Category: History
From the comments
On your 2010 R&R post: Your point about 90% being neither sacred nor stable shows how badly many people misinterpreted the paper.
You also said we don’t know how much higher than 90% we can go. I’m not sure exactly what you meant, but I’ve suggested that the threshold we should be most concerned about is the point beyond which you can be sure you’ll never get back to safe debt levels, because you’ll be faced with the Catch-22 of both austerity and “not-austerity” pushing debt higher for different reasons. This threshold is much lower than the point at which large countries will actually experience a fiscal crisis and probably lower than most people think. A reasonable estimate is only 150% debt-to-GDP, based on the observation that there are no historical episodes of countries recovering from 150%+ that are at all relevant to the U.S. or U.K. today (yes, I used the R&R data among other sources to test this).
The risk that the U.S. sails through such a threshold is becoming very real at current debt levels.
If you (or anyone) are interested, my paper reviewing all historical episodes of debt >150% of GDP (from the R&R database) was posted last month on Seeking Alpha and on http://www.cyniconomics.com and it’s called “Answering the Single Most Important Question in Today’s Economy.” And if the U. Mass. trio are interested, I’ll even offer my calculations.
An update on the Reinhart and Rogoff critique and some observations
My previous post presented this:
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
I’ve now had some time to look at the paper, and here are a few observations:
1. I am of course open to publishing a rebuttal from R&R, but on a first read the authors make a strong case for their claim that the core Reinhart-Rogoff result — concerning the growth slowdown at debt at 90% of gdp — is based on a coding error and some data exclusion issues. Please reread my earlier post on “the smell test.”
2. That said, as Ray Lopez mentions, including in the data the postwar bouncebacks of some Anglo countries (NZ, Australia, and Canada), as recommended by the critics, is not obviously going to improve the quality of the answer. For instance the Kiwis have postwar growth rates of 7.7, 11.9, -9.9, and 10.8 percent, across the late 1940s. Are those numbers — which were combined with high postwar levels of debt — relevant to current fiscal policy issues? I say no, while admitting this may lead us to throw out other data points as well. I don’t know what is the non-cherry-pick answer here or if there even is one.
3. It is perhaps unfortunate in this age of the internet that rebuttals must be presented so quickly, but so be it. It will be interesting to hear from R&R.
4. Not too long ago I reread R&R to ascertain whether they actually present the 90% level as an emergency cliff of sorts. I concluded they did not, although there were some sentences that a reader could take out of context toward confirming such an interpretation.
5. In the paper by the critics, the pp.7-9 discussion of “weighting by country” vs. “weighting by country-year” is very interesting, but the fact that it matters as much as it does makes me more skeptical about the entire enterprise. Whether you should weight by population is important too.
6. I am seeing a large number of tweets which both misrepresent R&R or misrepresent their influence on current policies of “austerity.”
7. My own view, as you can read in The Great Stagnation, is that the primary mechanism is slow growth causing high debt/gdp ratios, not vice versa. In any case this is by far the most important issue, whether or not you agree with my take on it.
8. The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid, dawdling on adjustment is not always so easy, and the feasible sum of international redistribution is quite low. For this reason the UK should be relatively uninterested in immediate austerity and many nations in the eurozone periphery more interested.
9. In the blogosphere, the ratio of blog posts “attacking austerity” to “proposing constructive alternatives to austerity” is at least ten to one. That too tells you something. Many of the alternatives proposed would indeed pass a Benthamite cost-benefit test, at least if implemented as desired, but they are simply inconsistent with incentives and the relatively selfish nature of individual behavior.
10. The most interesting question to me is a rather squirrelly and subjective one: how should this episode change the relative ratios of what I read? Should I in fact read fewer quantitative economics papers, instead (at the margin, of course) preferring more narrative history? This is not the first time that an extremely influential major empirical result has been overturned or at least thrown into serious doubt.
Addendum: FT Alphaville weighs in. And Annie Lowrey is tweeting some responses from R&R.
