Mike Konczal: Reinhart-Rogoff a Week Later: Why Does This Matter?
Mike Konczal:
Reinhart-Rogoff a Week Later: Why Does This Matter?: Well this is progress. We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote:
The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune. (h/t QZ.)
Today, Holtz-Eakin writes about Reinhart and Rogoff in National Review, but drops the "canonical" status. Now they are just two random people with some common sense the left is beating up:
In order to distract from the dismal state of analytic and actual economic affairs, the latest tactic is to blame...two researchers, Carmen Reinhardt and Kenneth Rogoff, who made the reasonable observation that ever-larger amounts of debt must eventually be associated with bad economic news.
That's not actually what they said, and if you read Holtz-Eakin in February Reinhart-Rogoff is sufficient evidence to enact the specific plans he wants. Now there's no defense of the "danger zone" argument; just the idea that the stimulus failed. Retreat!…
So what should we conclude about Reinhart-Rogoff a week later, now that the critique seems to have won? How should the government approach the debt?… One thing about the "cliff" metaphor is that there's no tradeoff that would make it acceptable…. With the danger zone metaphor now out of play, perhaps economists can see the relevant tradeoffs more clearly. Reinhart-Rogoff stand with a small negative relationship between debt and growth, one that is likely driven by low growth rather than high debt…. If there's even a basic fiscal multipler at work, the upside more than compensates for the downside. As Brad DeLong notes, if you consider a multipler of 1.5 and a marginal tax share of 1/3, the small correlation people are finding - Delong uses 0.006 percent from an in-house estimate - are more than canceled. Spending 2 percent more causes a bump of 3 percent of GDP, while debt goes up 1 percent of GDP. As Delong notes, "3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?" And as the IMF noted recently:
Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output.
Now is the time to move away from austerity and towards more expansion. There are costs (though debt servicing is at a historic low), but the benefits outweigh them….
Meanwhile, Ryan Avent… thinks that the Reinhart-Rogoff cliff results are overplayed as something that actually impacted policy. This is always a tricky question to answer, but Reinhart-Rogoff certainly dominated the sensible, mainstream conversation over the deficit and was a favorite go-to for conservatives… popular among journalists…. Media Matters put together this video…. (Bonus fun: in the video, at the 1m20s, Niall Ferguson refers to the 90 percent result as "the law of finance.")
I think the ideas matter. (Why else would we do this?) I think it's important to understand this revelation in light of other players moving against austerity, including both the IMF and the financial industry. As people reposition themselves, understanding that one of the core old ideas is now out of play allows a different reconfiguration of power. Also, it's worth repeating, it's becoming harder to pretend that austerity hasn't failed. It didn't even do the actual goal, which was reduce the debt-to-GDP ratios of the countries that were being targeted.
Citizens across the world who were normally indifferent are realizing that they were sold a bad bag of goods when it came to austerity and belt-tightening. They are now trying to figure out what happened, and how things could be done differently. As these are such critical issues, this examination is important. It's great we are having it.
