcing global dynamics when things go wrong, it will not be able to do its job in a crisis. The government must invest when no one else does and that means it has to invest less when everyone else does.

>All public spending is an investment of sorts

Not all of it, but even for the part that is, you have to ask whether that investment has a higher return than if the private sector made those investment decisions. That's obviously a highly ideological question. My own opinion is that it depends on the type of investment. I think we have good examples either way.

> risk-adjusted returns of 15%

The voodoo thinking here is the assumption that you can actually calculate "risk-adjusted returns" outside of a casino.

The point is that appropriate action can always be taken when needed, and unemployment is never necessary.

To elaborate a little bit: A monetarily sovereign government really only needs higher tax revenue to stave off demand-driven inflation. But in the case of demand-driven inflation, something has to be done anyway due to real constraints.

Now you might ask whether austerity now could help future real constraints in any way. The answer is typically no: austerity means that less is consumed today, but at the cost of less production today. Austerity does not cause stockpiles of real resources to be built for the future.

If you actually wanted to build real resources for the future (and such a plan would be dubious at best, because predicting future needs is tricky, especially in the face of changing technology), you would actually want to do the opposite of austerity: you would want to spend more now, in order to buy the real resources that are stored away in the stockpile.

It is only these real considerations that matter for a monetarily sovereign country. Monetary constraints only matter for countries that are not sovereign, e.g. the various members of the Euro area.

"Monetary constraints only matter for countries that are not sovereign, e.g. the various members of the Euro area."

The members of the Eurozone taken together have the same sovereignty over monetary policy as any other country. But that's beside the point.

The point is that a sovereign country with a central bank can print its own money, but that doesn't mean it can borrow in its own currency. If that country keeps printing tons of money inflating away the value of its debt and running a current account deficit on top of it will not be able to borrow in its own currency under its own laws for long.

That's where monetary constraints become very real constraints, because the country loses its ability to import stuff it doesn't produce.

> The members of the Eurozone taken together have the same sovereignty over monetary policy as any other country. But that's beside the point.

You are right of course, but they can't get their shit together.

> The point is that a sovereign country with a central bank can print its own money, but that doesn't mean it can borrow in its own currency.

This is getting into a bit wonky details, but the bottom line is that your concerns are misplaced. First of all, a monetarily sovereign government doesn't have to borrow in the first place. The only reason that they "borrow" is to provide a safe interest earning asset for the financial sector to play with, and so that the central bank can effectively raise the interest rate without paying interest itself - and wouldn't that cause interesting questions by the public, if suddenly raising interest rates would cost the central bank money!

Second, at the end of the day when the government runs a deficit, banks have a choice between keeping surplus reserves at the central bank or buying government bonds. As long as the interest rate paid on government bonds is higher than that on reserves, banks will buy government bonds.

So there are no monetary constraints.

What you should be concerned about, if anything at all, is the exchange rate to other currencies. Clearly, most normal countries see their exchange rate fall if they run a current account deficit for too long (the US is an interesting but explainable exception to that rule).

This makes imports more expensive. On the other hand, it makes your exports cheaper for foreigners, which is a boost for domestic industry. So in the end, the economy actually benefits.

The problem with EZ countries is precisely that you can't "take them together" because there is no centralized fiscal agent. You need this because there has to be fiscal transfers between weaker and stronger nations or else face growing imbalance of payments, and with the right catalyst, financial crisis. That's why the U.S. works as a monetary union.

There are fiscal transfers within the EU and there are other ways to rebalance like freedom of movement for workers. But you are right that it doesn't go far enough. Deeper integration is undoubtedly needed.

I wish you were right but there is a big difference between research not being able to show that large debts slow growth and banishing unemployment forever.

For starters there will always be some unemployment due to natural turnover: companies sometimes have to reduce their workforce and not every hire is a success for either the company or the employee. People need time to find the next job and companies need time to fill the position. This is often called the natural rate of unemployment.

However it is much more than that. Suppose the government could just spend lots more. What does it spend on? Or does it just hire every unemployed person? Are these permanent government jobs? What do they do? What are the long term effects?

Sadly I am not aware of any country that has managed to solve unemployment (except perhaps some totalitarian regimes like the former USSR and these were not sustainable solutions). You would think that is it was just a matter of spending as much as you want that this solution wold have been found long ago.


I am sure that it was not your intention, but please do not spread misinformation about the concept of natural rate of unemployment.

You are right that there will always be some unemployed as people need to find the next job after a surprising layoff. However, this is known as frictional unemployment, and can basically not be more than 2%. In practice, you'd expect it to be well below 1% in an otherwise well-functioning labor market, though I will admit that it depends on the exact institutions and laws surrounding labor.

What economists mean when they say "natural" unemployment is something else entirely. It refers to the (contested) idea that there is some "natural" rate of unemployment that the economy "wants" to achieve, in the sense that you will supposedly see some unintended negative side-effects if you use policy (such as classical demand policies) to push unemployment below that level. This unintended negative side-effect is typically said to be inflation.

There is some truth to this idea; the criticism is mostly in how one responds to it. There is truth to this idea because low unemployment increases the wage bargaining power of labor, which may result in higher inflation via the wage-price cycle.

However, the standard reaction to this is disappointing: Central banks purposefully generate unemployment to keep inflation low, making unemployment a macro-level problem, while the rest of policy (and public opinion) acts as if unemployment were the fault of the individual. This is clearly schizophrenic behavior.

The more intelligent response is to say that infinite demand for labor should be created at a fixed wage. This eliminates unemployment without enabling the wage-price cycle. This idea isn't exactly new, but it is not yet widely known, even though its supporters come from a surprisingly wide range of the political spectrum (the supporters disagree on the how of the implementation details; the main search keyword is "Job Guarantee", though I have also seen some superficially quite different proposals such as this one: http://www.morganwarstler.com/post/44789487956/guaranteed-in...).

Why is it not widely known? I believe it is a combination of (a) efforts to make this idea known outside of small academic circles are relatively recent, and (b) while individuals clearly benefit, there are no truly powerful individuals or social institutions that clearly benefit, hence the advocacy is not as well-organized as e.g. Austrian propaganda.

Thanks for the definition but I was not trying to get into a political discussion. Yes Austrian propoganda sucks but Eritrean propoganda sucks balls!

I wish nobody was unemployed. Well not really - I don't want an employer - a boss. You should be able to do what you want.

Milton Friedman was a very productive guy. Besides coining "natural rate of unemployment" he also invented the "basic income" (aka"negative income tax") many years ago. Great idea!

True, there is a minimal rate of unemployment due to people switching jobs. But that's different from "natural rate of unemployment", which is more an argument used to prop up unemployment.

Once everyone has a sufficiently decent job, workers will have have enormous bargaining power, because they do not fear losing their jobs. Imagine how negotiations between bosses and workers would go. The ability to openly disrespect the boss, and the clearer possibility to transcend boss rule.

Absent other methods of control (like the USSR used, as you point out), capitalism would risk overthrow; that is, replaced by another system, with different defining institutions.

Needless to say, this poses a problem for policymakers, whose success depends on their ability to serve the wealthy elites who finance their campaigns and dominate government. So they must pursue economic policies which lead to sufficiently high unemployment (often sacrificing growth too; obviously less people are making stuff); or at least fragile employment, like in the service industry.

"we don't need empirical evidence to know that at some point interest payments will require highter tax revenues which will reduce disposable income and hence consumption."

We always need empirical evidence. For your example, no, we don't know that, e.g. when the debt is monetized by the central bank. A bias towards sovereign debt elimination may be more dangerous than a bias towards sovereign debt accumulation - empirical evidence, not intuition, is how we validate the models that guide our trade-offs.

We will never have empirical evidence (with any predictive power) for what really happens if the biggest economy in the world, the one that provides the reserve currency, the preeminent military power, goes bust, because the sample size is 1.