A critique of Reinhart and Rogoff
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
The Golden Dilemma
I’ve been meaning to link to this NBER paper by Claude B. Erb and Campbell R. Harvey:
While gold objects have existed for thousands of years, gold’s role in diversified portfolios is not well understood. We critically examine popular stories such as ‘gold is an inflation hedge’. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. We also explore valuation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average consistent with mean reversion. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. In the end, investors face a golden dilemma: 1) embrace a view that ‘those who cannot remember the past are condemned to repeat it’ and the purchasing power of gold is likely to revert to its mean or 2) embrace a view that the emergence of new markets represent a structural change and ‘this time is different’.
There is a non-gated version of the paper here.
The Randall Collins theory of ritual
Much of it concerns the origins and application of violence, but this blog post on Randall Collins and his theory of ritual, by Xavier Marquez, is interesting throughout. Here is one excerpt:
The (relative) insignificance of ideology. Taken in its strongest terms, Collins’ theory seems to suggest that ideology is generally unimportant. Whether a symbol acquires socially motivating value depends much less on its “generalized” meaning than on its place within chains of interaction rituals; we are not generally the dupes of rhetorical framings and persuasive strategies except in the context of successful ritual situations. (Collins notes, for example, that most advertisement seems to be unsuccessful at actually persuading people to buy products, and is mostly intended to preserve attention space against competitors). From this perspective, the decline of labor movements worldwide, for example, may owe less to any ideological changes (“persuasion” and “manipulation” taken in a very broad sense) than to (intentional or unintentional) changes in the conditions for the ritual production of solidarity. Chris Bertram recently mused on the occasion of Margaret Thatcher’s death that UK society used to be socially more class-differentiated (there were strong institutions where class solidarities and roles were produced) but is now less so (since these institutions have vanished), despite very low levels of economic mobility and higher levels of economic inequality; many people now “feel” that there is more equality. From the interaction ritual perspective, these changes are not the result of the working class becoming simply convinced of lies due to clever persuasive strategies by elites, but of the less central place of rituals and symbols reinforcing class solidarity in their lives. This is in turn due to any number of causes: laws that made labor unions more difficult to organize, structural changes in employment patterns, the decay of rituals of deference, the emergence of rituals focused on celebrities that cut across social class, etc.
Collins is one of the most important social scientists in the world today, though in many circles he remains underdiscussed. You will find previous MR coverage of him here. The pointer is from @HenryFarrell.
Arnold Kling’s new book on Kindle
It’s called The Three Languages of Politics. It’s an extended take on the three-axis model. Get it! Write a charitable review! Use this post to give me your comments!
*Political Arithmetic*
The authors are Robert Fogel, Enid M. Fogel, Mark Guglielmo, and Nathaniel Grotte, and the subtitle is Simon Kuznets and the Empirical Tradition in Economics, on target as one might expect.
Experimental economics and Moliere’s *Tartuffe*
From Bertrand Crettez and Régis Deloche, forthcoming in JEBO:
Numerous papers show how game theory can improve our understanding of literature. There is no paper, however, using experimental economics to arrive at a new understanding of a play. We fill this gap by using experimental evidence to compare the last two versions of Molière’s Tartuffe. In the final version of the play, there are two stag hunt games, one without pre-game communication and one with. In the first game players fail to coordinate to the efficient equilibrium but in the second one they do, which is consistent with experimental evidence. In the penultimate version of the play, there is pre-game communication in the first stag hunt game but players fail to coordinate to the efficient equilibrium, which is not consistent with experimental evidence. By removing the pre-game communication from the first game, Molière adapted his play as if he had been a student of modern behavioral game theory.
Margaret Thatcher has passed away
Very sad news of course, it is hard to even know what to say, you can follow obituaries and comments on Twitter here.
On YouTube, here is Thatcher and Buckley. Here is a list of the 364 economists who signed a petition objecting to Thatcher’s macroeconomic policies. Here is a good Bartlett piece on Thatcher, who by the way raised taxes overall.
