Submitted by: Mike Spindell, Guest Blogger
When I started as a college student about 50 years ago I took the Sociology I course as a required subject. There is little I remember from that course and less I remember about the instructor, except for his introductory words on the first day of class. To paraphrase him he said: “You will be taking a lot of courses in what are called the Social Sciences. Approach them all, including mine, with skepticism because they really aren’t science courses like those you’ve learned as a high school student. They will spend a lot of lecture time though trying to prove they are truly scientific, don’t believe them”. His clear meaning was that although the Social Sciences try to operate as if they are using the scientific method of experiments/research to prove theories, most of the work done is skewed to prove the theory of choice by those doing the research. In the five decades since that lecture my own experience and reading has taught me how true the advice from that long forgotten Sociology instructor is.
The social science that has my attention at the moment is Economics. I’ve read many an economist, from all points on the political spectrum and frankly while I favor those such as Krugman and Baker, I take most of what they say as opinion, rather than scientifically determined truth. Yes I’ve even read “Freakonomics” by Levitt and Dubner and the follow-up “Superfreakonomics” and while they were good reads I see them as not only bad science, but a conflation of economics with other social sciences that is superficial at best. This is really the problem with many economists and their theories. They presume to divine human behavior via the prism of economic theory. In the end their proofs are merely retrofitting their pre-judgments. That brings me to the “Austerity” movement which has hampered the recovery from the economic “depression” brought on by the wars and tax reductions of the Bush years, while it has also caused a crisis worldwide through its imposition upon many nations. The foundation research that has justified this “Austerity” movement came from two Harvard Professors: Carmen Reinhart and Kenneth Rogoff. A University of Massachusetts student Thomas Herndon found that their work was filled with mathematical errors in their research spreadsheets. http://www.huffingtonpost.com/2013/04/16/reinhart-rogoff-austerity-research-errors_n_3094015.html Their spreadsheets were their “proofs” that economic austerity promotes economic recovery and this theory, long held by many economists, is the basis for the imposition of austerity onto so many Nation’s economies and is the source of bitter national debate in our own. Though I will present some overview and links amplifying “austerity’s” false assumptions, my interest is in presenting my view on why the powers that be have imposed this doctrine, whose effects fall squarely upon 99% of the people of these nations, leaving the wealthiest unscathed.
Thomas Herndon with others published a paper about Reinhart/Rogoff’s findings stating this:
“ The new paper, by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst, set out to reconstruct the findings of an influential 2010 paper by Reinhart and Rogoff, called “Growth In A Time Of Debt.” Reinhart and Rogoff, both of Harvard, claimed that economic growth slowed fairly dramatically for countries whose public debt crossed a threshold of 90 percent of gross domestic product.
The problem is that other economists have been unable to recreate Reinhart and Rogoff’s findings. Herndon, Ash and Pollin now say they were able to do so — but only by leaving out big, important pieces of data.
Using the same spreadsheet that Reinhart and Rogoff used for their research, Herndon, Ash and Pollin found that “Growth In A Time Of Debt” was built around a handful of significant errors. Correcting for those errors changes the findings dramatically: Average GDP growth for high-debt countries jumps from negative 0.1 percent to 2.2 percent.”
What we see then is that calculation “errors” showed that GDP growth for high debt countries actual increased rather than decreased. Reinhart and Rogoff (R&R) have been arguing that debt decreases GDP as the rationale for austerity and their argument seems not only unproven, but wrong. It gets worse.
The Harvard economists have argued that mistakes and omissions in their influential research on debt and economic growth don’t change their ultimate austerity-justifying conclusion: That too much debt hurts growth.But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.
In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff’s data and found “not even a shred of evidence” that high debt levels lead to slower economic growth. And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.
As you can see from the chart from Dube’s paper below, growth tends to be slower in the five years before countries have high debt levels. In the five years after they have high debt levels, there is no noticeable difference in growth at all, certainly not at the 90 percent debt-to-GDP level that Reinhart and Rogoff’s 2010 paper made infamous. Kimball and Wang present similar findings in their Quartz piece.