[Edit] And about your counter example: We do know that sovereign debt accumulation will eventually become impossible, so it's not relevant whether or not it would be beneficial. Once domestic lenders (who can be forced to lend) are exhausted, the government will have to borrow from foreigners in foreign currency under foreign law. So debt accumulation is only possible as long as foreigners are willing to lend.

A nit-pick, but also maybe a useful FYI, "sovereign debt" is different than public/national debt.

The US doesn't issue sovereign debt AFAIK, and you cannot just print more money to repay sovereign debt, that's the whole point of it. (Sovereign debt by definition is issued in a foreign currency.)

Monetizing debt would not change the fact that more debt would mean higher nominal payments, inflation would reduce real income and real consumption.

Correction: 74% of the American population carries net debt, even if it's "good debt". Inflation would act as a mini-jubilee to rebalance the economy between producers and financiers.

In the long-term, sure, it may have some wealth transfer effects.

But in the short term it's tragic for most people. Interest rates through the roof. Inadequate incomes. Etc.

Or to borrow a meme, "periods of high inflation have been great for the middle class" said nobody ever.

That assumes America has much of a middle class left.

There's obviously some point where having too much debt is bad, but if we go back to the classical "country as household" oversimplistic analogy, I doubt you'd find evidence that people who have mortgages over some magic value relative to their income suddenly start getting smaller annual raises.

I prefer we not go back to any oversimplistic analogies. That's part of what makes these debates so insufferable. A nation's economy isn't a household budget. A company isn't a person. A nation isn't a person.

I don't really see much value in someone's axiomatic understanding of all of economics premised on the belief that they are smarter than people who study economics (even if they are; probably they are!). I'd much prefer to hear from someone who is less smart, but who admits the subject is too complex for them to fully understand and who can be bothered to go out and actually attempt to measure something (rather than telling me what it must be).

I guess I'm saying I think I can learn more from an honest person than a smart one. Now I'm questioning why I am wasting my time reading hacker news again.

You don't read HN for nuanced and broadly-informed economics perspectives.

Indeed. I often find myself wishing there were an "Economist Hacker News" of sorts.

EJMR is the closest thing to HN for economists, and it's trash.

If households could print currency it would be analogous. The US Federal Government can not ever run out of money because it controls the currency. This is not to say that bad things can't happen (inflation for one); but in most cases its a balance sheet equation - Federal Debt is Private Credit.

If anything this makes Federal Debt more useful and attractive than private debt.

The problem isn't that households can't "print currency" (in a sense they can) but that their debts aren't denominated in the currency they can print. Thus, the US government is in a relatively unique position that, for example, Cyprus and Greece do not enjoy.

> If anything this makes Federal Debt more useful and attractive than private debt.

A theoretical observation borne out quite well by the observed market characteristics of federal debt (e.g., the federal governments cost of borrowing.)

Annual raises are not analogous to GDP. Spending is. If interest payments grow faster than income then spending will go down.

Also, if a household's interest payments are rising faster than its income then it will not be able to invest, say, in the education of the kids. So if you count the kids as part of that household over their lifetime, annual raises will indeed be smaller because better educated folks get bigger raises.

Spending isn't a good analogy to GDP either. We should probably just dispense with the analogy altogether...

The bigger point is that debt is often the lubricant of growth. E.g. we're FAR better off borrowing money to educate our kids than saving money and raising kids with no knowledge or skills.

> I doubt you'd find evidence that people who have mortgages over some magic value relative to their income suddenly start getting smaller annual raises.

Tell that to the people who are underwater on their mortgages and are therefore severely handicapped financially because it's punitively expensive for them to move to find a new job if they become unemployed.

When I was living in the US in 2009 I was laid off as a part of a company wide restructuring caused by the recession. Because I rented I was able to relocate to a new job in 6 weeks. Colleagues who were underwater on their mortgages and therefore had to find a new job within commuting distance of their house took much longer to find new jobs.

If you reinvested your household's profit into the company that pays your salaries, it might?

I find it a convincing argument that, of all the times for the US government to borrow, now is about as ideal as it gets by conventional measures. People will loan to the federal government for pitifully low rates.

And yet ...

I have to ask: If not now, when? If we can convince ourselves today that we can keep putting off the eventual cutbacks until tomorrow, as we have been for ages, how will next time be any different? If we can't justify cutbacks when the outlook is grim, how will we be able to when people are optimistic instead?

If not now, when? If not our generation, which? If the current state does not move us to make the hard calls, then what state would so move us?

"If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting."


Greece tried that. But to buy back bonds you have to sell assets and very quickly. That turns out to be very difficult politically. Forced assets sales will also cause the price of the asset to crash.

Um Greece cannot issue currency in the way that the US can.

No, but the linked article says the government could sell assets to buy back bonds instead of getting into a money printing debt monetization sprial.

No, it said it could buy back debt by reissuing new debt at a higher rate and using the proceeds; net interest burden would remain the same, but the debt GDP-ratio would change.

> But we should not lose sight of the fact that interest rates are a highly psychological affair. Once trust in the ability to repay debt gets eroded things can get out of control very quickly. So we should be scared at least a little bit.

This is one thing an overstretched fiat currency has strikingly in common with Ponzi schemes.

Same with any paper-based security as well. Any fiscal instrument can look like a Ponzi scheme if you pick the right angle.

That's why I wrote "overstretched". I'm not opposing the idea of fiat currency in general.

At essence of any Ponzi scheme lies debt that inherently can not be repaid, and public disclosure of that acts as tipping point.

>but we don't need empirical evidence to know that at some point interest payments will require highter tax revenues

When interest rates on bonds remain at or below the rate of GDP growth, this is not an issue. For the U.S. (and other countries which issue floating-rate non-convertible currencies) interest rates on bonds are a policy variable of the central bank.


It seems to me that "deficit scaremongers" are more worried about scenarios like Greece and the Weimar Republic, not "slower economic growth."

I think it's a good-faith concern. As much as I believe in data, the ability of the US to borrow cheaply enough to finance deficit spending is entirely up to the whims of investors. People are fickle. If the shit hits the fan and investors lose confidence in the USA for whatever reason, the deficit spending we currently rely on could become many times more expensive, and unsustainable.

EDIT: Downvotes? I doubt most people are even aware of this 90% number, but everyone knows about Greece. If you ask an average tea partier, I am willing to bet they are more concerned about Greece than exceeding 90% debt/GDP. If this is nonsense, refute it (I'd like to hear, and believe, that refutation).

Comparing the US, a huge resource-rich country with its own currency, to a tiny resource-poor european country that does not control its own currency is complete and utter nonsense.

To pay back its debt all the US government needs is dollars, and hey, look, the US government controls the supply of dollars.

To pay back its debt, the Greek government needs euros, and, oh, the ECB controls the supply of euros. Oops.

If you say the US can't print money because it will cause inflation - well, in the current climate you'd still be wrong, but let's address one issue at a time. The bottom line is that the US and Greece are fundamentally different, and comparisons between them are simply wrong.

Fair enough on the fact that the US can print Dollars -- that addresses the Greece argument, but not the Weimar Republic one. Why is the inflation concern invalid?

As part of the war reparations, the Weimar republic had to pay back debt demoninated in gold and foreign currency. Same problem as Greece (or Argentina, to pick another case). Wikipedia has a good write up.

I think it's a good-faith concern.

So do I, but I also think it's wrong. As for the inflation concern, Weimar Germany was the loser of a highly economically destructive war on awful armistice terms. Even with the long and arguably inconclusive wars the US has been involved in over the last decade, its position as the #1 world power isn't really in question.