Quality institutions and growth are not so well-connected
Here is a passage from a new paper from Lant Pritchett and Eric Werker:
One of the puzzles to be reconciled is that although “institutions” are associated with long run growth rates, their predictive power for short-to medium-run (5 to 10 years) growth, or for growth accelerations is very weak. (Khan, 2007) makes the distinction between “market supporting governance” versus “growth promoting governance.” He points out that, while “governance” measures are correlated with levels of GDP per capita, there is little or no predictive power of the current level of institutions for future growth rates.We illustrate this by comparing the level of income and a measure of “governance” versus the growth rate and that same measure of governance and the growth rate and the change in the measure of governance. Whereas the first is strong the second is quite weak and the third near zero.…Essentially all rich countries have reasonably high “quality of government” and all countries with high “quality of government” are rich.…But among countries with the same governance there are massive differences in growth (e.g. China versus Cote d’Ivoire) and countries with rapid growth (above .6) the ‘quality of government’ ranking ranges from .15 (Indonesia) to .9 (Singapore).
…Figure 7c shows there is no link at all between the improvement in ‘quality of government’ and economic growth 1984 to 2004. A country like Uganda has massive improvement but exactly average growth, China has massive growth and no improvement at all, Malaysia saw QOG worsen but growth well above average, etc.
The relevant figures start at around p.30. Was it Jeff Sachs who put it this way?: Go back to 1960 and try to measure the quality of institutions any way you wish, knowing of course in advance which countries end up doing well. Can you find any measure at all which predicts subsequent growth? This is a tough problem for we economists.
There is another sense in which institutions have to be the causal factor, in which case we are very far from having a sense of how to measure good institutions.
Irving Fisher on Prohibition
Here is one typical passage:
We see from the papers that Prohibition in Norway was given up. Do you know what Prohibition was in Norway? It allowed drinks containing 21 per cent alcohol! The people were so disgusted with the results that they overthrew this “Prohibition.” The heavy drinkers wanted their “personal liberty”; they did not want to stop at 21 per cent. It is easier to stop at one-half of one per cent than at 21. This is the lesson of experience. The only thing to do is what they did in Kansas – to tighten it up whenever there is an attack on Prohibition. The whole strength of the opposition consists in saying, “It can’t be done; it doesn’t work”; it is not that the object is a bad thing, but that it does not work. Now the more you tighten it the better it will work, and the more you loosen it up the worse it will work; and therefore the more you will have the very conditions that led to the overthrow of such Prohibition as they had in Norway and Ontario. In Ontario they originally allowed 2.2 per cent beer, then they “loosed up” and allowed 4.4 per cent and now they have loosened up still further. Experience shows that there is never a stable equilibrium at midway points and never any permanent solution of the liquor problem in a wide-open policy. The only stable equilibrium and permanent solution lies in the utter extermination of the liquor traffic.
William Shakespeare, grain hoarder
There seem to be some new results about the life of the Bard:
The Bard of Avon, who championed the downtrodden in plays like “Coriolanus,” was a conniving character in his personal life, British researchers claim — a tax dodger who profiteered in food commodities during a time of famine.
William Shakespeare was fined repeatedly for illegally hoarding grain, malt and barley for resale during a time of food shortages. He also was threatened with jail for avoiding taxes, according to the study of court and tax archives by researchers at Aberystwyth University in Wales.
The profits were channeled into real-estate deals, the researchers wrote, making Shakespeare one of Warwickshire’s largest landowners.
…It would seem that Shakespeare was drawing on personal knowledge when he wrote “Coriolanus,” a political tragedy that includes an early 1600s version of an Occupy protest against the 1%:
“They ne’er cared for us yet: suffer us to famish, and their storehouses crammed with grain; make edicts for usury, to support usurers; repeal daily any wholesome act established against the rich, and provide more piercing statutes daily to chain up and restrain the poor.”