This contradicts the conclusion of Reinhart and Rogoff’s 2010 paper, “Growth in a Time of Debt,” which has been used to justify austerity programs around the world. In that paper, and in many other papers, op-ed pieces and congressional testimony over the years, Reinhart And Rogoff have warned that high debt slows down growth, making it a huge problem to be dealt with immediately. The human costs of this error have been enormous.
Even after University of Massachusetts graduate student Thomas Herndon found Reinhart and Rogoff’s work included errors and that their 2010 paper was missing important data, the researchers stood by their ultimate conclusion: that growth dropped off significantly after debt hit 90 percent of GDP. They claimed that austerity opponents like Paul Krugman have been so so rude to them for no good reason.” http://www.huffingtonpost.com/2013/05/30/reinhart-rogoff-debunked_n_3361299.html
What is so infuriating about R&R is the destruction that follows in the wake of there now debunked theories. The unemployment in Europe is has reached record high levels high levels, countries like Greece and Spain have rioting in the streets and a new neo Nazi movement is gaining popularity throughout Europe. http://www.huffingtonpost.com/2013/05/31/eurozone-unemployment-record-high_n_3364881.html The cost in human suffering is incalculable, but these fatuous academic asses are not concerned with people, they are concerned with their reputations and they are concerned with catering to wealth. Their theories, rather than being the result of real research and experiment, are in effect self-fulfilling prophecies. This is NOT science; it is overweening egotism in tandem with uncaring self interest. This tale, however, gets worse. Huffington Pos contributor: Mark Gongloff wrote this article on Friday: “Austerity Fanatics Won’t Let Mere Economics Stop Them From Thinking They’re Winning” in it he writes:
“Like Hiroo Onoda, the Japanese soldier who hid on an island in the Philippines for 30 years refusing to believe Japan had lost World War II, austerity fanatics are never going to admit their failure. Instead, they are going to keep pushing the policies that are making millions of people in Europe and the United States miserable.
The latest example of their denial is a piece by Michael Rosen of the American Enterprise Institute, a conservative think tank, entitled “Austerity And Its Discontents.” He declares that, far from being shamed by the recent discovery of errors in influential research by Harvard economists Carmen Reinhart and Kenneth Rogoff, austerity fans have recently gained “the upper hand” in the global argument over austerity.
Rosen argues that Reinhart and Rogoff’s many loud rebuttals to their critics helped give austerians the “intellectual high ground.” He ignores that, in fact, Reinhart and Rogoff’s rebuttals have only compounded their errors. He also ignores that further research has debunked Reinhart and Rogoff utterly, revealing that their biggest mistake was in confusing the cause-effect relationship between high debt and growth. It turns out, contra Reinhart and Rogoff, that there is no evidence that high debt causes slow growth — in fact, the opposite might be true.
But then the austerians have never really needed the intellectual high ground. Their phobia of government debt is based mainly on the idea that debt is just bad because of course it has to be. It is bad when people take on a lot of debt, ipso facto the same thing is bad for government. We must eat our spinach, not our dessert!
Rosen is absolutely right when he points out that Germany, and the American Enterprise Institute, and the Wall Street Journal editorial page, and Michael Kinsley, and the many, many other long-time fans of austerity have only redoubled their efforts to push austerity measures in the wake of the Reinhart-Rogoff debunking and re-debunking. http://www.huffingtonpost.com/2013/05/31/austerity-failure-fanatics_n_3367787.html?ref=topbar
Now that I’ve presented the situation to you at least from my side of the fence, you can make up your minds about austerity. While I agree with many of the conclusions delivered by the writers quoted above my slant on it all is somewhat different. I believe that all economic theories and political theories, despite their validity, mask what is truly going on in our world today. It is easy of course to compare the call for austerity by conservatives under Democrats and the out of control spending and debt run up in the Reagan, Bush I and Bush II administrations. This comparison would lead one to believe there is fiscal hypocrisy at the bottom of this and that is true. However, the fiscal hypocrisy exist as much among Democrats as Republican’s as Max Baucus proved in his terms as Senator. Bill Clinton cut government to balance the budget. He aided in the erasure of Smoot Hawley and he hurt American jobs by signing NAFTA and CAFTA. President Obama has likewise played the fiscal conservative card, while complaining it has been forced on him. He has even put cuts of Social Security and Medicare on the table, although neither is related to the national debt.
