Austerity policies based on flawed research?

20Cent

Two academic papers which have had huge influence on the policy of pursuing austerity measures have been shown to be flawed.

One by Alberto F. Alesina, Silvia Ardagna called :Large Changes in Fiscal Policy: Taxes Versus Spending
Available here: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

Their approach to measuring austerity was all wrong.

An even more influential paper by Carmen M. Reinhart
Kenneth S. Rogoff called: GROWTH IN A TIME OF DEBT
Available here: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

was also deeply flawed

Critique of it here: Does High Public Debt Consistently Stifle Economic Growth?
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

Their main result was that: "median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower."

These papers have been highly influential in the US and Europe. Looks like they are based on errors. A good run down of the errors available here: http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems#.UW14rDQo2L4.twitter

Even the ex head of the IMF has said that the austerity measure were counter-productive.

Blog post by Paul Krugman about it: http://krugman.blogs.nytimes.com/2013/04/16/holy-coding-error-batman/?smid=tw-NytimesKrugman&seid=auto

Time to end the charade, these austerity polices are making things worse rather than improving the economies of the countries involved.

A Primal Nut

As long as we are borrowing billions every year it can't be called austerity. I also think its a disgrace that people like you think we should borrow even more money thus burdening the next generation with an even larger debt.

20Cent

A Primal Nut wrote: »

As long as we are borrowing billions every year it can't be called austerity. I also think its a disgrace that people like you think we should borrow even more money thus burdening the next generation with an even larger debt.

The contention is that austerity policies are making things worse for the current and future generations. Every country that has imposed these policies have seen a sharp economic downturn. It may seem counter intuitive but a stimulus package is what is required to get out of this downward spiral rather than continuing to follow the current flawed path.

djpbarry

20Cent wrote: »

It may seem counter intuitive but a stimulus package is what is required to get out of this downward spiral...

Both the US and UK tried stimulus - it hasn't worked.

20Cent

djpbarry wrote: »

Both the US and UK tried stimulus - it hasn't worked.

Both the US and UK stimulus packages were not considered enough, the US one worked well but was insufficient.

Anyway what about the op.
The research underpinning Europe's economic policy has been found to be false.

Isn't this a concern!

View

20Cent wrote: »

The research underpinning Europe's economic policy has been found to be false.

Isn't this a concern!

No, because the research isn't underpinning Europe's economic policy. Rather the economic policy is based on the fact that once your debt and deficit level goes beyond a certain level, economies hit an economic "crisis of confidence" and no one wants to loan you money to fund an unsustainable level of borrowing - hence, economic reality in the form of some variation of austerity hits home.

20Cent

German Finance Minister Dr Wolfgang Schauble

http://www.wolfgang-schaeuble.de/index.php?id=24&textid=1554
A permanently stable European currency is an indispensable part of this European growth model. As we discussed in Tokyo, and on several other occasions again and again, our conviction is that an excessive level of sovereign debt poses a risk to sustainability. Therefore I strongly believe in the research of Rogoff and Reinhart, for example, that as soon as you have reached a certain limit of sovereign indebtedness, increasing the deficit and the debt will not create more growth but will actually harm growth. For this reason, we have to know that if we want to achieve sustainable growth, we have to reduce sovereign debt in nearly all advanced economies.


The research he strongly believes in is wrong!

Nody

20Cent wrote: »

Both the US and UK stimulus packages were not considered enough, the US one worked well but was insufficient.

And the thousands of billions that Japan has pumped in to their economy for over a decade has worked?

20Cent

Nody wrote: »

And the thousands of billions that Japan has pumped in to their economy for over a decade has worked?

Yep:
Bank of Japan stimulus 'working'
http://www.bbc.co.uk/news/business-22178473

spank_inferno

Ireland is borrowing billions year on year to fund itself
- That is not austerity.

Ireland is borrowing billions year on year to fund itself.
- That is a massive stimulus, as its almost all given in cash to PS workers and social welfare.



(just to counter the mantra of "Austerity isn't working... we need stimulus").
We haven't yet had the former and we are already doing the latter.

Though if a further stimulus was required it should come in the form of considerable tax reductions, not spending increases.

Farmer Pudsey

Most non austerity economist hark bach to FDR and the great depression. His stimilus package seem to brink the US out of recession.However WWII helped as well. However in reality his public works package that developed the US infracture had a few advantages there was a need for this development in the US at present.

What form should a stimilus take, should it be in the form of roadbuilding, housing, ports, fisherys or somthing else. When his public works took place the car was about to become very popular so the stimilus actually stimulated another industry however WWII also helped.

