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  • Summers: Takeaways from the Reinhart-Rogoff Error

    In the Washington Post , Lawrence Summers weighs in on the now infamous Rogoff-Reinhart coding error . Summers seems a bit annoyed at both those people who don't see the error as a big deal, and those who are "taking joy" in Rogoff and Reinhart's mistake. Summers: Where should these debates settle? As someone who has done a fair amount of econometric research, consumed such research as a policymaker and participated (as an advocate) in debates about fiscal stimulus and austerity, these would be my takeaways: First, this experience should accelerate the evolution of mores with respect to economic research. Rogoff and Reinhart are rightly regarded as careful, honest scholars. Anyone close to the process of economic research will recognize that data errors like the ones they made are distressingly common. Indeed, the JP Morgan risk models in use when the London “whale” trade was placed appear to have had errors similar to those made by Reinhart and Rogoff. Going forward, authors, journals and commentators need to devote more effort to replicating significant results before broadcasting them widely. More generally, no important policy conclusion should ever be based on a single statistical result. Policy judgments should be based on evidence accumulated from multiple studies done with differing methodological approaches. Even then, there should be a reluctance to accept conclusions from “models” without an intuitive understanding of what drives them. It is understandable that scholars want their findings to inform policy debates. But they have an obligation to discourage and on occasion contradict those who would oversimplify and exaggerate their conclusions. Second, all participants in policy debates should retain a healthy skepticism about retrospective statistical analysis. Trillions of dollars have been lost and millions of people have become unemployed because the lesson learned from 60 years of experience between 1945 and 2005 was that “American house prices in aggregate always go up.” This was no data problem or misanalysis. It was a data regularity until it wasn’t. The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care. In retrospect, it was folly to believe that with data on about 30 countries it was possible to estimate a threshold beyond which debt became dangerous. Even if such a threshold existed, why should it be the same in countries with different currencies, financial systems, cultures, degrees of openness and growth experiences? And there is the chestnut that correlation does not establish causation and so any tendency for high debt and low growth to go together might well reflect the debt accumulation that follows from slow growth. Read Lessons can be learned from Reinhart-Rogoff error here .

  • Simon Nixon on 'What Comes After Austerity?'

    With Italy's new compromise government making moves to end austerity measures, the austerity backlash in Europe seems to be gathering momentum. Wall Street Journal Europe Editor Simon Nixon takes a look at what might be ahead for the euro zone. But he wants us to note that some European countries are now able to consider dropping austerity measures because, he argues, accepting them before has helped to lower borrowing costs. From the WSJ News Hub :

  • Federico Fubini Sees Ominous Signs in Europe's Imbalanced Markets

    As Italy's newly named president leads a public shift away from hardline austerity policies , noted Italian financial columnist Federico Fubini raises a provocative question: "Is Europe in depression?" At Project Syndicate , Fubini cites economic historian Charles Kindleberger in pointing to a "failure to 'maintain a market for distressed goods'" as a major reason the Great Depression was so severe. Fubini: Surely history is not repeating itself – at least not in the literal sense. European creditor countries today are not tempted by anything like America’s Smoot-Hawley Tariff Act, which crippled world trade in 1930. Germany, the Netherlands, Austria, and Finland remain committed to the European Union’s single market for goods and services (though their national regulators hinder intra-European capital flows). Still, one cannot help but notice similarities with the 1930’s. At the time of the Great Crash, the United States and France were piling up gold as fast as the Weimar Republic was piling up unemployment. Today’s northern European countries are running up record current-account surpluses, just as some southern European countries are experiencing Weimar-level unemployment. For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door. How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances. Read Europe in Depression? here .

  • Planet Money Podcast: "How Much Should We Trust Economics?"

    The latest Planet Money podcast features an interview with Thomas Herndon . Herndon attracted a lot of attention last week . He's the University of Massachusetts graduate student who discovered an error in Carmen Reinhart and Kenneth Rogoff 's influential paper on government debt. The error prompted the Planet Money team to ask, "How much should we trust economics?" Take a listen:

  • UMASS Economists' Critique of Reinhart/Rogoff's Work on Debt

    Carmen Reinhart and Kenneth Rogoff 's paper, Growth in a Time of Debt , has been required reading for policy makers in developed economies, and it is seen as highly influential in the debate over austerity. After the authors' methods were called into question, Rogoff and Reinhart looked over their work, and found an error. But they still stand by their conclusions (FT, sign-in required). Thomas Herndon , Michael Ash , and Robert Pollin are the economists who highlighted some key issues with Reinhart and Rogoff's work. In Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff , the authors write that they "find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics." Here is a sample of their critique: To build the case for a stylized fact, RR stresses the relevance of the relationship to a range of times and places and the robustness of the rounding to modest adjustments of the econometric methods and categorizations. The RR methods are non-parametric and appealingly straightforward. RR organizes country-years in four groups by public debt/GDP ratios, 0{30 percent, 30{60 percent, 60{90 percent, and greater than 90 percent. They then compare average real GDP growth rates across the debt/GDP groupings. The straightforward non-parametric method highlights a nonlinear relationship, with effects appearing at levels of public debt around 90 percent of GDP. We present RR's key results on mean real GDP growth from Figure 2 of RR 2010a (below) and Appendix Table 1 of RR 2010b in Table 1 (here). Figure 2 in RR 2010a and the first line of Appendix Table 1 in RR 2010b in fact do not match perfectly, but they do deliver a consistent message about growth in time of debt: real GDP growth is relatively stable around 3 to 4 percent until the ratio of public debt to GDP reaches 90 percent. At that point and beyond, average GDP growth drops sharply to zero or slightly negative. A necessary condition for a stylized fact is accuracy. We replicate RR and that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and growth among these 20 advanced economies in the post-war period. Our most basic finding is that when properly calculated, the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0:1 percent as RR claims. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when public debt/GDP ratios are lower. Download the paper here .

  • British Economy and the Dreaded Triple Dip

    Britain's economy shrank again in the fourth quarter of 2012, according to the United Kingdom's Office of National Statistics , sparking concerns there of a triple-dip recession. Here are some of the key takeaways from the release: • GDP was estimated to have decreased by 0.3% in Q4 2012 compared with Q3 2012. • Output of the production industries was estimated to have decreased by 1.8% in Q4 2012 compared with Q3 2012, following an increase of 0.7% between Q2 2012 and Q3 2012. • Construction sector output was estimated to have increased by 0.3% in Q4 2012 compared with Q3 2012, following a decrease of 2.5% between Q2 2012 and Q3 2012. • Output of the service industries was estimated to have been flat in Q4 2012 compared with Q3 2012, following an increase of 1.2% between Q2 2012 and Q3 2012. • GDP was estimated to have been flat in Q4 2012, when compared with Q4 2011. Not a pretty picture. Here's a look at GDP and main components since 2000: Read the full release here . And at the Mirror , Graham Hiscott says Britain might have already been in the third dip of the triple dip recession had London not hosted a pretty big party this past summer: Does the Chancellor have a Jessica Ennis poster on his wall at the Treasury? If not, he should, because if it weren’t for Team GB’s heroics and the big boost from the Olympics, it’s likely the UK would already be stuck in a triple dip recession. The Games - and the surge in spending - were a fig leaf for problems plaguing our economy. Today’s figures showing the economy shrank 0.3% in the fourth quarter of 2012 were a case of business as usual for battered Britain. Take out the Olympic bounce, and the economy has shrunk for four of the past five quarters. Hardly a gold medal winning performance. Read the full article here .

  • Roubini's Outlook for 2013: "Downside risks to the global economy are gathering force"

    As President Obama launches into his second term, getting the economy moving remains among his top priorities. It is not the challenge he faced four years ago, when we were just months removed from the near global economic meltdown of September 2008. Rather, it may look very similar to last year: slow growth around the globe. But, according to Nouriel Roubini , there will be some "important differences , " that might lead us to prefer slow growth to the alternative. In a piece for Project Syndicate , Roubini raises concern that, "given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries." With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year. After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits. Read The Economic Fundamentals of 2013 here .

