Punched In The Dick: Austerity Movement, by Grad Student

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Punched In The Dick: Austerity Movement, by Grad Student

#1  Postby Loren Michael » Apr 19, 2013 10:34 am

http://nymag.com/daily/intelligencer/20 ... ement.html

Most Ph.D. students spend their days reading esoteric books and stressing out about the tenure-track job market. Thomas Herndon, a 28-year-old economics grad student at UMass Amherst, just used part of his spring semester to shake the intellectual foundation of the global austerity movement.

Herndon became instantly famous in nerdy economics circles this week as the lead author of a recent paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," that took aim at a massively influential study by two Harvard professors named Carmen Reinhart and Kenneth Rogoff. Herndon found some hidden errors in Reinhart and Rogoff's data set, then calmly took the entire study out back and slaughtered it. Herndon's takedown — which first appeared in a Mike Konczal post that crashed its host site with traffic — was an immediate sensation. It was cited by prominent anti-austerians like Paul Krugman, spoken about by incoming Bank of England governor Mark Carney, and mentioned on CNBC and several other news outlets as proof that the pro-austerity movement is based, at least in part, on bogus math.

We spoke to Herndon about his crazy week, and how he's planning to celebrate his epic wonk takedown...
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#2  Postby Nicko » Apr 19, 2013 12:07 pm

Good for him. Possibly good for the whole world.

The austerity doctrine is an ahistorical, ideologically-based, illogical product of the far right and needs to be dismantled. Of course debt reduction is a good idea in the long term, but it is a project for a time of economic growth.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#3  Postby chairman bill » Apr 19, 2013 12:15 pm

Given that the UK government makes no claim to evidence-based policy-making, I doubt this will have any impact here. Gideon Osborne will plough on regardless, just as the education secretary Michael Gove, will plough on with his education deforms, untroubled by things such as 'evidence'.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#4  Postby Loren Michael » Apr 19, 2013 1:31 pm

To be sure, it's politics. The "intellectual foundation" of anything is going to be a relatively minor piece, even in places that have enviably educated populaces and relatively non-decayed political institutions.

But this is still very, very nice.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#5  Postby Panderos » Apr 20, 2013 6:21 pm

I've read This Time is Different which was the book by Rogoff and Reinhart, and I don't remember it being some pro-austerity piece.

What they said there, iirc, is that governments don't get out of debt by borrowing more. But they didn't then say governments need to cut all their spending either. They said that historically, governments have largely got out of debt in one way. And that is default - actual or effectively (through inflation/money printing).
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#6  Postby Thommo » Apr 20, 2013 6:30 pm

I read about this on a couple of news sources. It's a victory for the peer review process and probably great news for this guy's career, but diminishing the degree of the correlation between borrowing and poor growth doesn't actually undermine the basic need for governments to balance their books, and only reduces rather than destroys the conclusions of the original paper from what I can gather.

Weird thing about us Brits complaining about austerity though, we've actually cut far less severely and reduced our deficit by less than quite a few other countries. In terms of growth (which is what the paper in question was about) the issue isn't necessarily the pace of cuts so much as the location.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#7  Postby UtilityMonster » Apr 24, 2013 5:15 pm

Panderos wrote:I've read This Time is Different which was the book by Rogoff and Reinhart, and I don't remember it being some pro-austerity piece.

What they said there, iirc, is that governments don't get out of debt by borrowing more. But they didn't then say governments need to cut all their spending either. They said that historically, governments have largely got out of debt in one way. And that is default - actual or effectively (through inflation/money printing).


I read that book as well. It wasn't a pro-austerity piece per se, and it actually stated explicitly that austerity reduces economic growth during downturns. However, by stating, as the book did, that growth plummets once a government's debt exceeds 90% of GDP, which has now been determined to just be an arbitrary line, they de facto made the claim that governments should implement austerity measures if stimulus spending would increase their debt burden over 90%.

Regardless of their intent, their book was heralded by advocates of austerity as advocating for their position, just like Hayek's book The Road to Serfdom has been taken by libertarians as suggesting that increases in government social program spending inevitably lead to a totalitarian state, despite the fact that many Hayek scholars say this is incorrect. R&R's case is not helped by the fact that they went on to explicitly advocate austerity in the Wall Street Journal using their research as the basis for their argument.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#8  Postby Panderos » Apr 24, 2013 6:38 pm

UtilityMonster wrote:I read that book as well. It wasn't a pro-austerity piece per se, and it actually stated explicitly that austerity reduces economic growth during downturns. However, by stating, as the book did, that growth plummets once a government's debt exceeds 90% of GDP, which has now been determined to just be an arbitrary line, they de facto made the claim that governments should implement austerity measures if stimulus spending would increase their debt burden over 90%.

Regardless of their intent, their book was heralded by advocates of austerity as advocating for their position, just like Hayek's book The Road to Serfdom has been taken by libertarians as suggesting that increases in government social program spending inevitably lead to a totalitarian state, despite the fact that many Hayek scholars say this is incorrect. R&R's case is not helped by the fact that they went on to explicitly advocate austerity in the Wall Street Journal using their research as the basis for their argument.

