Martin Wolf's Point About the British Industrial Revolution, Debt, and Growth...
A Note on Self-Defeating Austerity and Current Levels of Interest Rates

Noted for May 27, 2013

Jeff Frankel sends us to Kevin Warsh (2006): Corporate Cash Balances and Economic Activity | Cosma Shalizi: Advanced Data Analysis: Problem Set 11 | Solution Set 11 | Barry Ritholtz: A hedge fund for you and me? The best move is to take a pass |

  • Robert Waldmann: Angry Bear » Debt and Growth III: "Does the Reinhart Rogoff (hence R-R) data set… post WWII contain evidence that a debt-to-gdp ratio higher than 90% causes lower real GDP growth. My answer is: no…. Why is my result different from almost everyon else’s (except for Dube’s)? Well, I take the very very first step to address causation — I run a regression including lagged real GDP growth…. The dependent variable is annual real GDP growth. The first coefficient is on the debt-to-gdp ratio in percent rounded down to 90 if it is over 90. The second coefficient—the coefficient of interest—is the ratio minus 90 if it is over 90 or zero if it is under 90. This coefficient is an estimate of the effect of further debt once debt has already reached 90% of GDP…. l1drgdp is the one year lagged rate of real GDP growth. _cons is a constant term…. The coefficient on debtgdpmin90 is actually very slightly positive. There is no evidence in the R-R data set that debt to GDP ratios greater than 90% are worse for growth than a debt ratio of 90%."

  • Ezra Klein and Evan Soltas: Bernanke lashes Congress: "Ben Bernanke thinks Congress is doing quite a lot wrong…. 'The expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year…. Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.'… He basically walked up to Congress and said, 'You’re the reason the economy isn’t taking off more.' This is why people need to stop celebrating our rapidly falling deficits. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong…. We’re doing basically nothing about long-term deficits, which is where the problem actually lies. And we’re using policies, like sequestration, that most everyone agrees are bad policy…. No wonder Bernanke’s irked."

  • Daniel Kuehn: Facts & other stubborn things: A mostly good (some bad) criticism of Krugman and a bad criticism of Krugman: "The good one is the Reinhart and Rogoff response… the criticism of R&R needs to focus on (1.) empirical assumptions they made, (2.) the disproportional focus on the 90% figure that was not the watershed it was purported to be, and (3.) the monotone public discussion of the direction of causality (which has not matched their writing on the subject). These are three valid areas of criticism…. Krugman's gone substantially beyond these criticisms…. The worst is when Krugman treats them like eager accomplices of politicians that support austerity, like they've been hiding data, or that the debate has turned on their paper…. Reinhart and Rogoff have addressed each of these in their letter. It does get goofy in parts, though. Take this: 'Your recent April 29, 2013 NY Times blog The Italian Miracle is meant to highlight how in high-debt Italy, interest rates have come down since the European Central Bank’s well-placed efforts to act more as a lender of last resort to periphery countries. No disagreement there. However, this positive development is meant to re-enforce your strongly held view that high debt is not a problem (even for Italy) and that causality runs exclusively from slow growth to debt… Indeed, your repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject… Of course, it is well known that the economic cycle impacts government finances and therefore debt (causation from growth to debt). Cyclically adjusted budgets have been around for decades, your shallow characterization of the growth-debt connection.' It's stuff like this that makes it hard for an objective reader to take them seriously…. Krugman's… never said causality runs exclusively from slow growth to debt. He's gone out of his way to present the alternative. This is common across people that go nuts over Krugman--straw-manning comes with the territory in blogs, but Krugman gets more straw-manning than almost any other economist on the internet right now…. Krugmania is one of the weirdest things in the economics blogosphere, IMO. I don't know why people don't just say 'well he gets a little liberal and a little shrill for me sometimes and I don't like that' and leave it at that. Instead they put out some really nutty criticisms."

  • Mark Thoma: Economist's View: Water Mismanagement: We're Depleting Our Aquifers: "I didn't realize how fast water levels in aquifers are falling: 'Water Waste May Leave Us Thirsty, by David Biello, Scientific American: 'Since 1900, the U.S. has pulled enough water from underground aquifers to fill two Lake Eries. And in just the first decade of the 21st century, we've extracted underground water sufficient to raise global sea level by more than 2 percent. We suck up 25 cubic kilometers of buried water per year. That's the message from the U.S. Geological Survey's evaluation of how the U.S. is managing its aquifers. Or mismanaging. For example: water levels in the aquifer that underlies the nation's bread basket have dropped in some places by as much as 160 feet. The rest of the world isn't doing any better…. Mismanagement of water resources is a hallmark of this new human-dominated era in the Earth's geologic history, known as the Anthropocene. Despite building, on average, one large dam every day for the last 130 years, we use more water than we store. And we're letting that freshwater escape to the seas. Which means we may find ourselves with water, water everywhere, but not much fit to drink.'"

  • Yuriy Gorodnichenko and Michael Weber: Are Sticky Prices Costly? Evidence From The Stock Market "We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide “model-free” evidence that sticky prices are indeed costly."

  • Max Rivlin-Nadler: United Nations Tells Ron Paul To Shove His Lawsuit: "Last we checked, Ron Paul had filed a lawsuit with the World Intellectual Property Organization (an agency of the UN, which he HATES) in an attempt to expropriate both and from his supporters. So how'd that all turn out for Paul? Not so well. Both of the domain name disputes were dismissed because Paul still took his supports to court, even though they offered to give him the sites for free (they only requested compensation for their very sizable mailing lists). Not only did Paul lose both domain name disputes, but he was also found guilty of 'reverse domain name hijacking', which is essentially being found guilty of wasting the court's time."

  • Joe Weisenthal: Thomas Herndon On Reinhart And Rogoff's Data Availability: "Kenneth Rogoff and Carmen Reinhart… a big open letter to Paul Krugman, blasting him for his uncivil and nasty tone in the debate over recent years…. In their open letter, R&R dispute the popular notion that they were keeping their data secret…. To accuse us of not sharing our data is an unfounded attack on our academic and personal integrity…. Via email, we asked [Thomas] Herndon his precise take on what happened…. 'I don't want to assign wrongdoing to any parties… before I got the spreadsheet, it was difficult for me to try to piece together the data from the publicly available sources, and that I spent a decent amount of time trying to…. [T]hey did make their debt/GDP data available on their website, and they linked to the Angus Maddison dataset…. However, they also got growth data from numerous other sources, and they did not make the spreadsheet where they "put it all together" available (and actually still haven't), so that their actual calculations could  be checked…. During the fall semester, I spent a bit of time trying to figure out what was the actual growth data they used and how they took the average, because some of my summary statistics weren't matching…. Another complication to the story is that I think Krugman might be referring to comments by Dean Baker (2010) here as well as Bivens and Irons (2010), here. From Baker, Bivens and Irons's comments, it seems they tried to get the data (I think Dean Baker tried, and then Bivens and Irons who were co-authors) from Reinhart and Rogoff, but were unable to get it, and I could be wrong, but I think that this might be what Krugman is referring too. That being said, the authors did write this in early 2010, and RR did make half the dataset (the debt/GDP data) available a little later in the year. So this is another complication that I'm not too familiar with, and you would probably need to ask Krugman, Baker, Bivens and Irons about their experiences.'… Bottom line: On this point of whether they showed their data, they may have a point that they pointed to their data sources. But as Herndon argues, it took seeing their spreadsheet to discover the error."