  • The British Economy and Challenging the Austerity Narrative

    Fantastic storytelling from Adam Davidson in the New York Times about visiting the Bank of England and meeting with Monetary Policy Committee member Adam Posen. But Davidson's story is also about, well, storytelling and how it is applied to decision making at one of the most influential global financial institutions. It seems Posen has been fighting against the tide within the BofE and losing because his math hasn't squared with the narratives his fellow committee members have bought into: Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England’s economic staff. The staff members take the most recent economic data — G.D.P. growth, the unemployment rate and more subtle details gathered from interviews with businesspeople throughout the country — and try to fashion it into a narrative. Does a sudden spike in new factory orders represent a fundamental shift, or is it just a preholiday blip? Do anecdotal reports of rising food prices herald a period of inflation, or is it the result of a cold snap? Which story feels truer? A few days later, each of the nine members of the M.P.C. puts forth his or her own interpretation. Over two days, the members debate these competing narratives and discuss what the Bank of England should do. Then the committee votes, and the winning policies are implemented. Soon after Cameron was elected, Posen argued that the committee should endorse a more radical, expansionary approach of economic recovery. He believed that the data indicated the sputtering would end and the economy would grow only if the Bank of England began buying many billions of pounds’ more worth of bonds. This added stimulus would flood the banking system with new cash and indirectly push banks to lend to businesses and citizens. (Banks don’t make money by sitting on cash.) Some of Posen’s colleagues warned that this would lead to inflation. He countered that the economy was operating below its capacity, so there was no reason to fear inflation. Each month, the committee heard Posen’s advice. Each month, it voted 8 to 1 against him. The bank eschewed his more expansionary suggestions and stuck to a more conservative approach of keeping interest rates low and modest bond-buying. Soon Posen became a famously divisive figure in London’s financial community, alternatively the enlightened genius trying to save the country and the mad Yank who wanted to inflate the pound out of existence. “There was this period,” he remembers, “when I would lie awake at night and think: Am I just crazy? Maybe I’m nuts. It’s like the scene in ‘12 Angry Men.’ I almost wavered. But then I decided: No, no, no. I was convinced: They’re nuts and I’m right.” Read God Save the British Economy here .

  • UK Austerity Measures to Continue

    The economic situation in Britain has mirrored a London winter day: gray and bleak. And it may be worse than a lot of us have realized. Chancellor of the Exchequer George Osborne addressed Parliament earlier this week and reported that the government is anticipating an extension of austerity measures beyond 2015. The Economist 's John Prideaux and Jeremy Cliffe discuss the impact of Osborne's address on the British economy and beyond:

  • A New Model for Fighting Debt: Treating Greece as a Charity Case

    Peter Nomikos is a very, very wealthy Greek businessman, and he believes he has a solution to his country's debt crisis. Nomikos, heir to a shipping fortune, has set up a charitable organization and is asking all Greeks to donate and pay down the countr's debt. We're not convinced this will work, but it is worth watching, and Nomikos deserves credit for at least trying another path. Der Spiegel interviewed Nomikos about Greece Debt Free , and asked him why his plan is better than just getting all Greeks to pay their taxes: Nomikos : The difference is that with taxes, you don't know what they are being used for. There is a lack of trust in the state, and I am not going to pretend that I can solve this cultural problem. But Greeks are also great patriots, and I think we should harness this feeling. A euro for "Debt-free Greece" is not a euro in taxes lost. It is complementary. SPIEGEL ONLINE : What is the reaction from the Greek government? Nomikos : Many people in the government and the diplomatic community find our campaign very encouraging. But remember, we are non-political and non-governmental. It is the first real show of a private Greek citizen to organize other Greeks to address our biggest problem. It shows to the world that we are taking initiative. SPIEGEL ONLINE : You established the foundation in the US state of Delaware. Why not in Greece? Nomikos : In Greece, I couldn't be sure the money would remain untouched. Also, being a US charitable foundation means that American taxpayers can deduct any donation from their taxes. It is an incentive for the wealthy Greek diaspora in the US. SPIEGEL ONLINE : And for other nationalities as well? Nomikos : Any friend of Greece is welcome. Originally, I thought mainly diaspora Greeks would participate. But there has been a huge amount of interest from the business community within Greece. Some companies are marketing their products with our slogan "Debt-free Greece" and pay part of the profits into our campaign. Read the full interview here .

  • Planet Money: My Big Austere Greek Wedding

    The Planet Money team has a knack for asking the right questions. This week, they are taking an issue that everybody is talking about--Greece's debt crisis--and exploring it in a way that gets at some core dilemmas. What if Greece does what Angela Merkel and others want and in exchange goes through decades of pain? Is that a wise economic policy for Greeks? For Europe? And what does it mean for a couple that is getting married this week?

