Financial Stability News

Flashing news about financial stability and central banking

Tag Archives: austerity

The Reinhart – Roghoff story

The highlight of this week has been the high-profile critique by Pollin & Co from UMassAmherst of professors Reinhart and Roghoff and their “austerity” paper, where they showed that the danger zone of public debt is 90 % of GDP. Their results has been used by the UK finance minister Osborn to justify their current harsh budget policy, and by many otheres to justify the current fashion of “austerity growth driven policies”.

Financial Times has given the debate wide coverage, see here and this very good summary blog post by G. Davis here. But you may also be interested in these posts by Prof. Mitchell here and prof. Wray here that is much more direct in their critique of R&R and also show the absurdity in their initial paper. As Wray and co-author Nersisyan noted in a Levy WP from 2010:

R&R … have no idea what sovereign debt is. They add together government debts issued by states on gold standards, fixed exchange rates and floating rates. They aggregated across governments that issue debt in their own currency and states that issue debt denominated in foreign currency. It is not even possible to determine from their book exactly what is government debt versus private debt.

So, it does not make sense to compare apples and oranges; the debt ratio of Spain (w/o its own currency) is obviously not the same as the debt ratio for the UK. And the debt ratio for Japan (borrowing mainly domestically) has a different meaning than the US debt ratio (most US debt is to foreigners; and the US dollar enjoy resever currency status).

This has huge implications for macroeconomic policy going forward. The IMF is gradually coming around to a “less austerity” position, and the FT notes that they will get into a fight with the UK government in the forthcoming Article IV discussion. So watch out for the continuation of the contiuation of the R&R story.

EU’s unemployment continue to increase

Unemployment continue to increase, as reported by Eurostat yesterday. Depressing figures; should be of greater concern for everybody! For a good review of the situation, see this blog from Professor Bill Mitchell, University of Newcastle, NSW Australia.

Brad DeLong on FT’s call for austerity

The FT’s editorial today with a balanced call for austerity in Europa was surprising and disappointing, given all the writings of Martin Wolf and others in the paper before. Today Brad de Long take charge at the ed and discuss why it is that people who should know better fall in the “austerity trap”. He points out that even Milton Friedman would have to to stabilize nominal GDP and buy stuff for until inflation and growth are reestablished on a sustainable path.Well written.

Also included are the response from Paul Krugman which is even better, and probably well to the mark (still scary):

My best theory here is that it’s political and sociological: conservative-leaning economists who should know better are driven by peer pressure to suppress their better instincts.

Think about Greg Mankiw and inflation. Early on in the Lesser Depression Greg came out for inflation — fairly high inflation! — as the solution, to give us negative real interest rates. But he encountered a firestorm of criticism from his political allies — and went silent.

The point is that even among academics with tenure and established reputations, there is apparently enough leverage in the hands of the enforcers of right-wing orthodoxy that they end up bowing to the reign of error.

As for Rachman: I think this is a subtler form of peer pressure. And for what it’s worth, Ryan Avent has already written the devastating reply to Rachman I haven’t had time for because I’m on Reddit!

Willem Buiter on the Euro crisis

Citigroup’s  chief economist Willem Buiter has earlier written a host of academic papers on the deficiencies of the Euro system. Now in his new capacity at Citigroup he has some sobering thoughts about the Euro crisis and the future bleak prospects for the EU:

Slow growth or negative growth with high and/or rising unemployment is the new normal for the EA, the UK, Japan and the US, unless non-market ways of restructuring excessive sovereign, bank and household debt are pursued.

The question is if this new normalcy can prevail without riots in the streets? We will have to wait and see.