How can huge government debt not cause slower economic growth? At very least all of the money wasted on debt repayment could've been spent on incentive programs. Unless the borrowed money is invested in something that consistently returns more than the debt financing, I don't see how one could think a high debt/gdp ratio would be okay.

There are a number of things that are wrong with your argument:

1. Interest payments typically do not replace other government spending. This is simply not how politics works: Politicians, at least at the highest level of government, typically do not look at the budget in terms of how much is available, but in terms of how much should be spent.

2. From the perspective of the macroeconomy, interest payments are a zero-sum game. The money goes to other actors in the economy who spend it.

3. Government is always able to spend the money on programs in addition to interest payment. After all, the government runs the monetary system (I realize that this is hard to grok because it is so different from our own, private, experience with how money works, but the difference is significant.)

Admittedly, I know little about all of this but:

1. So when NASAs budget gets cut, it's not because there's not enough money available?

2. Other actors in the economy who spend it on what?? How is that supposed to be equal in economic growth to spending it directly on investment?

3. Similar to #1. If government is always able to spend money on programs in addition to interest payments, then why are programs ever cut? And why then would debt ever be a concern? You make it seem as though debt is completely irrelevant.

Excellent. Up vote. Gotta spread these truths on HN. Because if HN can't grok it, nobody can.

How does government debt slow growth? Explain the mechanism. (Bear in mind that "growth" is in GDP, a dubious measure in the first place. Hurricanes and cancer add to GDP.)

It's easy to see how slow growth can increase debt: expenses grow through inefficiency, inflation, or whatever, but revenue fails to keep up. So we get low growth driving up debt. I can buy that.

If you have a big mortgage to pay off, will that slow down your salary increases? How? Why? You may lament the fact your salary goes to paying interest on your mortgage, but if anything you're more motivated to increase your salary (the proportional benefits from raises are greater!)

In regards to your analogy: let's say you aren't salaried, but are self employed. Now you take on a a big mortgage, and spend you income on paying your mortgage instead of investing it in growing your business.

Government debt slows growth because you have to pay it back. The currency (you savings/income) may end up being devalued, or your taxes may have to go up.

You're only proving the opposing case with such a toothless argument. Generally speaking, debt is defined as something that is expected to be paid back. That's what makes it debt and not a gift.

In many cases, taking debt increases growth.

Maybe you took convertible debt or a loan to fund your startup? I don't imagine you told investors or bankers that taking on debt would slow the growth of your company. Did your 10-slide pitch deck show upward growth because you intend to stop growing as soon as they fund you? Why would investors lend you money if they knew your growth would slow down as soon as they did it?

Now, consider government. What happens when your community outgrows its roads? Do new businesses continue opening in that area? Do well-paid executives and engineers move to a city with lousy, outdated schools, poor telephone service, and minimal broadband Internet service?

I don't imagine you told investors or bankers that taking on debt would slow the growth of your company

Businesses use limited amounts of debt to fuel growth because they have a justifiable case that shows that the servicing of the debt is less than the returns on the investments made with the debt.

Often, businesses are wrong about whether or not their "justifiable case" is true. When wrong, their debt may just cut into the other assets on their balance sheet. Perhaps creditors will allow them to refinance so that their debt servicing is below their investment. Perhaps they'll go bankrupt. Perhaps they'll close their doors.

The US government 1. Has a really crappy track record of finding a return for its investments. 2. Will cause much more world disruption if it has guessed wrong on the whole "returns on investment vs debt servicing" equation.

Finally, businesses do not borrow money without limits. Their borrowing of money is based upon the amount of credit that outside parties give them. Given the US Government's downgrade in its rated ability to service its debt, shouldn't we be concerned that we're overextending ourselves?

They were downgraded on "willingness" to service their debt. Not ability. Notice that after the downgrade, interest rates went down. What does that tell you?

No, willingness to pay debt was never at issue. That was a red herring put out by the Administration and lapped up by an unquestioning media. We take in more than enough on a monthly basis to service our debt. Willingness to increase the debt ceiling to pay for government programs that we haven't actually borrowed the money for yet was the issue.

Interest rates are down worldwide and has more to do with inflation and "the savings glut". They say nothing particularly positive about the US Government's credit worthiness.

Like the authors, you have causality backwards. You're implying that I cannot find an example where inflation was almost 15% and interest rates were over 16% back in the 1980s. Fed interest rates were lowered after the 2008 crisis to limit deflation. Inflation did not cause low T-bill rates. In fact, logic would dictate that high inflation would increase Treasury rate expectations and the demand for inflation-protected TIPS.

The reason interest rates were low after Congress nearly defaulted on their debts is because federal bonds were considered a safer risk/reward than the markets. Wall Street trusted our treasury to pay its interest this last year more than they trusted blue chips to both hold their value and pay dividends with an unstable recovery. They were even holding onto T-bills while losing to inflation at times.

The US government 1. Has a really crappy track record of finding a return for its investments.

I question this premise, which seems to have become an article of faith with a lot of people. Could you explain what you base this view on?

Every time the government gets involved in something, it destroys it. It perverts the economic efficiencies and causes a mess that "Oh darnit! We need a bigger government program to solve it!" Then, when it racks up failure after failure after failure trying to solve a problem; it never takes the blame for its intrusion by shutting the programs down and allowing for other solutions. It asks for more money, more authority, more regulations/laws. There is no testing in government for usefulness. There is no refactoring. It is the worst kind of spaghetti code that grows endlessly.

  - I mean, we just had a Depression because of government's involvement in housing pricing and lending.
  - Public Education.  Ever increasing money spent, never increasing results.
  - Student Loans and Higher Education pricing is the next disaster that they have brewed by getting involved.
  - Healthcare, as bad as it was with the mess of state regulations it had on it is becoming astoundingly worse with Obamacare.
  - Social Security, Medicare, etc. are all financial disasters that have created huge obligations that we will be unable to pay.
  - Airport security has done nothing to make us safer since the TSA, but there it is.  A huge behemoth that makes travel painful.
I'd add the Military in there as well since it's a huge money suck that is extraordinarily wasteful - but it's one of those few necessary evils that we don't have a choice on to some extent. Plus, since it's results oriented (kill or be killed) - it's actually gotten to be pretty good at what it does.

[edit: hit post too soon]

You make a great point - businesses have get money from bankers who expect a return. If government had that restriction on raising debt we wouldn't have a problem.

We are 5 years into massive deficit, and massive debt, how much better are the schools? Execs and engineers are migrating back to Detroit now? The biggest problem is that for all that debt, there is very little to show for it.

What if you take out a business loan instead of a mortgage? You're still taking on debt, but now the debt is fueling your growth and hopefully leading to higher wealth. It doesn't seem like an open and shut case to me.

Of course, if you feel like the Government spending is good investment and will bring a return, then no problem. If you think it is wasteful political payoff, then it is a problem.

The core problems is if the government taxes and extra $1000 dollars away from you that you would have used to grow your business, then spends it on debt service, or war, or something wasteful, that will slow growth.

Debt service that allows it to borrow more then spend more in the immediate. Wars that require massive amounts of spending on things that include manufactured goods. Something wasteful....which is open to significant interpretation in a lot of cases. Waste is part of any large organization. Government isn't alone there.

It's just not this simple. It never is. That's why these arguments about debt and economy keep breaking down.

I agree, except when the amount of debt gets so large, and goes way beyond the immediate. Then it becomes much more clear that it is a problem.

There is a case to be made that in 2008-2009, a big, debt financed, short term stimulus could have been helpful. But when that metastasizes into long term spending that doesn't look like it is going anywhere soon, and doesn't seem to be accomplishing anything, then it is worthwhile to sound the alarm.

Spending causes various kinds of deadweight loss: Outright waste, rent-seeking by negative-output industries, do-nothing jobs and does-nothing purchases, some regulations have large financial externalities, war and war accessories.