What is happening here is the result of the wealthiest people and the largest corporations becoming international entities. The rise of the multi-national could well herald the decline and fall of the nation state. From the perspective of the “Haves” it makes perfect sense. Why be bound by the laws of a particular nation, when you can break free and roam the world as you please? Truly, to these multi-nationals and the people behind them, the world is their oyster. The only problems they have are government regulation, taxes and those pesky workers who want more wages. The solution is to bring the 99% to a level slightly above starvation. This ensures that they will work for any amount that helps them put some food on the table. It necessitates that social assistance programs be destroyed so the peasants will have no choice but to seek shelter from devastation at some low paying job that keeps them little above subsistence.
Imagine yourself as one of the Super Rich, or as the CEO of a huge multinational corporation. My guess is that most of them see themselves as extraordinary people, chosen by fate or God to be in their exalted positions. They are able to go anywhere in the world on a whim. They don’t have one palatial home they have five, some in the world’s greatest Cities and others in the world’s most beautiful places. They don’t have one luxury car they have twenty collectibles and a fleet of limousines to take them place to place, flanked by bodyguards. While it’s true some wealthy eschew these outward signs, usually it is done as some sort of reverse snobbery, like the Kennedy penchant for driving Oldsmobiles, or J.B. Hunt driving to work every day in an old Chevy, with a paper bag lunch prepared by his wife.
The rich are not like your and me and moreover they know it. The truth is austerity is one more step on the road toward worldwide feudalism. Our wealthy class has helped to plot this out and they are served by people like Reinhart and Rogoff as courtiers and henchmen. They are leading us to a chaos they believe will result in solidifying their hold on the world and their eventual Nobility. However, when chaos descends on society through the discontent of so many, even wealth might not be protection against the violent psychopaths that gain control. That’s what I think about austerity, what do you think?
Old joke:
Ask a group of scientists what 2+2 is. Mathematicians say it’s trivial, engineers say it’s 3.9993 etc. Then enter the economist who quickly closes the door behind him, draws the curtains and says: “Well, it depends on the assumptions. What do you want it to be?”
Just another attempt out of Harvard (Reinhart and Rogoff) to provide cover for financial regulators who should be held accountable for their rule-making. John Dugan, head of the OCC from 2005-2010, got his JD from Harvard Law School … Ben Bernanke, Henry Paulson, and Larry Summers are all Harvard alums.
“Well, it depends on the assumptions. What do you want it to be?” …
“Many in Congress believe the austerity myth. I believe that the “sequester” was intentional, not as a motivator to deal with the issue at hand, but for force big across the board cuts.”
BK,
With response to you entire comment and the quote above, we are substantially in almost total agreement, except at times on minor details.
The words “economics” and “economy” come from the same base Greek word as “ecology” and “ecosystem.”
That Greek word is oikos:
(Wikipedia, “oikos”). In the cosmic sense, it is our home in the solar system, the Earth, especially the part that sustains us, the Earth’s global ecosystem.
Our English word economics is the combination of the Greek “oikos” and the Greek word “nomos”:
(Wikipedia, “Economics”). The fundamental source of economy, wealth, and sustenance is the Earth, by operation of the fundamental laws of the ecosystem.
That is, economics is based on the laws of nature of the planet Earth.
Our national home is the nation we live in, for example the U.S.A.
The fundamental “law of the dwelling” at that level is the U.S. Constitution, which was forged to further the common good:
(The Common Good). Through religious concepts fused with secular social Darwinism, this has degenerated into a plutocratic concept of a plutonomy that has gradually been absorbing the old “common good” economy (Ayn Rand: Patron Saint of The Plutocracy).
Tony C. claims, “Real sciences do not have to advertise themselves as “science.””
Not intended to be a scientific response.
Thank your for this, Mr. Spindell.
The rich are very soon going to learn a word they have chosen to ignore at their own peril: “enough.”
Gated communities will be no protection for what will soon arrive.
What the rich have created cannot be sustained, and won’t, as enforced by the geometry of the surface area of a sphere, which is QUITE finite. The used-up people living upon it are just about done with the rich.