Where should a stimilus be targated in Ireland, in reality we have alot of the intrafracture we need. At present we need to develo export products. However any buisness employing staff has to complete with social welfare for staff. No low skill work can pay them wages when benifits like medical cards and college grants copme into play.

THere is no point in providing stimilus that leads to an increase in public service costs. When poster talk about stimilus they should define where the stimilus be directed.

20Cent

spank_inferno wrote: »

Ireland is borrowing billions year on year to fund itself
- That is not austerity.

Ireland is borrowing billions year on year to fund itself.
- That is a massive stimulus, as its almost all given in cash to PS workers and social welfare.



(just to counter the mantra of "Austerity isn't working... we need stimulus").
We haven't yet had the former and we are already doing the latter.

Though if a further stimulus was required it should come in the form of considerable tax reductions, not spending increases.

Interesting take on things, pretty much everyone besides yourself is calling it austerity.

Anyway isn't it a bit disturbing that the research on which much of European policy is based is incorrect!

djpbarry

20Cent wrote: »

Interesting take on things, pretty much everyone besides yourself is calling it austerity.

Ireland really hasn't yet had what could be considered "austerity" at all.

20Cent wrote: »

Anyway isn't it a bit disturbing that the research on which much of European policy is based is incorrect!

I think you're over-stating the impact of the study in question. Besides, the "critique" arrived at broadly similar conclusions - high debt/GDP ratios stunt growth.

KyussBishop

Burdening the next generation with debt? We are already burdening them with a lower quality of life and opportunities, as they are growing, and are burdening the current generation with significant unemployment and again a reduced quality of life and increased cost of living.

It is sustainability that matters, not debt; the debt levels of Europe taken as a whole, allow enormous room for an EU-wide stimulus package, that could help end this crisis, and all EU countries (including Ireland) could pay back their share sustainably in the (potentially very) long run.


Austerity is cuts to public spending and increased taxes, which we definitely do have; the "that's not real austerity" line of argument is the usual no-true-scotsman type fallacy, that we are not suffering nearly enough that we can call this 'austerity'.

When you decimate a countries GDP, and suddenly then have to borrow to maintain previous spending, that doesn't magically make previous spending levels a 'stimulus'; this kind of wrangling over semantics, is used almost entirely to avoid the actual content of the debate, that austerity is actively harming EU economies.

I mean really, it is focusing solely on semantics to avoid engaging in real debate.


Straight away, our country could do with stimulus which develops power and public transport infrastructure (particularly rail), to reduce our reliance on fossil fuels (particularly imports) for power, and to provide better transport in general for populated areas (particularly which rely less on oil).

The price of oil and other fossil fuels is going to skyrocket as resource-extraction limits are reached in the near-future, so we are going to be forced to adjust our infrastructure anyway, and there is no better time to start than now, when we have a large reserve force of unemployed people who can work on that (bringing the private sector back to recovery in the process).

Again, we will be forced to do this anyway in the future, so if people argue against it, they need to explain an alternative, as otherwise electricity/fuel costs will lead to rising inflation in the future, thus forcing us to switch infrastructure anyway (but at much greater cost than now, as we will be facing a much bigger supply crunch).

Icepick

KyussBishop wrote: »

It is sustainability that matters, not debt; the debt levels of Europe taken as a whole, allow enormous room for an EU-wide stimulus package, that could help end this crisis, and all EU countries (including Ireland) could pay back their share sustainably in the (potentially very) long run.

ECB has already pumped trillions into the market.
So they are fixing too much debt with more debt. What could possibly go wrong...

KyussBishop

Icepick wrote: »

ECB has already pumped trillions into the market.
So they are fixing too much debt with more debt. What could possibly go wrong...

That's not debt that's quantitative easing; exchanging created money for bank assets.

Anyway, what is wrong with public debt so long as it is sustainable? It is the unsustainability of Ireland's current debt that is the problem, but dealing with debt at an EU-wide level (a much lower public debt vs GDP ratio in total), allows huge room for manoeuvre.


Also, while talking about debt, what about private debt as well? 94+% percent of the money in the economy is debt-based money (sourced from loans), i.e. for every Euro out there, someone is in debt to 94% of it; as we have seen with the current crisis, that (plus the fact that the interest on such debt, can only be sourced from even more debt-based money) can get rather spectacularly unsustainable, damaging not just private but public finances as well (when parts of the economy underpinning such financing, falls out from beneath it).

Perhaps we should take control of money creation back out of private hands, into public hands, and have government put some more sustainable forms of money into the economy, that is not based on debt.