Taxes are mostly outside of government control, so more spending implies more debt. Reducing debt implies reducing spending, and therefore less loss.

You're right that it's not the debt itself (or even the spending) that matters, but it's a good enough proxy.

If I have a big mortgage to pay off that slows my growth because I'm wasting about 60% of that monthly expense solely on debt repayment. Without the big mortgage - and the same salary - I could be making monthly investments that actually produce income.

This is true in a sense, but we're not talking 60% vs. 0%, but 60% vs 55%, or (in fact) 7.2% vs. 7.1% (in the case of the US servicing its debt). The fact that we're talking about shaving a tiny amount of debt servicing by, say, gutting education seems more like "I'll save money by getting rid of my cable bill, but now I can't work from home".

The US spends 6% of the budget for interest on the debt, and 2% on education. Doesn't that say we are already deep into the problem, are already too deep in debt, and need to reprioritize? The bigger the debt is, the more legitimate spending will get squeezed. The longer we wait to address debt, the harder it will be to get out of the hole.


How many successful investors also live in their car? If not mortgage, then you'd have to pay rent. You could also save money but not eating, but how sustainable is that?

How could the ether not exist? All waves must have a medium!

When the data doesn't fit the model, it doesn't matter how pretty the model is, the model is wrong.

The right way to answer these questions is to say "The data contradicts my intuitions. How could my intuitions be wrong?"

Is there data that shows that a massive government debt does not slow economic growth?

Most of government dept is owed to domestic creditors. And the creditors will either spend the interest or invest it. ( It is really hard to freeze money, essentially you need to bury cash in your backyard.) So the money simply stays in the economy.

Why do you assume that domestic creditors will invest domestically, though? Pay a debt to Apple and a new factory will get built... in China.

There never was any evidence because they never published the data till now. Nobody could reproduce the results.

Why the fuck is this considered acceptable? Why should I listen to any boffin who refuses to release his data? It's not exactly difficult to upload a couple files to your damn website. I've been in the exact same position and I did it in 5 minutes. But it took them THREE FUCKING YEARS to release this shit. What a joke.

Corporate controlled media ?

It's not even a corporate conspiracy... it's the markets demand for politics to be entertainment... not something based on empirical data.

See: http://www.amazon.com/Amusing-Ourselves-Death-Discourse-Busi...

But what about shops like CNBC ? They get lots of ad revenue from the FIRE industry.

I would imagine the problem cited will be the amount of revenue going to debt service.

Which is only a problem if you can show you're forgoing vital services for it.

Example: 30 billion, at say, 2% interest per year (which a government could easily get, and the US can currently do much better then) is only 600 million interest repayments. And remember, this is before accounting for inflation, since the loan can be repaid with much cheaper dollars in the future (i.e. inflation usually sits at around 2%, and a government can tweak that as needed).

US debt servicing currently compromises about 7% of the annual budget. So there's no imminent risk that interest payments couldn't be paid for out of general revenue.

Even if the US really needed 600 million per year of some service, it would _still_ make more sense to take out the 30 billion loan, plough 28.8 billion into infrastructure or other investments, then spend 600 million on those services, 600 million on financing the interest, and repay the entire thing with simultaneously cheaper dollars in the future _and_ the new revenue they've generated from growth.

The only _real_ danger, is the risk you may have to run a larger fraction of your annual revenue into debt servicing if you can't refinance. But you can put money aside to account offset that contingency, and still borrow.

We spend about $190 billion a year paying interest on our debt, out of $2.45 trillion in revenue. That's about 7.8%, which is not an unsustainable large number by any stretch of the imagination. To use the ever-dubious household analogy, it's like a programmer ($150k/year salary) having a $650 car payment. Maybe the ideal car payment for someone bringing home around $8000/month is more like $500 or below, but it's not exactly the height of fiscal irresponsibility.

Interest expense for the fiscal year of 2012 was actually 360 billion. And interest rates are at record lows, lets just say that interest rates jump back to average levels, then your looking at more than doubling that amount over the next 10 years as the debt gets refinanced and more debt gets added. Hardly sustainable. And the Fed is deliberately keeping interest rates at a ridiculously low level, so that the debt burden can be kept low, but we can't have that forever and things aren't looking too good in the near future.

That's at the current interest rate (which is close to zero), the problem gets worse when interest rates go up due to inflation concerns.

The interest rate is controlled by the Fed, which is effectively a branch of government.

Also, inflation concerns (by reasonable people) only occur when the economy overheating. An overheating economy automatically reduces the government deficit via increased tax flows and reduced social security spending.

Treasury bills have a fixed-rate coupon. We pay more for older ones issued when interest rates were higher, but if we issue lots of them right now we'll still be paying 2.91% interest in 2043 when the bonds are retired. The idea is that when the economy expands further and interest rates rise, we don't borrow as much because a) revenues will be higher as well, which is good and b) it would be more expensive to borrow then, which is bad.

Could you elaborate? I don't understand.

My mental model is that if inflation is 2%, the nominal interest rates are 2% higher than the real interest rate. How much does inflation affect the real interest rate?

A lot of the US debt is short-term; plus the US has a primary deficit.

The average interest rate over the past 50 years has been something like 5% [citation needed on my own number]. If we hit that, we will very quickly need to pay more money, and a lot of that old debt rolls over each year.

The US does not have a debt problem in 2013; as has been said, we can borrow at effectively zero. The US might very well have a big debt problem in 2018 or 2023.

My question was what's the relationship between nominal interest rates and real interest rates. Naively, it seems to me that we should care more about real interest rates than nominal interest rates (in which case why do we care about inflation, which just changes the measuring stick?).

Is there evidence to the contrary or are we back to people yelling past each other with unsupported theories?

Lost in the conversation about government debt is the determining factor of whether or not government debt can ever be a problem at all. It's not how much you owe, it's not who you owe it to; it's what you owe.

If your government owes IOU's that it can print itself (fiat currency), it can never default on those IOU's.

If your government owes IOU's printed by another government or sovereign body, then it can most certainly run out of them and must buy them at market rates.

>If your government owes IOU's that it can print itself (fiat currency), it can never default on those IOU's.

People like to repeat this as if it's somehow insightful and helpful to the discussion, but it's vacuous. Yes, you can always just print away debts denominated in a currency you control. That says nothing about how much you fuck up the economy by doing so. That's why some countries that could print their way out of debt (Russia '98) default anyway, because even a default might not be as bad as (the risk of) triggering complete collapse of the currency.

Saying you have to 'keep printing money' to cover debts is meaningless. All money is printed (or keystroked) into existence. Governments impose a tax burden payable only in the state's currency (so that people are forced to offer their output for sale in that currency), then they provide that currency.

The way to be fiscally responsible with your currency is to print enough so that everyone has a job, but so much that you're overrunning your output capacity and increasing inflation. Keep interest rates on bonds (if you choose to issue them) lower than your GDP growth (and since you're the monopoly issuer of your currency, you have control over interest rates) and you won't have issues with expanding debt % [1].

The first response to this is usually "well, Greece" or "well, Zimbabwe". The crucial difference in those countries was that what they owed was not their own currency, but foreign currencies.

[1] http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf

So how does that contradict what I said?

> That says nothing about how much you fuck up the economy by doing so.

It says a great deal about the possible effects of deficit spending.

If you owe a foreign currency and have a catastrophic decrease in output, you're going to have problems.

If your debts are denominated in your own currency and have stable output, then increasing net financial assets to the private sector can prop up aggregate demand to keep the economy operating at full employment.

That sounds great, until you realize that "the printing money" can have consequences worse than default, which is why we have actual examples of defaults by nations that had debts denominated in their own currency.

Hence my point, to which reiterating how cool it is to print your way out of debt is non-responsive.

Russia had foreign denominated debts and a collapse of real output. Try again.