The time of the rich is waning and they know it, Panic is setting in. Offshore accounts will be no haven, but they stuff dollars there like there’s no tomorrow, thinking it will “help.” It will not. It will just make the rich less rich a whole lot faster.
What we have built cannot be sustained and will be coming down. The rich have the farthest to fall.
Many in Congress believe the austerity myth. I believe that the “sequester” was intentional, not as a motivator to deal with the issue at hand, but for force big across the board cuts. Those cuts that raise a really big fuss just get special laws passed to calm things down. What would the fuss had been if we had been told that it was an agreed to plan by both parties that the cuts would remain in place?
I have previously mentioned the feudal society that we seem to heading for. The wealth disparity is deliberate and must be protected, therefore the militarization/police state that works for the wealthy and the corporate and the propaganda of fear that allows basic civil rights to be abrogated. The removal of the economic and political safety net for the most vulnerable also expands the wealth gap and increases anxiety and fear.
A new slavery is being created in our prisons where the school to prison pipeline is expanding the already over-zealous prosecution of minority groups. The attack on education is deliberate. In a broader framework, the denial of an education or the provision of an inadequate education often ensures compliant and inexpensive workers. Education can be used to subjugate a population and control it.
Time for some camomile.
Mike S:
All I did was answer a question as to what kind of phone service I liked.
tony c:
thanks for the clarification.
But that is still a good deal of money being taken out of the private sector.
Germany is doing well and so is Sweden from my understanding, they cut taxes.
Bron: someone is paying.
No they aren’t. Brain breaking work was done by others, but once done, the trail is blazed. They may profit from their labor, but sooner or later they die and profit no more.
Any profit made from those ideas after that point is a free lunch. Edison no longer profits from his work, any profit made in Edison’s name goes to people that did not do the work. Reynolds no longer profits from his arduous discovery, and any profit made in Reynolds name goes to people that did not do the work.
Those are free lunches. Thousands upon thousands of useful, powerful ideas have outlived the minds in which they originated, and are still producing benefits today for people that did not invent them, did not even improve upon them, they simply use them for free and enjoy the gain, because the idea works.
Metaphorically speaking, that is a free lunch.
Bron: R&R was talking about 90% of GDP as total debt, not debt service.
A country can borrow money at essentially our inflation rate; around 3%, so if your debt is 90% of GDP, your debt service is about 2.7% of GDP. Most of us can handle even 15% of our earnings at debt service; which means we would not be in trouble until our debt was over five times our annual earnings. For a typical American family, that would be a mortgage, a few cars, some furniture and appliances and entertainment equipment on credit. Which is how many, many American families are living life, and service their debt without significant hardship.
Bron: They still claim the same thing, however.
Here is the state of austerity in the EU: Retreat From Austerity.
Some excerpts:
The result is what the Greek prime minister acknowledged was “Europe’s Great Depression”. Greece has seen its economy shrink by 25% in five years. Spain’s recession is three times deeper than forecast. The IMF predicts its economy will shrink 1.6% this year. Its general unemployment level is at 27%.
Portugal cut its fiscal deficit by a third between 2010 and 2012 and saw unemployment rise to 18%. Across Portugal, the Republic of Ireland, Greece, Italy, Spain and Cyprus the best educated are on the move, seeking work beyond their own countries.
What Europe’s leaders and officials fear more now is unemployment, recession, and growing disillusionment with the eurozone that seems unable to deliver. Reducing debt is no longer the priority.
Value is still produced produced primarily by humans working; that is an inescapable truth at this point in our technological development. Austerity that reduces the ability of humans to work and produce value causes a catastrophic cascade that results in some of what we see above, 27% unemployment, and a flight to places where work can be done.
It is fine to try and be fiscally responsible, but there is no binary yes/no switch for debt. Some debt spending prevents catastrophic cascades and ends up prevent far greater losses than the debt itself. Some debt spending is an investment that keeps people working and producing value. It cannot be judged in isolation, it has to be judged as part of a whole system. That is what the R&R study was supposed to do, and when their biased errors were found out and corrected, they proved that debt increased GDP, if it did anything.