Righto, thanks for the clarification. If their data clearly said austerity is a better policy, then I don't blame them for writing an article saying as much. Whether it really did even before the mistake I'm not totally sure, since austerity can still result in debts increasing (see the UK at the moment..).

But yeah like you say, people see what they want, and that goes for both sides here.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#9  Postby Thommo » Apr 24, 2013 7:04 pm

Panderos wrote:Whether it really did even before the mistake I'm not totally sure, since austerity can still result in debts increasing (see the UK at the moment..).


I think it depends what you mean by "result in", the rising debts would be happening with or without austerity, almost certainly faster without austerity.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#10  Postby Panderos » Apr 24, 2013 8:44 pm

I just meant you can have a policy of austerity and still have rising debts. In fact in that very book mentioned above I think they said it's very rare, perhaps there is only one or two examples since the war, of countries successfully imposing austerity as a way of getting out of debt. And I seem to remember that was either some dictatorship or someone small who had that imposed on them from larger powers (possibly both), and it was not pleasurable for the citizens of that country. Perhaps UM can weigh in here.

So yes, austerity might give you slightly slower rising debts, but that isn't the only consideration going into which policy is the better one.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#11  Postby Thommo » Apr 24, 2013 9:01 pm

How are you defining austerity here? Clearly there have been hundreds of post-war examples of recessions and in pretty much all those cases the gap between revenues and spending has been closed (once you factor in inflation) by some combination of spending cuts, tax rises and slowing or eliminating spending rises.

I'm also interested in what constitutes a "slightly" slower rate of rising debt.

...perhaps there is only one or two examples since the war, of countries successfully imposing austerity as a way of getting out of debt.


I don't think anyone is proposing austerity as a means of getting out of debt are they? Surely this is all to do with deficit reduction?
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#12  Postby Panderos » Apr 25, 2013 10:05 am

Thommo wrote:How are you defining austerity here?

Well I personally mean attempting to cut spending more than trivially, not including automatic stabilisers. I'm not sure if that's the definition in the book.
Thommo wrote:Clearly there have been hundreds of post-war examples of recessions and in pretty much all those cases the gap between revenues and spending has been closed (once you factor in inflation) by some combination of spending cuts, tax rises and slowing or eliminating spending rises.

If you are leaving recession, your welfare bills will reduce automatically and your tax take increase automatically as people re-enter work, you don't necessarily need to increase taxes or actively cut spending. Labour were running a deficit of about £36bn before the crash. The Tories in the 80s kept it around or slightly below £10bn. Osborne is as I understand it trying to cut that 'structural' part. I don't think it's really to do with the recession - the extra £100bn or whatever was due to the financial crisis and recession and that will disappear by itself...we hope.

Thommo wrote:I'm also interested in what constitutes a "slightly" slower rate of rising debt.

Are you after data? I don't have it, it's just a word. The US debt at the end of 2008 was $10 trillion, and at the end of 2012 $16 trillion. That's a 60% increase. The UK's debt at the end of 2008 was $0.53 trillion and at the end of 2012 $1.04 trillion, almost a 100% increase. Which one went with stimulus and which with austerity again? I know that's just anecdotal - I just haven't seen any evidence that austerity is a superior economic policy.

Thommo wrote:I don't think anyone is proposing austerity as a means of getting out of debt are they? Surely this is all to do with deficit reduction?

To what end? Maximise our debt and then just leave it?

Edit: If I recall correctly, the book says that austerity as a means of getting out of a debt problem is likely to fail. Getting out of a structural deficit problem, I don't think it even comments on that. Cutting the structural deficit makes perfect sense, although whether doing it during a recession is a good idea I'm not sure.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#13  Postby Thommo » Apr 25, 2013 12:41 pm

Panderos wrote:
Thommo wrote:Clearly there have been hundreds of post-war examples of recessions and in pretty much all those cases the gap between revenues and spending has been closed (once you factor in inflation) by some combination of spending cuts, tax rises and slowing or eliminating spending rises.

If you are leaving recession, your welfare bills will reduce automatically and your tax take increase automatically as people re-enter work, you don't necessarily need to increase taxes or actively cut spending. Labour were running a deficit of about £36bn before the crash.


Sure good point, the deficit for the 2007-2008 financial year was £36bn, the deficit the following year would have been larger as they followed their budgeted spending commitments in all likelihood according to any reasonable pre-crash growth forecasts though.

I would just emphasise I included a third option for closing the gap as well as spending cuts and tax rises though - you can also slow or eliminate future spending rises to account for the gap between forecast growth/size of the economy and actual growth (shrinkage)/size of the economy.

Incidentally, you may be interested to see the increased size of the welfare budget from 07 - 13 was around £33.5bn, of which around £5.7bn from unemployment payments directly. http://www.ukpublicspending.co.uk/year_ ... 40#ukgs302

Panderos wrote:The Tories in the 80s kept it around or slightly below £10bn. Osborne is as I understand it trying to cut that 'structural' part. I don't think it's really to do with the recession - the extra £100bn or whatever was due to the financial crisis and recession and that will disappear by itself...we hope.