So, yay Keynesianism?

Absolutely! Yes. Didn't Simpson-Bowels ( the bi-partisan deficit reduction committee) cite the Reinhart-Rogoff 90% limit as part of the justification for long run austerity policies.

I'd go further. Lets lay down the gauntlet here and proclaim: there is no long term deficit problem in the USA.

This (and the rest of the thread dangling underneath it) is a false dilemma; "either Reinhart-Rogoff must be correct or Keynesianism must be correct".

Bingo! This basically changes everything (or at least disproves the major argument against the deficit issue, since there is no proof that economic growth will be negatively affected by the debt).

Too bad this can't be used more publicly in the political arena, since if anyone so much as mentions the economic theory people will be like "Reindeer-Stroganoff what?"

Reindeer Stroganoff sounds delicious.

Yeah you're right. To wonky. Its to ez for j6p to equate the household budget/debt analogies with that of the Federal government. Especially with the false analogy reinforced every 5s by politicians/pundits on Fox News/CNN.

That one's always bugged me, because it's easy to imagine a Keynesian household budget, too. Imagine a multi-generational household where the patriarch has savings but where the living expenses are covered by his descendants. Then the banking system go crazy for a couple of months - a kid has a business idea that will make money but has lost bank funding. The patriarch has the choice whether to invest savings to get the business off the ground (increasing the probability of the kid contributing to living expenses in the future), or instead just tell the kid to tighten his belt, at the expense of the patriarch's own future living standard.

I'm pretty sure the military families and your parents drawing social security might say otherwise:

"Fully two-thirds of the national debt is owed to the U.S. government, American investors and future retirees, through the Social Security Trust Fund and pension plans for civil service workers and military personnel. China, it turns out, holds less than 8 percent of the money our government has borrowed over the years."


Are you saying that a sovereign nation using a floating fx non-convertible currency regime cannot meet any financial obligation ? Or won't ?

There's always the risk of voluntary default; either the Republicans are bluffing on not raising debt-ceiling, or they aren't.

Stepping back for a moment, this thorough debunking of Reinhart and Rogoff's flawed paper means that now there is NO evidence that government debt exceeding 90% of GDP somehow negatively impacts growth. Let me repeat that: there is NO EVIDENCE that more government debt causes slower economic growth -- just theories.

These two sentences do not say the same thing. There is evidence that debt results in slower economic growth. There is not evidence that it negatively impacts growth, to with that it results in economic shrinkage. I'm with your general sentiment but don't throw the baby out with the bathwater in your enthusiasm.

I'm not so sure that this error means that a free lunch has been discovered.

No one's claiming that...

What this means is, instead of slashing budgets in a recession because you think debt slows growth, instead invest in a recession, because the alternative is no benefit to growth plus putting more people out of work.

What us "scaremongers" are going to say is that it's not very wise. Debt is based on future growth so it's always a gamble. Wouldn't you rather be prudent and spend less? Or is there some rush to spend every single dime? I just don't get it. Breaking it down with research into past events doesn't negate the fact that borrowing has to be paid back. Did we just fall of the rational-thinking cart or something? It's not silly to be conservative. In fact in a lot of places it's called wisdom.

To put it shortly, a completely de-leveraged economy leaves people starving in the streets. We're basically spending to outrace Malthus.

Since the GDP contains all government spendings and debt, it is obvious that debt and spendings only increase "economic growth". But if you call a spade a spade and realize that 100% of government spendings is taken from products of the market, then the real GDP (RP) will be defined like this: RP = "Official GDP" - 2 * (gov debt and expenditures).

That would only be true if 100% of government spending came from taxes and the government didn't spend anything, it does not. Deficit spending comes from people investing in the government, and a non-trivial amount comes from foreigners. You buy something from Walmart -> China gets USD -> China buys US treasuries. You got a product, the US government got money, and the Chinese got left with an IOU.

Moreover, government spending doesn't vanish into a blackhole. If I tax a dollar from you, and then build a highway or launch a GPS satellite or educate a child, I not only put your money back into the economy, I also left lasting changes that improve efficiency.

I guess I just assumed that if excel was used at a financial firm, there were unit tests (or whatever the excel equivalent would be). It's a scary thought that it might not be the case because excel doesn't excel at reporting errors or debugging.

They'll say nothing at all.

Is The Reinhart-Rogoff Result Based On A Simple Spreadsheet Error?

Oh my goodness, no. That's the least of it. They took all Commonwealth countries, found the periods where they had over 90% debt-to-GDP ratio, and EQUAL WEIGHTED them regardless of length or country.

I won't do a better job of explaining this than the article: "U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally."


That in addition to the Excel error, this is just stupidity. I can't believe it got as far as it did, except that certain groups really wanted to believe its conclusions, even though they were false.


They also subjectively ignored the post-WW2 period for most countries; coincidentally when countries had high debt and grew like crazy.

I bet that if you started with the desired results in mind for a study like this, you could create a list of variables to try and pick the combination that maximizes your metric.

Then provide a post-hoc justification for each choice.

For example: * debt-to-gdp 80%, 85%, 90%, 95%

* Ignore years after ww2 (the war was an externality)

* Don't ignore years after ww2 (why would we? they're years.)

* Ignore years after ww2 for countries that got aid from US (removing an externality)

* Ignore years after ww2 for countries that did not get aid from US (most countries did, don't want to mix the sample)

* Ignore years after ww2 for countries that were in the European theater (removing an externality)

* Ignore years after ww2 for countries that were not in the European theater (not affected by war like rest of globe)

* Ignore years after any war (externality)

* Weigh by population of country at time of study (lazy way to account for size of industry)

* Weigh by population of country by year (better way to accounts for size of industry)

* Equal weight for all countries (easy to explain)

* For each country, take periods of high debt-to-gdp and compare against periods without high debt-to-gdp; then compare countries equally (easy to explain-ish)

* Take each period of consecutive years with a high debt-to-gdp ratio and call each period one sample point. Average these inequal-length points together and compare against all years of low debt-to-gdp (Come on! Nobody would believe-- oh no.)

This actually isn't news. Questions have already been raised as this paper was never peer reviewed [1] (Jan 2013), which states:

> According to their C.V.s [2], it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.

So I really don't know why anyone listened to this in the first place other than it furthered their pre-existing political agenda.

This is why any paper should be required to release:

- the raw data supporting it;

- the assumptions, exclusions and weightings made to produce the final data; and

- any code used for a model.

All of these issues are particularly problematic when it comes to climate science.

[1]: http://www.nextnewdeal.net/rortybomb/no-90-percent-debt-thre...

[2]: http://www.carmenreinhart.com/c.v./cv-in-pdf/

"This actually isn't news"

This is news. "We can't replicate" a landmark study (yes, it was an intercontinental landmark study) is very different from "we have found the specific errors that make this study faulty".

Deleting a comment in one thread (especially a parent comment) and reposting it in another is not a very good practice. Also, this is obviously news. Also, a gratuitous reference to climate science in this context is flamebait—luckily it hasn't set anyone off. Fully agree about releasing both data and code.

So I really don't know why anyone listened to this in the first place

Maybe because this seems to be standard for research publications.


e: downvote with comments please

Wait -- so apparently it's acceptable in economics to publish big important papers with broad-reaching public policy implications without releasing the data on which the paper was based? That would never fly in the sciences.

> That would never fly in the sciences.

Or would it?


Regardless of what side you come down on w.r.t. this particular issue (and I realize it's a sensitive one), the fact that global policy was influenced by a paper that used secret, buggy Fortran code to manipulate a data set is extremely concerning. This is not good science.

Publishing data and source code should be a requirement these days.