Adam Smith of course argued that the grain hoarder was usually welfare-improving. Other accounts of the new Shakespeare results are here. Here is one good article with this interesting bit:
She said the playwright’s funeral monument in Stratford’s Holy Trinity Church reflected this. The original monument erected after his death in 1616 showed Shakespeare holding a sack of grain. In the 18th century, it was replaced with a more ”writerly” memorial depicting Shakespeare with a tasseled cushion and a quill pen.
So far I cannot find a draft of the original research paper itself.
How effective are capital controls?
In general, capital controls are found to have little impact on the total volume of capital inflows and thus on currency appreciation. For example, the imposition of inflow restrictions by Brazil, Chile, and Colombia in the 1990s had no significant impact on total capital inflows, nor were pressures on the exchange rate alleviated. In fact, over the course of their capital controls, the real effective exchange rate appreciated by about 5 and 4 percent annually in Brazil and Chile, respectively. In Thailand the real exchange rate started appreciating within a week after controls of short-term flows were imposed in December 2006. The most recent episode of control in Colombia (during 2007-08) was also ineffective in reducing the volume of non-FDI inflows or in moderating the currency appreciation…
That is from Jonathan D. Ostry, “Managing Capital Inflows: Old and New Debates,” in The Great Recession: Lessons for Central Bankers, edited by Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug.
Do note that the passage above can be taken either as evidence for or against restrictions on capital flows.
John Stuart Mill’s Letter to Bentham
TO JEREMY BENTHAM
My dear Sir,
Mr. Walker is a very intimate friend of mine, who lives at No. 31 in Berkeley Square. I have engaged him, as he is soon coming here, first to go to your house, and get for me the 3.d and 4.th volumes of Hooke’s Roman history. But I am recapitulating the 1.st and 2.d volumes, having finished them all except a few pages of the 2.d. I will be glad if you will let him have the 3.d and 4.th volumes.
I am yours sincerely
John Stuart Mill.
Newington Green,
Tuesday 1812.
A rather ordinary letter until one considers the date. Mill you see was born in 1806, thus making him six at the time of writing. The editors of Mill’s letters note that his essay on Hooke’s Roman history has survived and includes a footnote correcting Hooke’s Greek.
The new changes to British welfare policy
The process starts today, as listed by the FT:
1 April – Spare room subsidy ends
1 April – Council tax benefit eligibility decided by local councils
8 April – New benefit rates come into effect. Most will be increased by a below-inflation 1 per cent
8 April – Personal Independence Payment replaces Disability Living Allowance in north England
15 April – Benefit cap, limiting sums a single household can receive to about £500 [TC: that is per week], begins in four London areas before national roll-out in July
29 April – Universal Credit pilot begins in one English town
Here is a CRS-like summary of the changes (pdf). The Guardian breaks down some of the exact numbers. If I understand their categories correctly, total benefit spending in nominal terms is going up by 1.9%, less than the rate of price inflation. Supporters of reform argue that welfare benefits have been going up at a higher rate than have wages. At the first link you will see that British public opinion was about 60% in favor of higher benefits in 1991 and was about 27% in favor of higher benefits as of 2011.
There is a concomitant movement afoot to cut benefits for immigrants.
I have been reading up on the Poor Law reforms of 1834 for a forthcoming MRU course, and the number of parallels to the current situation is striking. (By the way, here is a good D.A. Baugh article (jstor) about welfare costs leading up to those reforms.) For instance as British workers themselves struggled, support for toughening up the Poor Laws increased considerably. The final 1834 changes, which restricted eligibility, limited grants, consolidated categories of aid, and emphasized “putting the poor back to work,” passed Parliament by a considerable margin. There was also at that time, and now, a variety of popular overestimates for how much the benefits were squelching work effort (see Mark Blaug on the Poor Laws for instance).
This current reform is viewed by many critics as not being very generous. It also can be said, however, that relative to current and recently lowered expectations of future wealth for the middle class, this is probably offering a higher percentage of redistribution than was the case a few years ago or for that matter during the pre-Thatcher British welfare state.