Remembering the Old New Republic: Hoisted from the Archives from Five Years Ago
Let us remember the days when the Old New Republic, under the ownership of Marty Peretz and the editorship of Franklin Foer put forward people who are, shall we say, not very quantitative to make "the case against Keynes... [and] Krugman", and for austerity.
Good riddance:
(June 2010): The Case Against Keynes (With Some Questions for Krugman, Too): "As President Obama’s bipartisan fiscal commission gets set to convene...
...the Greek budget disaster has triggered the predictable flood of cautionary notes about how we’re spending too much and heading toward a debt crisis. Should these concerns illuminate the commission’s work—or are they merely alarmist? Paul Krugman harbors no doubts:
Despite a chorus of voices claiming otherwise... we aren’t Greece.... [T]the truth is that policy makers aren’t doing too much; they’re doing too little.
We should enact another stimulus plan, and administration officials would push for one if Congress had not been ‘spooked by the deficit hawks.’ For its part, he adds, the Fed should abandon its groundless fears of inflation and work instead to ward off the threat of deflation....
Carmen Reinhardt and Kenneth Rogoff argue that rising debt to GDP levels eventually slows economic growth. By the late 1990s, Japan was well into what they identify as the zone of danger, when the debt to GDP ratio reaches 90 percent. The U.S. is not there yet, but we’re on track to get there by the end of this decade unless we change course.... I’m no economist; neither are most policymakers. And one may well believe that just as war is too important to leave to the generals, the economy is too important is leave to the economists. Nonetheless... our operating presumption must be that excessive debt accumulation will eventually reduce economic growth. Besides, if CBO is right that we’re on track to incur annual interest payments of more than $900 billion by 2020, and if foreigners continue to hold nearly half our debt, we’ll be transferring about 2 percent of GDP overseas every year in interest payments alone. And how can we afford the substantial increases in future-oriented investment—in infrastructure, basic research, science and technology, and education—if we stay on our current path?...
As I wrote:
Risks of Debt?: The Real Disagreement with Reinhart-Rogoff: The threshold at 90% is not there.... That it appears to be there in Reinhart and Rogoff's paper is an artifact of Reinhart and Rogoff's non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%. Owen Zidar provides what seems to me at least to be a much more informative cut at the data:
and writes:
I took all countries with Public Debt to GDP ratios above 50… evenly divided them into 50 equalized sized bins of Debt to GDP*… plot[ted] the mean of the outcome of interest for each bin…. [This] would show clean breaks at a Debt to GDP ratio of 90 if they actually exist…
There is no 90% threshold. Making policy under the belief that risks at 100% are very different than risks at 80% is in no way supported by any of the data....
A good deal of this decline comes from countries where interest rates tend to be higher and the stock market tends to be lower where government debt is higher. That is not relevant to the U.S. today. A good deal of this decline comes from countries where inflation rates are higher when government debt is higher. That is not relevant to the U.S. today. Still more of this decline comes from countries where growth was already slow, and high government debt relative to GDP is, as Larry Summers constantly says, a result not of the numerator but of the denominator. That is not relevant to the U.S. today. How much of this correlation is left for a country with low interest rates, low inflation rates, buoyant stock prices, and healthy prior growth?... The answer is: not much, if any. Until interest and inflation rates begin to rise above normal levels or the stock market tanks, there is little risk to accumulating more government debt here in the United States....
[And] note is how small the correlation is. Suppose that all of the correlation is causation from higher debt to slower growth. Let us then consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. And suppose that we boost government spending by 2% of GDP.
Let us boost government spending, in the first case, for this year. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by... wait for it... 0.006%-points per year.
After 10 years GDP is lower than it would otherwise have been by... 0.06%. 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?
The 2.5 multiplier case is more so. Spend an extra 2% of GDP over each of the next three years. Collect 15% of a year's extra output as a plus in the short run. Taking account of higher tax revenues, debt goes up by 1% of GDP, and we have the same ten-year depressing effect of 0.06% of GDP.
15% now. -0.06% in a decade.
The first would be temporary, the second is permanent, but even so the costs are much less than the benefits as long as the economy is still at the zero lower bound.
And this isn’t the graph that you were looking for. You want the causal graph.... We are supposed to be scared of a government-spending program of between 2% and 6% of a year's GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP?
That does not seem to me to compute.