Not a good example. From http://en.wikipedia.org/wiki/Hockey_stick_controversy, the above conclusion was itself discredited and finally:

"The test in science is whether findings can be replicated using different data and methods. More than two dozen reconstructions, using various statistical methods and combinations of proxy records, have supported the broad consensus shown in the original 1998 hockey-stick graph"

But the result wasn't discredited: there was in fact a normalization error in Mann et al's original findings, and we didn't find out until 8 years later because the data manipulation code was "proprietary."

Meanwhile, everyone proceeded as if it were fact.

We need to raise the bar of skepticism and with it the burden of proof. Show me your raw data. Show me your code for manipulating that data into the final result. I'm honestly surprised that publishing data + paper + a source code repository isn't required in order to be taken seriously these days.

Not according to http://www.realclimate.org/index.php?p=121

"7) Basically then the MM05 criticism is simply about whether selected N. American tree rings should have been included, not that there was a mathematical flaw?


"8) So does this all matter?


This is not a credible source.

I don't think it matters what side you take; the study you link to has long been debunked.


There is no serious rebuttal or debunking of Mcintyre contained within that post. Even if we ignore the details of that specific controversy, it is still obvious that there are

1) big problems in the climate science community with regard to data and replicability (see climateaudit for more than you could ever want)

2) massive statistical problems with reconstructions. See Mcshane and Wyner 2011.

I don't think it even matters what study we're talking about. A publicly-funded scientist who withholds "proprietary" source code used in a result of this magnitude is not doing good science.

The interesting question to me is whether any government policy was decided on this before it was debunked. I can't see any evidence of that necessarily, but would love a confirmation. Otherwise, isn't this exactly the type of thing that people are upset about regarding Reinhart-Rogoff?

Publishing data and source code is the exact problem we are trying to solve at my startup, http://banyan.co

Yes, though this has been a huge charge for guys like Levitt/Dubner (Freakonomics authors) - that data sets must be published in tandem with conclusions based on said data. (Assuming, of course, the data sets are not publicly available. It does no good to reproduce census data and the like!)

You should see how bad it is in my field of study - biomechanics. It's a pure black box. We have total cronyism, where one reviewer has disproportional power since he was the first to publish much of the modern stuff. Therefore, people will do anything to have him review their papers, and his papers are pushed through despite what many feel are seriously glaring errors in methodology and collection.

This is the walled garden crap that turns me off to "peer-reviewed research."

A new journal http://f1000research.com/ has a really interesting new take on this: post-publication, transparent peer-review.

Feynman talked about an "extra" kind of integrity, where one bends over backwards to show how one might be wrong. In my field (organic chemistry), this is de rigeur, and it is enforced by the fact that you can release a paper on one day and have people report on how replicable it is within 24h.

For a much fuzzier field like economics, where the line between knowledge and opinion is extremely blurry, this "bending over backwards" to show how you might be wrong should be applied 100x .

Umm, that's not true. In plenty of fields it's common not to publish the raw data, and instead publish only some graphs that summarize a huge data set down to a couple of data points. This includes biology, physics, and medicine. On the contrary, people actively "protect" and "guard" their data. And yes, that's a big problem.

Or they selectively release data. A personal example: a researcher was happy to give me unpublished data for a famous study which turned in an exciting research; then I asked about a pilot study she led which the technical report indicated was turning in a null result - all of a sudden, of course she would not give me any of the data and told me I shouldn't be relying on unpublished research!

Welcome to the social sciences.

This is in part why I am a programmer now and why my Poli Sci degree is sitting in a drawer.

I avoided Poli Sci at every turn, so this is actually an honest question: how much science is in Poli Sci? It actually seems a bit like Computer Science, in that, if the degree has the word Science in it, it probably isn't.

There's quite a bit of data-anlytics type stuff in quantitative poli-sci these days. Now whether it's good science or not varies, much like in the rest of "big data", where there's no guarantee that either the data or the analysis is always good. There's some very careful stuff, and a lot of data-dredging on datasets of convenience (or over-extrapolation from limited data sets).

More traditional poli-sci is scientific in the sense of the social sciences, which has a fairly long history of epistemological debate I'm only vaguely familiar with. I think I would probably call it scientific in a certain sense, but maybe a different word is needed. I'd group it vaguely with disciplines like anthropology, archaeology, and linguistics as areas with quite a bit of methodological diversity, but still a more empirical orientation than you find in the humanities. Part of the issue is that there is data, but how to interpret the data is complex ("there is no such thing as raw data"). Though for mostly institutional reasons there are some people who are more philosophers or historians who also happen to be in poli-sci departments.

Exactly. We had two extremes at my department where one professor felt PS should be regarded as a hard science, and one that felt it belonged in the Humanities department.

At my school, it depended heavily on what your focus was. We had three professors, each focusing on their own area of specialization: American politics, international politics, and theory.

The American politics professor had an academic pedigree and insisted that Political Science could and should be a hard science backed up by facts and numbers. In his papers you need statistics, studies, and graphs. He focused very much on the methodology of your research and how well you could back up your claims with solid evidence.

The theoretical professor appreciated hard facts but it was much more important to him that you had a well-reasoned argument, and as _delirium said, would much rather read a 10-page paper full of epistemological debate than one twice that filled with detailed Bayesian analysis.

The international politics professor didn't care because he had tenure.

If that offends you, wait until you get a social science paper with conclusions that are contradicted by the data sets included in the paper.

That would never fly in the sciences.

It's pretty common in medical research.

Yes it would because the test of scientific knowledge is whether it be confirmed with a different data set.

If a conclusion is only provable with one specific data set, then it can hardly be considered a universal objective truth of nature.

By analogy: if I drop a hammer and tell you that gravitational acceleration is 9.8 meters per second squared, you don't need to come over to my house and borrow my hammer to test it.

Sharing data and code is helpful for error checking, as it was in this case.

In this case the main publication that had impact was a book, which even in the physical sciences tend to be reviewed under different standards. There is some pretty out-there stuff published by major physicists in book form.


I don't know about the particular stat the article is talking about, but they give plenty of data here.

The most incredible and depressing aspect of this is that it will have no impact whatsoever on policy makers, leaders or their supporters.

Can anyone imagine Paul Ryan or Cameron/Osborne coming out and admitting their policies are based on nothing more than gut feelings unsupported by anything? What about the countless pundits who've spent years squawking about austerity? The notion is laughable.

Worse than that: the people who like a Ryan and his type actually respect gut feelings better than wonky data.

Well, we were all born into a political system based on the whims of politicians and bureaucrats...and not people like engineers who respect strong data.

Which is why I personally put more trust in the irrationality of markets and business over the irrationality of elected lawyers who gain power via rhetoric (and not production).

There is another study that explains these events:



Nah. The most depressing part for me is: challenging people's flawed beliefs reinforces those flawed beliefs. Creationism, Iraq had WMDs, anthropocentric climate change, etc.

I used to believe that if only we all just talked things out, we'd come to an agreement. No more.

Now I focus on better organizing. Rallying the troops.

With the computation, they still find 0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%

I wonder what you'll conclude with that data.

Why the ad hominem, bob13579?

Opinions about government spending have nothing to do with economic science, they are political decisions. There is a reason most deficit fear-mongers come from the right.

austerity -> cuts to social programs -> more poor people with less resources -> labor market who will work cheaper

>their policies are based on nothing more than gut feelings unsupported by anything?

What a charitable perspective.

It's interesting to note that one of the authors of the original paper, Ken Rogan, was the chief economist at the IMF 2001-2003. He also joined the group of 30 in 2008, an economic policy organization that is very influential in things like the Basel accords, IMF governance and matters of finance in Brussels.

Many of these organizations rely on private data to support their policy decisions, or rely on private analysis from similar organizations. That's hard to criticize because at least some of it would cause serious harm to the folks who provided it, or enable high finance players to front run policy actions to huge profit.