Scofflaw

20Cent wrote: »

Both the US and UK stimulus packages were not considered enough, the US one worked well but was insufficient.

Anyway what about the op.
The research underpinning Europe's economic policy has been found to be false.

Isn't this a concern!

I doubt it, since the claim that this is "underpinning Europe's economic policy" is itself incorrect. "Debt drag" - that is, that high public debt slows growth - rests on a much older and wider foundation than a single 2010 paper. And has other recent research papers in its favour too - see, for example, here or here.

To be fair, that may be why the paper's methodological flaws weren't seen immediately, because it only confirmed what was already "known". But a single paper that confirmed evolution,and which turned out to have methodological flaws, doesn't show evolution to be incorrect. Well, unless you're a creationist - but then it's probably worth thinking about that analogy, too.

cordially,
Scofflaw

Dob74

djpbarry wrote: »

Both the US and UK tried stimulus - it hasn't worked.

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

The Piigs need to play hard ball. Lying down and expecting creditor country policy doesn't work.
Kicking the can down the street wont get us out of the depression we are in.

KyussBishop

Also, the US is slowly entering into austerity policies now that sequestration has been enacted, and other cuts/reductions have been enacted; watch the recovery of the US economy slowdown now, as time goes forward.

Scofflaw

Dob74 wrote: »

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

The Piigs need to play hard ball. Lying down and expecting creditor country policy doesn't work.
Kicking the can down the street wont get us out of the depression we are in.

Well, let's play "spot the stimulus":



Where in that did the effects of the stimulus kick in?

cordially,
Scofflaw

View

Dob74 wrote: »

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

There's more to an economy than the unemployment rate. The UK's deficit is amongst the worst in the EU and its debt level is fast catching up with the "worst in class" - it does still have some time to play with but time is only useful if its finances turn around. The US meanwhile has only just pulled back from its "fiscal cliff" - an issue I believe is postponed rather than resolved.

djpbarry

KyussBishop wrote: »

Straight away, our country could do with stimulus which develops power and public transport infrastructure (particularly rail), to reduce our reliance on fossil fuels (particularly imports) for power, and to provide better transport in general for populated areas (particularly which rely less on oil).

So assuming that this is to be implemented EU-wide and assuming it absolutely has to be done at some point (which I don't agree with, by the way, but that's not for this thread), how much will it cost and what will this do to EU debt/GDP ratios?

djpbarry

Dob74 wrote: »

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

UK unemployment has been at the same level for about 4 years now?

Cody Pomeray

Scofflaw wrote: »

Well, let's play "spot the stimulus":



Where in that did the effects of the stimulus kick in?

cordially,
Scofflaw

What, no US chart?

On the UK: Perhaps you're making the error of assuming that QE was instigated in the UK in order to reduce unemployment... or that any failure to actually bring unemployment down implies that it was a failure.

In fact, the argument goes that without QE, the situation could have been much worse. That QE is the buffer that insulates the UK's banking system from its exposure to the Eurozone.

I'm not saying that QE is a magic bullet either in the UK or the US. But I hope nobody is seriously expecting a chart like the above to be an adequate rebuttal to its potential.

20Cent

Scofflaw wrote: »

I doubt it, since the claim that this is "underpinning Europe's economic policy" is itself incorrect. "Debt drag" - that is, that high public debt slows growth - rests on a much older and wider foundation than a single 2010 paper. And has other recent research papers in its favour too - see, for example, here or here.

To be fair, that may be why the paper's methodological flaws weren't seen immediately, because it only confirmed what was already "known". But a single paper that confirmed evolution,and which turned out to have methodological flaws, doesn't show evolution to be incorrect. Well, unless you're a creationist - but then it's probably worth thinking about that analogy, too.

cordially,
Scofflaw

Both those papers you link to reference the Reinhart/Rogoff study which has been found to be flawed.
That high debt means slow growth is the question but also what about the inverse slow growth increases debt. If thats the case we are in a downward spiral, (this seems to be the case). Need to break out of it.

Even the IMF guy who designed Ireland's austerity measures is saying he was wrong. The IMF World Economic Outlook report has warned the UK that their cutting policy is actually slowing growth and making things worse.

Nice dig with the creationist bit there btw....

KyussBishop

djpbarry wrote: »

So assuming that this is to be implemented EU-wide and assuming it absolutely has to be done at some point (which I don't agree with, by the way, but that's not for this thread), how much will it cost and what will this do to EU debt/GDP ratios?

It doesn't have to be done, but it may be hard for the Euro to survive the rest of the decade/crisis without it.