I'm not quite sure what to make of that non-inflation + growth adjusted figure from the 80s. I think that the deficit clearing isn't quite as simple as trying to cut the 'structural' part, not least because it isn't quite clear exactly how much is structural and there's little agreement on the point. However, I think you're right that we could use it as a ballpark target, at least after we factor in the additional costs from debt interest repayments and inflation as well as the aforementioned additional spending commitments Labour had already made at the time of the onset of the recession and the shortfall between the size of the economy before recession and the size afterwards.

Image

This graph should show reasonably clearly both the shortfall in UK GDP from the forecast targets on which 2008 spending was based and also the fact that the UK economy is still smaller than it was in 2007.

Panderos wrote:
Thommo wrote:I'm also interested in what constitutes a "slightly" slower rate of rising debt.

Are you after data? I don't have it, it's just a word.


No, just wondering roughly what you meant!

Panderos wrote:The US debt at the end of 2008 was $10 trillion, and at the end of 2012 $16 trillion. That's a 60% increase. The UK's debt at the end of 2008 was $0.53 trillion and at the end of 2012 $1.04 trillion, almost a 100% increase. Which one went with stimulus and which with austerity again? I know that's just anecdotal - I just haven't seen any evidence that austerity is a superior economic policy.


That's a good example, thanks.

Edit: No, sorry, I have to take that back. This isn't an appropriate measure and says nothing about policy. Clearly if the UK had had a national debt of just $1bn then the same increase would be 50000%, but this tells us nothing of the effect of the policies, only something about the size of the existing debt.

A more accurate measure might be to look at the increase as a percentage of GDP without factoring in the size of the existing debt which skews the figures. In this instance it's ~40% for both nations over the period 2007-2012:-

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(Sorry, stuggling to find hard figures that are directly comparable, hence the approximation)

Panderos wrote:
Thommo wrote:I don't think anyone is proposing austerity as a means of getting out of debt are they? Surely this is all to do with deficit reduction?

To what end? Maximise our debt and then just leave it?


Essentially, yes, inflation and economic growth means that the sustainable level of debt and fractional cost as part of the budget decline over time. There's no particular need to pay down the capital as I understand it.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#14  Postby Panderos » Apr 25, 2013 2:18 pm

Thommo wrote:I would just emphasise I included a third option for closing the gap as well as spending cuts and tax rises though - you can also slow or eliminate future spending rises to account for the gap between forecast growth/size of the economy and actual growth (shrinkage)/size of the economy.

Right ok... that seems like cancelling something you planned to buy..it won't enter into any historical explanation. Closing a predicted gap, yes, but not a real one.

Thommo wrote:Incidentally, you may be interested to see the increased size of the welfare budget from 07 - 13 was around £33.5bn, of which around £5.7bn from unemployment payments directly.

Right. Presumably most of the deficit rise was from tax shortfalls then?

Thommo wrote:I'm not quite sure what to make of that non-inflation + growth adjusted figure from the 80s.
It was just for comparison. But you are right it should have been inflation adjusted.

Thommo wrote:I think that the deficit clearing isn't quite as simple as trying to cut the 'structural' part, not least because it isn't quite clear exactly how much is structural and there's little agreement on the point. However, I think you're right that we could use it as a ballpark target, at least after we factor in the additional costs from debt interest repayments and inflation as well as the aforementioned additional spending commitments Labour had already made at the time of the onset of the recession and the shortfall between the size of the economy before recession and the size afterwards.

Sure I agree, although am still a bit dubious on this bit about cutting planned spending.

Thommo wrote:Edit: No, sorry, I have to take that back....In this instance it's ~40% for both nations over the period 2007-2012

I take your point and assume that 40% is right. Again.. not very convincing for austerity as a means of preventing debt increases.

Thommo wrote:
Panderos wrote:
Thommo wrote:I don't think anyone is proposing austerity as a means of getting out of debt are they? Surely this is all to do with deficit reduction?
To what end? Maximise our debt and then just leave it?

Essentially, yes, inflation and economic growth means that the sustainable level of debt and fractional cost as part of the budget decline over time. There's no particular need to pay down the capital as I understand it.

Yes and its the inflation part much more than the growth part. Countries don't grow out of debt, that much was clear from that book. That massive spike in war debt on your graph was something like £10bn. Peanuts now, inflated all away.
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Re: Punched In The Dick: Austerity Movement, by Grad Student

#15  Postby Thommo » Apr 25, 2013 2:47 pm

Panderos wrote:
Thommo wrote:Incidentally, you may be interested to see the increased size of the welfare budget from 07 - 13 was around £33.5bn, of which around £5.7bn from unemployment payments directly.

Right. Presumably most of the deficit rise was from tax shortfalls then?


I guess so, good question.

Panderos wrote:
Thommo wrote:Edit: No, sorry, I have to take that back....In this instance it's ~40% for both nations over the period 2007-2012

I take your point and assume that 40% is right. Again.. not very convincing for austerity as a means of preventing debt increases.


I agree.
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