But what to make of an insider like that refusing to release data that had no market risk or legal restrictions in place. It's not hard to imagine that his primary goal was support of an economic philosophy and would have been just as happy to publish a paper that claimed high debt/gdp rations promote growth.

It certainly makes me wonder if this kind of approach is part of the culture in some of these policy and international finance organizations. If the data relied on by the IMF/ECB/etc as they've effectively reformed governments and imposed major budget changes can't be made public, then you're highly reliant on them to be ethical and extremely diligent.

If there's any significant amount of philosophy trumping science in the european restructuring, one begins to wonder if some of the weaker euro members are still actual democracies.

I see a lot of comments here to the effect that this means debt is a free lunch now. Would that it were so - we could get rid of taxes, as well as Medicare and Social Security withholding. And nix the Obamacare penalty. And, of course, buy everyone a pony.

Sadly, ponies are a finite resource until such time as the government figures out how to print more of them. Debt still has a multiplier less than 1 - far less, for large amounts of debt.

All this article means is the magic number where debt starts to cause deep hurting is somewhere above 90% of GDP.

Serious question - not trolling. Even if increasing the deficit does not affect GDP (and I'm in no position to even comment on whether or not I think it does) - how is that sustainable? I mean, AFAIK the argument behind increasing government spending is as simple as "it solves problems" - it provides help to those in need, affects the economy, etc. But why won't this at some point collapse? And if it will at some point collapse, why do we think politics will allow the government to behave any differently as we near that time? So again - serious question - I fail to see how we can expect government spending to grow without eventually consuming 100% of everyone's income or collapsing entirely (and I understand that many people may consider the former a good thing).

edit: And this may be because I don't know where the money comes from to begin with. If I keep getting bigger and bigger loans and there's no way my income will allow me to pay these loands back in the foreseeable future, then won't everyone just cease doing business with me at some point? Does "debt" in a government context act differently, and if so, why?

Some historical notes:


The US national debt during WWII was around 120% of GDP. In the years that followed, that ratio fell to below 40%. However, we didn't appreciably pay off our debts, the real dollar amount stayed a little over $2 trillion. We accomplished this feat, of course, by substantially increasing the GDP. It is easy to realize that it is fine for debt to continuously grow, so long as the GDP grows faster.

Also, the only president to entirely pay off the national debt, Andrew Jackson, triggered one of the deepest depressions in US history.

> I fail to see how we can expect government spending to grow without eventually consuming 100% of everyone's income or collapsing entirely (and I understand that many people may consider the former a good thing).

Both options sound good to me, in that if people manage to keep eating and living in houses and raising their children after this happens, we will have officially entered a post-scarcity economy.

This surprises me - Reinhart and Rogoff are both very well respected economists, and neither is a culture warrior type - they've published enough (Including "This Time Its Different", a great book to understand the history of financial crises) that I almost wonder if there's more to this than meets the eye at first glance. I realize the first tendency is to "burn the witch", but I'd like to learn more.

"both very well respected economists"

Not any more. This is a career killer. I wouldn't be surprised to see them accepting posts with the American Enterprise Institute or Cato in short order.

EDIT: also, Barry Ritholtz is generally perceived as an honest broker on these things, and his commentary is here: http://www.ritholtz.com/blog/2013/04/did-reinhart-rogoff-scr...

I realize most of HN is left-of-center, but Cato in particular is not fluff. Specifically on the two, Rogoff was Chief Economist of the IMF (I spent a summer interning when he was there), and no one considers either of these economists as crazy-right wing types (the IMF, by American political standards, is probably a centrist Democratic type, even if it does make some very stupid calls for austerity from time to time).

There's always room for disagreement because economics is the dismal science (as one famous line put it, Harry Truman wanted to find a one-handed economist - so they wouldn't always answer "X could happen, on the other hand, Y could happen), and answers aren't as binary as they sometimes are in the hard sciences. I'm curious to see what Rogoff and Reinhart respond to this with.

Edit: thanks for the Ritholz piece - hadn't seen that. I certainly am not claiming that there's no mistake - I just want to see what the defendants in this have to say, so to speak.

I wasn't casting aspersions on their previous credentials, but if anything that magnifies the seriousness of this situation. It looks a lot like unethical cherry picking of data (the 'coding error' is really of secondary importance to me).

I know economics can be considered on the transition from hard to soft sciences, and even within the field you have very soft-science schools like the Austrians to very quantitative approaches like 'freshwater'. But that doesn't seem to apply here. Maybe if they added caveats to their methodology it would have been different.

I'm also not dismissing Cato or AEP out of hand, but nobody can deny that they are partisan think tanks. Their primary purpose is to provide cover for policy proposals, not original research.

Reinhart and Rogoff's response here: Matt Yglesias has been covering this somewhat gleefully. But as they point out, they called it an association, not a cause (correlation, not causation).


Thanks for the link to their response. I am going to try to refrain from further comment until I've look at the other papers they reference and beyond the summary of what's alleged.

That being said, and paraphrasing Yglesias, that association/causation disclaimer from them is really weak sauce. I don't recall such protestations while the paper was a cause celebre.

Debt and growth are obviously separate entities that are hard to correlate. Intuitively it makes sense that debt doesn't inherently slow growth, and could even speed growth.

Reducing the problem to a personal level, you borrow money to buy a good car which enables you to work a higher paying job. This scenario makes the case that debt causes growth. From a policy standpoint if you borrow money for long term infrastructure and growth opportunities you could easily see debt as a net positive.

OTOH, you run up your credit cards to buy a better TVs or to buy 'friends'. In this instance debt can only lead to eventual poverty and ruin.

Which type of spending do you think is happening more often at a federal level?

Isn't it more plausible that public debt is caused by government deficit spending, which causes economic growth, but a temporary kind of growth that is only as good as the government's ability to continue spending?

Well, that assumes the non-existence of "multipliers". The concept of a multiplier is that if a government debt-spends on something, some of the effects will be able to continue on their own power and contribute to economic growth after the government spending stops. That would be economic growth that wouldn't happen if the debt-spending didn't happen.

It's also sort of the heart of Keynesianism. The counterpoint is the more intuitive certainty that if times are tough, everyone should tighten their belts, including the government. That's sort of what drives the austerity efforts.

The counterpoint is the more intuitive certainty that if times are tough, everyone should tighten their belts, including the government.

spinonthird has already pointed out the Paradox of Thrift. I would add that a lot of confusion surrounding this particular topic comes from the widespread inability to distinguish between real tough times and monetary tough times.

By monetary tough times I mean: bank collapses, loan defaults, low available income.

By real tough times I mean: lack of available resources, natural disasters destroying infrastructure.

In real tough times, it is true that everybody should tighten their belt. Typically, they are forced to do so via inflation, and if the government refuses to listen there will be hyperinflation.

In monetary tough times, tightening your belt personally is your only choice due to the constraints that you have. But it is exactly the wrong response for government to tighten its belt as well. Rather, government - especially monetarily sovereign government - should use its unique position in the economy to get the economy going again, to enable the real capacity available to be used.

Observe how a simple confusion of these scenarios can lead to incorrect predictions, similarly to how so many people predicted back in 2009 that raging hyperinflation should have happened by now. They were obviously wrong, and I posit that underlying their wrongness is the inability to properly distinguish between real and monetary phenomena.

And the counter-counterpoint is the paradox of thrift. http://en.wikipedia.org/wiki/Paradox_of_thrift

Is there evidence for or against the existence of multipliers? Sorry if this is a basic question.

That's the crux of the entire debate. There arguably is plenty of evidence of multipliers, but the problem is that when your lab is the entire society, there's no counterfactual - there's no control group. So you can never quite say that in the absence of the debt spending, the multiplier effect wouldn't have happened.

