Osborne's gurus get their sums wrong!!

[Glyn_Wigley]

BST might like this one!

"As Rogoff and Reinhart demonstrate convincingly, all financial crises ultimately have their origins in one thing – rapid and unsustainable increases in debt.

As they write, "if there is one common theme… it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks that it seems during a boom.
 
That was George Osborne in 2010. “Rogoff and Reinhart” are two economist whose influence over the Coalition’s economic policy is hard to over-state.
 
In short they conclude to make sure the debt-to-GDP ratio does not get above 90%.as it significantly impedes growth.
 
However, a new paper shows that there are serious problems with Reinhart and Rogoff’s approach, including that their Excel spreadsheet has an error that fundamentally changes their findings.
 
They conclude? They find "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
 
"One of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel."
 
This is a big deal because politicians around the world have used the findings from R&R to justify austerity measures that have slowed growth and raised unemployment."
 
http://blogs.telegraph.co.uk/news/ja...he-chancellor/
 
http://www.usnews.com/opinion/blogs/...s-big-problems
 
If this is correct, how much unemployment has been created through politicians believing in this miscalculated study? It was the initial R&R papers that created the framework for most of the subsequent policy debate on austerity measures. This work has been used time and time again to justify deficit reduction.

[BillyStubbsTears]

I saw that last night on Simon Wren-Lewis's blog Glyn.

Almost beyond belief. Entire nations' economic judgement being based on a paper by economists who can't use Excel properly. If it wasn't so tragic, it'd be hilarious.

One of  Rogoff & Reinhart's most ridiculous approaches (even more so than their ability with Excel) was to average out each country's experience of debt and growth, then average the averages. That is a schoolboy error. What it means is the following. In the UK, since the War, we have had 19 years in which debt to GDP was >90% and the average growth rate in those years was 2.6%. In New Zealand, they had ONE such year, and the growth rate was -7.6%. So R&R would say that the average experience in the UK and NZ was the average of +2.6 and -7.6 = -2.5% growth when debt to GDP was >90%. That is a mistake almost too stupid to believe.

As expected, Krugman has waded into the debate with his usual combination of perception and crushing argument. He's produced the following graph of growth rate vs debt levels from 1950-2007.



See any evidence there that, as Gideon keeps saying, economic growth falls off a cliff when debt goes above 90%? Nope, me neither. And especially not for the UK.

But, as I've said before, this is what happens when you put a middling History graduate and failed journalist in charge of the f**king economy.

[Nudga]

You need to get out more Billy.

[BillyStubbsTears]

Nudge. What I get up to in one day would shame most folk in a year. Don't you worry spadge.

I post stuff like this while cracking one off on the middle of a business meeting while supping a pint laying on the beach.

[Sprotyrover]

Wot a hamskanker went to Oxford Silver spoon in his gob and could only manage a 2.1 in modern history! which cretin has let this TARD loose on our economy?

[BobG]

Why isn't the Labour Party trumpeting this all over the sodding planet though? The Tories have plastered every airwave for 3 and half years with their sneers about Labour economics and its alleged consequences - so why the chuff aren't Labour launching Exocets right. left and centre?

I do think this Labour Party is massively reactive. It lets the Tories drive the news agenda something terrible. And when it does have a point to make that might actually shake the alleged truths we've all  learned in a Goebbels like fashion 'really are the truth' it does so at about 0.5 decibel. WTF is wrong with this Labour Party?

BobG

[BillyStubbsTears]

Bob

I've got a slightly different take. I reckon Labour have been very canny. Balls understands far more about economics than Osborne ever will. He KNEW Austerity wasn't going to work 3 years back.

But Osborne had the upper hand back then. He had coined the brilliant term "Deficit Denier" to slap down anyone who challenged Austerity. Devastatingly effective.

Balls put a few markers down. He gave a speech in America in summer 2010 predicting what the effect of Austerity would be in the UK. But he knew that he was onto a loser trying to argue strongly in the UK. There was a danger that Labour would lose all credibility if they argued too strongly against Austerity. Not because Austerity was right, but because the prevailing mood among the public THOUGHT that it was right. So he has kept a low profile and sniped from the sidelines.

He has basically kept his powder dry and allow Osborne to f**k himself. Which Osborne has obligingly done. His economic policy is utterly bereft of any support from any credible source. There is absolutely no possibility of a strong recovery before the next Election.

In the meantime, more and more people have discovered for themselves that the fetish for Austerity was a mirage. And now, pretty much EVERY major economic commentator and analyst is saying that Govt stimulus is required. Even the IMF, which has never proposed a Govt stimulus in any circumstances in half a century is telling Osborne that he is "playing with fire" to not do so. Basically, they are telling him that Balls called it right and he called it wrong. So when Balls comes out punching in the 12 months leading up to the election in 2015, saying "Look, I TOLD Osborne what would happen, I told you he didn't have a clue, I told you that we COULD have got ourselves out of the debt and depression problem by the approach that EVERYONE know says is right", he's pushing on an open door.