And certainly even if their 0.1% decline had been real it means nothing, it is a point measurement for a year, and does not tell us what the GDP would have been without the debt spending. Presumably, in some countries like Greece, the result of ending their debt spending was a 25% contraction in their economy and Great Depression style unemployment.
A year is too short of a time to assess a national policy; something like ten is a better indicator. You need something that reflects a longer economic cycle of at least five years. Most successful businesses that start are not profitable for at least two years, and don’t hit their stride for four or five. Those are the expectations of venture capitalists in the business of business, and those should be the expectations of countries and economists too. Debt spending should be an investment in improvement, but it isn’t going to be felt for years.
Michael M, Herbert Hoover was blamed for the great depression but it was caused by the previous administration.
“Michael M, Herbert Hoover was blamed for the great depression but it was caused by the previous administration.”
Bruce,
Of course you are referring to the Presidency of Calvin Coolidge, who was the President Ronald Reagan most admired. Coincidence?
tony c:
someone is paying. If I buy you lunch or the restaurant gives you a free lunch, someone, somewhere is paying.
I know, you and Elizabeth Warren are soulmates.
Mike Spindell:
If I make 100,000 dollars per year and $90,000 goes to debt service, that means I have $10,000 per year to spend on myself for clothes, cars, house, food, etc. I either have to live very cheaply or I have to borrow money to live or I have to figure out some way to increase my income.
If I borrow money to live, then I am just digging the hole deeper. If I live cheaply it is going to take years to pay off a debt which costs $90,000 per year to service. My only way out is to sell an asset or to increase my salary substantially. If I am going to increase my salary, I have 3 ways to do it, charge more or get more customers. Or make cuts [find ways to trim waste and inefficiency] in my business to increase the amount of money I am earning.
Or I can do all 3 or any combination thereof.
But none of this happens in a vacuum so I am at the mercy of the broader economy. Which, hopefully, is doing well. If it isnt then my options are limited to trimming waste and/or living cheaply until the economy picks up. I might pick up a few customers along the way if I am lucky.
You cannot spend 90% of what you make on debt service and be healthy financially. You need to invest money and save for a rainy day.
Bottom line is we are going to pay a terrible price for the debt we have and it isnt the rich or the bankers who caused the problem. They arent the ones printing money and taxing and spending. They are operating in the economic environment created by irresponsible politicians.
I dont care what any study shows, simple common sense tells me if you are spending 90% of what you earn on debt service, there is no money with which to grow. And in the case of government, growing only increases the amount of debt.
“I dont care what any study shows, simple common sense tells me if you are spending 90% of what you earn on debt service, there is no money with which to grow. And in the case of government, growing only increases the amount of debt.”
Bron,
If you would kindly reread what I quoted you will see that your attitude is quite common and is basically from the category of “don’t give me the facts my mind’s made up”.
“Rosen argues that Reinhart and Rogoff’s many loud rebuttals to their critics helped give austerians the “intellectual high ground.” He ignores that, in fact, Reinhart and Rogoff’s rebuttals have only compounded their errors. He also ignores that further research has debunked Reinhart and Rogoff utterly, revealing that their biggest mistake was in confusing the cause-effect relationship between high debt and growth. It turns out, contra Reinhart and Rogoff, that there is no evidence that high debt causes slow growth — in fact, the opposite might be true.
But then the austerians have never really needed the intellectual high ground. Their phobia of government debt is based mainly on the idea that debt is just bad because of course it has to be. It is bad when people take on a lot of debt, ipso facto the same thing is bad for government. We must eat our spinach, not our dessert!
Rosen is absolutely right when he points out that Germany, and the American Enterprise Institute, and the Wall Street Journal editorial page, and Michael Kinsley, and the many, many other long-time fans of austerity have only redoubled their efforts to push austerity measures in the wake of the Reinhart-Rogoff debunking and re-debunking.” http://www.huffingtonpost.com/2013/05/31/austerity-failure-fanatics_n_3367787.html?ref=topbar
Your analogies continue fail because you are unable grasp the fact that you can’t compare the financial needs of governments with either household incomes, or with business procedures. Your argument is “apples and oranges”.
Bron: I think there are no free lunches.
