Economic Policy: Saturday Twentieth Century Economic History Weblogging
Liveblogging World War II: April 20, 1943

Noted for April 20, 2013

  • Paul Krugman: Correlation, Causality, and Casuistry: "One last thing: even if you take Dube’s forward-looking regression as a causal relationship, which you shouldn’t, notice how weak that relationship is in the relevant range. It looks as if raising debt from 50 to 150 percent of GDP, other things equal, reduces growth by around 0.1 percentage point over the next three years. This is the dreadful consequences that prevents us from doing anything about mass unemployment?"

  • Paul Krugman: Lack Of Nuance Is Not The Problem: "I see that both Tyler Cowen and Austin Frakt are offering explanations/excuses for the Reinhart-Rogoff affair in terms of the dynamics of wonk celebrity…. As an explanation, I think this has some merit; as an excuse, none…. What happened with R-R was that they came out with a sloppy paper that played to the spirit of the times. The sloppiness was immediately obvious from the way they highlighted slow US growth in the late 1940s as an illustration of the price of debt overhang, somehow missing the point about postwar demobilization. It took only a few days for critics to point out the correlation versus causation issue too…. But the paper was also a huge immediate hit with the austerians, and they got sucked in. Notice, however, that the problem with the original wasn’t that it failed to convey the nuances. The problem was that it was just plain wrong — wrong about America after the war, wrong about what a debt-growth correlation means. (It turns out that there was other wrongness too, but that was enough)."

Justin Green: 'Indisputable Torture' | Andrea Terzi: Why the Reinhart-Rogoff paper was flawed right from the start | Justin Fox: Reinhart, Rogoff, and How the Macroeconomic Sausage Is Made | Andrew Gelman: Memo to Reinhart and Rogoff: I think it’s best to admit your errors and go on from there | Arindrajit Dube: Guest Post: Reinhart/Rogoff and Growth in a Time Before Debt | Jeff Frankel: Fear of Fracking: The Problem with the Precautionary Principle | Kevin Drum: Elena Kagan Writes an Awesome Dissent | Mark Thoma: Economist's View: Narayana Kocherlakota contra Jeremy Stein: Low Real Interest Rates and Financial Market Instability | Sarah Bloom Raskin: Aspects of Inequality in the Recent Business Cycle | John Maynard Keynes: Trotsky On England | Gillian Tett: Interview: Facebook’s Sheryl Sandberg | Ambrose Evans-Pritchard: Debunking austerity claims makes no difference to Europe's monks and zealots |

  • Simon Wren-Lewis: mAn Understandable Mistake: "No, I’m not talking about coding in excel - as someone who has in the past done plenty of empirical work, my overriding reaction is empathy…. What I’m talking about is the weak global recovery and a primary reason for it. But there is a link, which I will come to at the end. To be honest, this post is really just to encourage you to read this Vox piece by Kose, Loungani and Terrones, which comes from the recent IMF WEO report (pdf). It tells a story in pictures (particularly comprehensive and clear pictures) that I and others - most notably Paul Krugman - have been telling for some time…. [G]overnment spending in the advanced economies has grown at a much slower rate in this recovery than in previous recoveries, and of course this recovery has been significantly slower as a result. In contrast, government spending in the emerging economies has been as rapid during the recovery as before the recession, and they have recovered rapidly from recession. Go into detail within the advanced economies group, and the pattern is clear: the greater the contraction in government spending relative to previous recoveries, the slower the recovery has been."