He's playing it perfectly. You just need to be patient.

None of which helps the poor t**ts who have lost their jobs because of Gideon's incompetence, but there is nothing Labour can do for them expect win in 2015.

[Sprotyrover]

I doubt it will happen Labour's last govt was spendthrift and I can assure you that they cocked the economy up nicely,it's just a pity that there isn't a sensible alternative to the two main parties until that happens Sproty won't be voting for anybody!

[big fat yorkshire pudding]

Well given government spending is part of the growth calculation it's obvious really that if you cut spending growth decreases naturally.  That graph does show a small trend, not huge but a small trend that growth decreases as debt does (I'm wagering because of the usual cuts that follow to pull back debt, again fairly common sense.

As for policy on it, I still don't believe spending is the way forward, the way forward is still to make changes that aren't part of government spending, I know from the lot of work I do that business reserves are far better than they have been for some time and that's part of why a lot aren't spending, there's some thought that we'll start seeing heavier investments in future.  What I have seen though is that the work and demand is still there, just that profits are squeezed and the market is more competitive which as we know does also effect the growth of the economy somewhat.

[BillyStubbsTears]

BFYP

We will not see higher investment until there is widespread confidence that growth is coming.

But we won't see widespread confidence that growth is coming until there are signs that demand is coming.

And the primary reason that demand has been so weak (and it is - VERY. Compared to the potential GDP of the country, we are under-producing and consuming by about £200bn compared to what we could do without sparking an inflationary boom) is that companies are scared to invest.

It's a classic vicious circle. It is exactly the spiral of collapse that Keynes studied 80 years back. And the solution is still the same.

In normal times, you reduce interest rates to spur investment. You penalise those who sit on their money and you encourage them to find a better return by spending it on something that will improve their position in future years - new buildings, plant, vehicles, computers, staff.

But the problem that we've had for 5 years now is that interest rates are negative compared to inflation and STILL companies prefer to sit on their money rather than invest it. They are still scared that there is insufficient demand in the economy to justify investment.

The problem is that this becomes a locked-in mindset after a while.

And that is why the solution is for Govt to inject demand into the economy by spending the money that private companies won't. Get more people back to work and earning. Get more business out there for companies to compete for. Get the log-jam moving.

Keynes had a perfect analogy for the problem in the 1930s and it still applies today. He said that the economy was like a car engine. In the 30s Depression, everyone thought that the engine was knacked. But it wasn't it just needed a new starter motor to get it started up again. The starter motor was Govt spending to kick-start demand. When the Govt finally did that in the UK and USA as a result of WWII, the economies that were supposedly wrecked, exploded into life.

The same thing would happen now if we had people in charge with the ability to understand the basics. You can THEN have your discussion about what the right level of Govt debt and spending is for the long-term. But having that discussion when the economy is on its back is a self-indulgent distraction from the core of the problem.

[BillyStubbsTears]

  That graph does show a small trend, not huge but a small trend that growth decreases as debt does (I'm wagering because of the usual cuts that follow to pull back debt, again fairly common sense.

Apparently not. The biggest error in the way in which R&R's work has been used for political emphasis is that no discussion has been had about the direction of causality. Does high debt lead to low growth, or low growth lead to high debt? That matters. Very much. If it is the former, then keeping your debt down is vital or your economy will stall. If it is the latter, then getting growth going is the key to reducing debt.

So Arindrajit Dube of University of Massachusetts has re-analysed the data to look at the growth rate BEFORE and AFTER any given year and compare that to the debt level. He has found comprehensive evidence that in years when the debt is high, the growth rate was poor BEFORE that time, and is much less of a problem in future years. He says:
"Current period debt-to-GDP is a pretty poor predictor of future GDP growth at debt-to-GDP ratios of 30% or greater—the range where one might expect to find a tipping point dynamic.  But it does a great job predicting past growth. This pattern is a telltale sign of reverse causality."

In other words, we get bad debt because the economy collapses. The economy doesn't collapse because we get bad debt. Unless that is, we impose a mad policy of Austerity to try to bring down the debt, and we produce an extended period of economic collapse. But then, no-one would be so economically illiterate as to do that, would they?

[BobG]

Thank you Billy. i infinitely prefer your hypothesis about why Balls &CO are keeping their powder dry to my rather superficial cynicism. I bloody hope you're right. I felt let down, badly, (but not by debt I hasten to add) by Blair & Co. Another let down from the Labour Party would finish me off as a left voter in this ocean of blue round here.

BobG