Anti-keynesians (hayekians?) point this out regularly and like to say that the burden of proof is on the keynesians, which will of course be impossible for the keynesians to ever prove. So that's where they get their handhold on arguing against keynesian theory. (Note I'm only a hobbyist with this stuff so my explanations may be way off - this is just my own sense of it.)

Now, there's something to be said for sometimes accepting something that is not potentially provably false. I think Darwinian evolution is an example of something that is not a strictly technical theory, but there's been such a body of experimentation over the years that you pretty much have to accept it as fact anyway.

And there's work done in modern Causality about how to tease out causality from correlation in the absence of counterfactuals. I've been trying to struggle through a causality textbook by Judea Pearl but it's really weird advanced stuff.

The U.S. debt-spent to build most of the infrastructure we have today (highways, trains, power plants, etc), as well as to buy total U.S. military dominance in foreign affairs. It's been working pretty well for us so far.

There's always work to be done in digging a deeper hole?

I understand you're joking, but just to point out - digging a deeper hole probably wouldn't be much of a multiplier, while other public spending efforts could have much higher multipliers.

On the other hand, if the deeper hold leads to a valuable public resource...

> if a government debt-spends on something, some of the effects will be able to continue on their own power and contribute to economic growth after the government spending stops

That's what investing capital is supposed to do, only it should be done with private funds and private risk. If the growth were likely to continue, capital would seek out those enterprises without debt-spending.

That's not always possible for all sources of multipliers. (Roads, dams, etc.) Although I recognize we're devolving into one of the common argument patterns that never get anywhere. :)

Since I don't take the sacrament of Keynesian multipliers, it will not go anywhere.

And that ability is infinite in the non-convertible floating fx currency regime that we have today. I'd say there is a free lunch to the extend that foreign countries such as China and Japan prefer to export to us more than import from us. Therefore they must save in our currency (USD) in order to maintain exchange rates at levels that support export desires.

Dropping back the frame for a bit - Jeff Sachs is on EconTalk this week, and he says what ( IMO ) should be the idea under scrutiny - employment prospects for people without college degrees have declined quite a bit since 1973. The present relatively high debt/deficit load was a result of an attempt to trade debt/deficits for higher employment using a ... somewhat intentionally-blown housing bubble. It didn't work. Something mysterious is "regulating employment down" in the system, and we don't seem to have a good handle on it. Tyler Cowen has posited a weakish "zero marginal product worker" hypothesis that does not seem to be easily decidable. Sachs' idea is that this has been developing since about 1973 and we haven't addressed it yet, and that this failure is a failure grounded in weaknesses of social science itself.

I can't find a more evenhanded and clear statement of the problem than his.

> In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.

What's amazing to me is that no one, until the researchers spotlighted here, apparently thought to ask to see the data? Isn't this part of peer-review?

Things like this is why I love being part of the open-source community. People may brag about and diss each other's code performance to an unnecessary degree of hostility, but at least we can all check the code and run it for ourselves.

> Isn't this part of peer-review?

iirc, the paper wasn't published, let alone peer-reviewed. it was "discovered" and used as a justification by people who may or may not understand the deeper issues involved.

That's not true, it was published in the American Economic Review, which is apparently a very well-respected journal.


I believe it was published in a section of the journal that does not require peer-review.

Putting on my tinfoil hat, I wonder if this error was intentional or unintentional? Was the errant conclusion known to be false by any who propagated it? If so, by whom and to what end?

For example, perhaps the US and Euro governments wanted to justify some tough measures of fiscal restraint and increase public support, and they wanted to keep it from being delayed until collapse was impossible to avoid. (See, I'm not totally jaded. But I can think of plenty of worse scenarios too.)

The "flaws" seem to be too large (and some deliberate) to be unintentional, but maybe I give too much credit. I've just noticed too much misinformation being spread by those who should know better, and coincidentally seem to benefit the most from it. I'm suspending my judgement until I learn more, but anyone else have any insights?

This article give a better explanation: http://www.businessinsider.com/thomas-herndon-michael-ash-an...

The source is actually:


and the paper (including the data and code files upon which the results are based!) is:


Thanks. I should have known better. I don't think Business Insider creates original content (well, they do create some, but not much).

Submitted the source to HN.

Mainstream economics is centered around recommending policies that ensure bond-holders are paid. It all leads back to that. If there is too much debt destroying the underlying economy causing bond interest payers to default, lower rates. If rates go to zero, print money to pay the bondholders. If that causes inflation raise taxes and cut spending to pay the bondholders (a.k.a austerity), etc. The political economic dimension of the relationship between bondholders and the people who pay there interest is an important missing component from our understanding.

Hmm no, if there is inflation, enact a one time wealth tax and then cancel those money.

Also, you can print money to increase supply, this is what the Asian miracle is all about after all. Too bad they didn't print money to increase demand...

Randy Wray's view: http://www.economonitor.com/lrwray/2013/04/17/no-rogoff-and-...

concluding paragraph makes so much sense:

"More than five decades ago, Abba Lerner gave the answer to this question. If there are involuntarily unemployed (we would add underemployed) people it means the deficit is too low. The government should either cut taxes or increase spending. It is certainly debatable which one is a better policy, but that’s beyond the scope of this paper. When is the deficit too large? When it’s over 3%, 7%, 10%? Again, there is no magic number and anyone who comes up with a universal number simply misunderstands the modern monetary regime and macroeconomics. In opposition to magic, Lerner proposed “functional finance”—the notion that the federal government’s budgetary outcome is of no consequence by itself, but rather, what is important is the economic effects of government spending and taxing. When total spending in the economy, including government spending, is more than what the economy is able to produce when employed at full capacity, the government should either lower its spending or raise taxes. A failure to do so will lead to inflation. So inflation is the true limit to government spending not lack of financing. Government debt is merely the result of government deficit and hence the same applies to debt as well."

Are we describing running the same formulae on the same numbers as 'replicating' these days?

Did real economists always consider these results provisional/dubious/bogus and the fact that they were used as the basis of policy is to the shame of our policy makers and press, or is the field of economics so messed up that research based on schoolboy errors can become the accepted view within the field?

It seems clear to me that government debt in modern fiat-credit economies isn't really debt in the same sense that private debt is debt. It doesn't behave like private debt. I don't think debt is even the correct term for it. Maybe we need a new one.

Where do I find the paper that links GDP to sustainability or quality of life? You can have a compulsive debt driven society and still have strong economic activity, no? Or is "economic growth" really an indicator of economic sustainability?

Official response to the critique by Reinhart and Rogoff: https://news.ycombinator.com/item?id=5560829

I think this is another example of why we must start with apriori approach to economics (and all learning for that matter) and only resort to posteriori methods as a secondary methodology. In this case we can prove logically that inflation reduces the investment capital available and that will always result in a decrease of production. If that is accepted arguing about how bad we can make something before X milestone seems a little less important.

The point is: don't copy Europe's austerity disaster.

This is also good evidence for why you should release your data online, so it can be properly vetted

Reinhart and Rogoff may reach exactly the opposite conclusion, given the embarrassing publicity. For me this is an illustration of why publishing just your conclusions without data (or code, or whatever details are germane to your field) is so common.

They accidentially, the whole economy.

Mike Norman called out the flaws in Reinhart and Rogoff a while back: http://www.youtube.com/watch?v=JkKxN1H1P10&list=UUZhuQXt...

I wonder if this sort of error is less common in 2007+ thanks to the addition of tables.

As ernardom points out above (below? predict-o-karma where are you!), this involved much more intellectually serious errors than just the calculation bug. They both missed (or possibly cherry-picked) countries and misweighted them.

I would venture to guess that they'd be entirely incompetent at whatever software they attempted to use.

I enjoyed reading "This Time is Different" I think their discussions of debt has motivated us to look at this concept in more depth. Maybe we can improve on their crude excel spreadsheet analysis. Then someone should do it!

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