  • Corey Robin: The Price of Labor: Burke, Nietzsche, and Menger: "Edmund Burke…. 'When any commodity is carried to market, it is not the necessity of the vendor, but the necessity of the purchaser that raises the price…. If the goods at market are beyond the demand, they fall in their value; if below it, they rise. The impossibility of the subsistence of a man, who carries his labour to a market, is totally beside the question in this way of viewing it. The only question is, what is it worth to the buyer?' Carl Menger, Principles of Economics: 'Neither the means of subsistence nor the minimum of subsistence of a laborer, therefore, can be the direct cause or determining principle of the price of labor services. In reality, as we shall see, the prices of actual labor services are governed, like the prices of all other goods, by their values. But their values are governed, as was shown, by the magnitude of importance of the satisfactions that would have to remain unsatisfied if we were unable to command the labor services.' Friedrich Nietzsche, The Wanderer and His Shadow: 'The value of work.—If we wanted to determine the value of work by how much time, effort, good or ill will, compulsion, inventiveness or laziness, honesty or deception has been expended on it, then the valuation can never be just; for we would have to be able to place the entire person on the scales, and that is impossible. Here the rule must be “judge not!” But it is precisely to justice that they appeal who nowadays are dissatisfied with the evaluation of work. If we reflect further we find that no personality can be held accountable for what it produces, that is to say its work: so that no merit can be derived from it; all work is as good or bad as it must be given this or that constellation of strengths and weaknesses, knowledge and desires. The worker is not free to choose whether he works, nor how he works. It is only from the standpoint of utility, narrower and wider, that work can be evaluated.'"

  • Zachary A. Goldfarb: Did underwater mortgages kill the economy?: "How much has the phenomenon of people being underwater on their mortgages – rather than simply the decline in home prices – held back growth? A recently revised paper by Atif Mian of Princeton, Amir Sufi of the University of Chicago Booth School of Business and Kamalesh Rao of MasterCard Advisers suggests that underwater mortgages have played a significant role in holding back the recovery. The paper, 'Household Balance Sheets, Consumption and the Economic Slump', was first released several years ago, but it has been revised to include an important new calculation…. The authors found that being underwater makes a big difference. As the chart below shows, Zip codes with fewer than 15 percent of homeowners only cut back only a little – spending only half a cent less for every dollar their home fell in value. But in Zip codes where more than 50 percent of homeowners were underwater, borrowers cut back five times as much – spending 2.5 cents less on car purchases for each dollar of reduced housing wealth…. [B]orrowers with very high leverage – which would include people who are underwater – are likely to cut back significantly on spending in a housing decline."

  • Menzie Chinn: Econbrowser: No Time for Austerity: US Edition: "With unemployment at 7.6% and an output gap of around 6%, it's (still) not the time to embark on front-loaded spending cuts in the United States…. [W]hat effect studies like Reinhart-Rogoff might have had in countries that elected to start the process of fiscal consolidation without much pressure from the bond markets or other external financiers. Britain and the United States are the big question marks there. The Cameron government in Britain — over the protestations of the opposition party and the monetary fund and other groups — has slashed the country’s budget. But it still has not met its own deficit-reduction targets, because the economy has remained mired in recession and automatic spending on social programs has increased. The country still could reverse course and engage in an effort to improve growth rather than an effort to hold down its debts. But thus far it has chosen not to. The United States has also embarked on a campaign of deficit reduction, though a more modest one. Thus far, the Obama administration and Congress have raised taxes on the wealthiest Americans and agreed to trillions in budget cuts. With the aggressive actions taken by the Federal Reserve, the economy has continued to grow — which will greatly aid the country’s fiscal situation in the long run. How important were academics like Professors Reinhart and Rogoff to that process? My sense is not very, as well, even if policy makers pushing for deficit reduction cited them. Reinhart and Rogoff have responded to the publication of the Herndon-Ash-Pollin results by noting that the finding of 1% reduction in trend growth above the 90% threshold remains intact (this is the distinction between using median vs. mean differences); moreover, over time, 1% cumulatively becomes important in assessing the impact on the level of GDP. On this last point, I definitely agree."

  • Menzie Chinn: Econbrowser: "The Great Divergence of Policies": "The current global recovery has followed an unusual path compared with the three previous global recoveries… sharp divergence of activity across advanced and emerging market economies… great divergence of monetary and fiscal policies, which has become increasingly pronounced during the past two years…. Of particular note is this statement: '…Even though monetary policy has been effective, policymakers had to resort to unconventional measures. Even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy. This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies. Four years into a weak recovery, policymakers may therefore need to worry about the risk of overburdening monetary policy because it is being relied on to deliver more than it traditionally has.'… [G]overnment spending is most depressed relative to previous episodes in those cases where the recovery has been most lackluster. The contrast between the US and the UK merits particular attention."