  • Economix: De Facto Austerity Programs in U.S. Local Governments

    Over at Economix , Yale economists Ben Polak and Peter Schott point to local government jobs as what makes the current recovery and historical anomaly. Private employment may not have come back at the rate it did following past recessions, but it has largely come back. Here's a look at local government employment following five recessions: Polak and Schott: Going back as long as the data have been collected (1955), with the one exception of the 1981 recession, local government employment continued to grow almost every month regardless of what the economy threw at it. But since the latest recession began, local government employment has fallen by 3 percent, and is still falling. In the equivalent period following the 1990 and 2001 recessions, local government employment grew 7.7 and 5.2 percent. Even following the 1981 recession, by this stage local government employment was up by 1.4 percent. Who is losing these local government jobs? In 1981 it was mostly teachers. Now, the losses are shared by teachers and other local government workers alike. State government is much less important than local because it is a much smaller share of total nonfarm employment: 4 percent versus 10 percent. Nevertheless, a similar story can be told there. This far into each recession since 1955, state government employment had grown. Since the start of the latest recession, state government employment is still down 1.2 percent. Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent. Read America's Hidden Austerity Program here .

  • UK in Double-Dip Recession

    Britain has entered into a double-dip recession, according to the UK Office for National Statistics . To be more precise, it looks as though Britain is in the second dip of a double-dip recession, and has been since the end of 2011. Here's the quarter-by-quarter growth rate for UK GDP, from the BBC : BBC Economic Editor Stephanie Flanders says the report from the ONS is anything but surprising, as conditions in the UK economy have been flat and disappointing for some time now. The 0.2% decline in GDP in the first three months of 2012 is slightly worse than many expected, and bad news for those hoping the UK would avoid falling formally back into recession. But the underlying story told by these statistics is not news to anyone: the UK's economy is bumping along the bottom and still struggling to gain momentum. Economists at Citi point out that, excluding the war years, it's been the worst four years for the UK economy in at least 100 years: worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s. In all those other cases, it took less than four years for the economy to get back to where it was before the downturn started. Indeed, four years after the start of recession in the early 1980s - that iconic example of a double-dip - output was 3.2% higher than its pre-recession peak. Read No recovery for UK: No let up for ONS here.

  • Roubini: Europe 'has an austerity strategy but no growth strategy'

    Nouriel Roubini is afraid Europe may be headed toward a very rude awakening to what he calls a "short vacation." At Project Syndicate , he credits Mario Draghi and the European Central Bank with taking important measures that staved off major problems like a liquidity run on Europe's banks. But the positive impact of those moves may have been temporary, and now, Roubini argues, the short-term approach by Europe's policymakers could have medium and long term negative impact on growth and economic stability. To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating. France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets. Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone. Irish voters may reject the fiscal compact in a referendum. And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. Even structural reforms that will eventually increase productivity growth can be recessionary in the short run. Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand. Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs. Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock. The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. Read Europe's Short Vacation here .

  • Acemoglu and Johnson Calls Out EU Leaders for Mismanagement of Debt Crisis

    Daron Acemoglu and Simon Johnson blame Europe's leaders--or "policy elite"--for worsening the economic crisis and "betraying all of the lofty promises of unity and prosperity issued when the euro was created." What should Euro Zone leaders have done? For one, Acemoglu and Johnson argue, they should have worked earlier to restructure the debt of countries like Greece. From Project Syndicate : The Greek, Portuguese, Irish, and Italian economies are reeling under fiscal austerity – with budget cuts and higher taxes as far as the eye can see. This policy mix will slow their growth, and that of the rest of Europe. But that is only part of the problem. The bigger issue is the “debt overhang” that has forced European governments to pursue this course. There are strong parallels to what happened in the United States in the past few years: many families felt crushed by their debts, so household consumption fell and has yet to recover. The adjustment will be even more painful in Europe, because a sovereign-debt crisis has a depressing effect on everyone – consumers, investors, and the public sector alike. There is a simple way to deal with a debt overhang: reduce payments by restructuring the debt. Many firms are able to renegotiate financing terms with their creditors – typically extending the maturity of their liabilities, which enables them to borrow more to finance new, better projects. If such negotiation cannot be achieved voluntarily, US firms can use Chapter 11 of the bankruptcy code, under which a court supervises and approves the reorganization of liabilities. So you would think the same would be true for US households and embattled European governments. But the restructuring of debt has been too little and has come too late. Why? In both cases, the main argument for not removing the debt overhang came from bankers, who claimed that it would create havoc in financial markets for two reasons. First, banks were the primary creditors, and the large losses that they would face in any restructuring was bound to trigger a domino effect, with waves of pessimism driving up interest rates and ruining other borrowers’ prospects. Second, banks would also suffer because they had sold insurance against default – in the form of credit-default swaps. When these swaps were activated, the banks would incur potentially further crippling losses. Read Captured Europe here .
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