I don't need to put together spending figures etc.; I would see it spend up to the point of a sustainable public debt vs GDP level, and hold steady at that point while the EU economies recover.

This would best be supplemented by a range of other policies as well, aimed at alleviating private debt loads, to bring demand back up.


You can even supercede use of debt with inflation-limited money creation as well, and eliminate all of the most major problems debt causes; it's quite silly for entire countries to be paying interest to private parties in the end in any case, when money creation could be put to public use, and particularly when those private parties are often banks which generate their profits indirectly through private money creation in the first place.

KyussBishop

Cody Pomeray wrote: »

What, no US chart?

On the UK: Perhaps you're making the error of assuming that QE was instigated in the UK in order to reduce unemployment... or that any failure to actually bring unemployment down implies that it was a failure.

In fact, the argument goes that without QE, the situation could have been much worse. That QE is the buffer that insulates the UK's banking system from its exposure to the Eurozone.

I'm not saying that QE is a magic bullet either in the UK or the US. But I hope nobody is seriously expecting a chart like the above to be an adequate rebuttal to its potential.

Indeed, QE isn't a proper "stimulus" as such; a real stimulus goes out to the real economy (business and workers), not banks/finance (who just use the money for speculating, not investing in activities that stimulate demand in general, particularly since the private sector is too indebted to take on more loans).

20Cent

Spot the stimulus US edition

A Primal Nut

KyussBishop wrote: »

Austerity is cuts to public spending and increased taxes, which we definitely do have; the "that's not real austerity" line of argument is the usual no-true-scotsman type fallacy, that we are not suffering nearly enough that we can call this 'austerity'.

The point is that the level of debt is not sustainable. At some point, something has to be done about it. The idea that we can keep borrowing and borrowing forever and never face to the consequences of that I can't get my head around. Most people are careful not to borrow too much in their private lives, it should be the same for the Irish government.

Particularly as the cost of borrowing has now become so high.

It doesn't matter that more borrowing may improve the economy; we still have to deal with our debt at some point. Yes an improved economy would help the government budget but that alone won't enable us to face up to the level of debt we have to get under control.

KyussBishop

A Primal Nut wrote: »

The point is that the level of debt is not sustainable. At some point, something has to be done about it. The idea that we can keep borrowing and borrowing forever and never face to the consequences of that I can't get my head around. Most people are careful not to borrow too much in their private lives, it should be the same for the Irish government.

Particularly as the cost of borrowing has now become so high.

It's unsustainable for Ireland alone, sure, but not with proper EU help, and not if we had control over our own currency (which is an essential part of a countries sovereignty).

That's why the crisis can only be solved with EU help (unless we exit, which will be horrendously painful), and is why the EU has a collective obligation to seek recovery policies; not because of anything written in law, but simply morally, because it is so irresponsible to have a lack of recovery policies, i.e. to have such a catastrophically dangerous system in place, and to severely limit countries options for dealing with the crisis due to lack of control over monetary policy (and thus, by extension, much of fiscal policy).

All the necessary economic solutions to the crisis are already known, it is only politics blocking recovery.

A Primal Nut wrote:

It doesn't matter that more borrowing may improve the economy; we still have to deal with our debt at some point. Yes an improved economy would help the government budget but that alone won't enable us to face up to the level of debt we have to get under control.

It's not debt that matters, it's sustainability that matters; Ireland alone can't sustainably enact stimulus, but Europe as a whole has enough space, to expand debt to enact stimulus policies.


You can even slowly do away with public debt over time (over a long period), just by putting money creation back to public use, instead of solely for the use of private banks; this obsoletes public debt (and all of its problems) altogether, but I still talk about public debt, to show recovery is possible even on those terms.

Cody Pomeray

A Primal Nut wrote: »

The point is that the level of debt is not sustainable. At some point, something has to be done about it. The idea that we can keep borrowing and borrowing forever and never face to the consequences of that I can't get my head around.

It doesn't necessarily have to mean borrowing on the back of the Treasury or raising taxes.

In fact, the fiscal rules and the sovereign indebtedness make that impossible for pretty much everyone as far as i am aware.

So the additional borrowing would have to be done by an agency of the Eurozone: the ESM or the EIB, for example. The good thing about those agencies is that they only need the initial capital, and then they can raise funds as many multiples of that.

That agency could then invite private financing to join with it in investments, again enlarging the scale of a stimulus.

Obviously, the stimulus should be focused on production and exports.

Hollande has suggested all of this. It;s not particularly imaginative. It's so amazingly boring it might actually work.