Metaphorically speaking there are plenty of free lunches, we practically live on them. We both use calculus in our work. Isn’t that a free lunch? We did not have to do the work of inventing it, proving the chain rule, or finding the base of natural logarithms. Somebody else invented the Jacobian and proved its value. You and I have never paid a dime for any research completed before we were adults and paying taxes. Yet we use the tools, intellectual and physical, invented by those that have gone before us, and for the most part we get all those problem solutions (and ways to solve new problems) absolutely free. We have not had to invent steel, or the procedure invented by Reynolds to refine aluminum hundreds of times more cheaply than the procedures that preceded it. You can, for free, learn the melting point of tungsten that others spent time and money to discover.
We have used many thousands of these “free lunch” tools to build modern civilization. They produce reliable predictions, strong materials, cheap safety, and high confidence in our plans.
You are surrounded by free lunches, immersed in them. You just take them for granted.
“I think there are no free lunches”
Bron,
That is not true if you are wealthy, or are a corporation. Mitt Romney pays a smaller percentage of taxes than I do, yet earns about $40 million a year, that is a free lunch. The New York Stock Exchange got an exceptional tax break to keep from relocating, that is a free lunch. Many foreign auto companies received billion$ in incentives to move to States with “right to work laws” and that is a free lunch. How come the only “free lunches” that interest you are the ones that allegedly go to people on the lower end of the economic scale?
http://www.ft.com/intl/cms/s/0/433778c4-b7e8-11e2-9f1a-00144feabdc0.html#axzz2V3x4DfHb
apparently R&R corrected their research.
“apparently R&R corrected their research.”
Bron,
Not a good link since I would have to subscribe to the Financial Times to view it and I don’t do subscriptions.
Oky1: If everyone would just put into a basket all the thing we agree on …
That basket would be empty. We had about 120 million voters in the 2012 election. A tiny percentage of those were undoubtedly murderers that got away with their crimes, a larger but still small percentage were professional criminals, embezzlers, sex slavers, prostitutes and drug dealers. An even larger percentage were occasional criminals that have gotten away with their crimes or at least have not lost their voting rights, such as rapists, shoplifters, wife beaters, drug users, hit and run drivers, con men, black mailers, or many that have committed violent assaults on others. Why would people that “profit” from crime (as an emotionally or hedonistically satisfying experience, or as a way to gain money or other valuables, or as a way to ascend to a position of power) agree that they should be punished for that? Why would a gang leader that has already personally killed a handful of people, and uses violence, drugs, stolen money and nearly-enslaved women to keep “his dogs” in line, vote to punish any aspect of the way he makes his living and maintains his position?
Exactly what laws do you think we can ALL agree to punish? Exactly what laws do you think we can ALL agree warrant taxing us to investigate, prosecute, and incarcerate violators? Since the taxation would also be a law, exactly what form of taxation do you think we can ALL agree upon?
Your basket would be empty. I do not say that in derision, I say that so you can abandon the fantasy of 100% agreement on anything, and move on to a more productive model of what should count as “agreement.”
Unless you are just an anarchist that thinks it should be every man for himself. In which case, you are probably a criminal or wannabe criminal.
“So you are a still in the closet supporter of Alex Jones/Infowars/Ron Paul fan after all! LOL;)”
Oky1,
The answer is an affirmative no. Alex Jones is basically a scam artist who makes money off of devising intricately implausible conspiracies, Infowars is generally inaccurate and Ron Pauls is a pretend Objectivist, who is a closet bigot. Why would I support any of that? To the extent that it is possible I try to be an independent, unaffiliated thinker. I consider myself an iconoclast and I’m not a fan of “Ists” or “Isms”.
Some poetic science and music about the subject:
(War is the Highway 61 of the 1%).
Reblogged this on Money or Debt and commented:
Good summary and references on the debunking of Reinhart and Rogoff’s faith-based austerity arguments.
**That’s what I think about austerity, what do you think? **
So you are a still in the closet supporter of Alex Jones/Infowars/Ron Paul fan after all! LOL;)
Ya, they’ve got some problems, but don’t we all.
Notice I didn’t say Rand Paul, I’m still unsure myself.
If everyone would just put into a basket all the thing we agree on & take care of those at once, then we would be free to argue for decades about the few things left we don’t agree on.