Monday, May 6, 2013

Larry Summers: Reinhart-Rogoff Debacle Shows No Policy Should Be Based 'On A Single Statistical Result'

The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care. In retrospect, it was folly to believe that with data on about 30 countries it was possible to estimate a threshold beyond which debt became dangerous. Even if such a threshold existed, why should it be the same in countries with and without their own currency, with very different financial systems, cultures, degrees of openness and growth experiences? And there is the chestnut that correlation does not establish causation and any tendency for high debt and low growth to go together reflects the debt accumulation that follows from slow growth.
Reuters via The Huffington Post
Larry Summers: Reinhart-Rogoff Debacle Shows No Policy Should Be Based 'On A Single Statistical Result'
Larry Summers

Did Summers read Nersisyan and Wray? See Does Excessive Sovereign Debt Really Hurt Growth? – A Critique of This Time Is Different, by Reinhart and Rogoff by Yeva Nersisyan and L. Randall Wray, June 2010, Levy Institute.

Time to declare total victory.

2 comments:

Ralph Musgrave said...

Summers’s Huffington article is rubbish. First, in defence of Rogoff he puts the straw man argument that “it is a grave mistake to suppose that the debt can or should be accumulated with abandon.”

Well – doh – no one every said debt should “accumulate with abandon”. Keynsians and MMTers do not advocate “abandon”: they advocate very specific ideas as to when the deficit and debt should expand or contract and by how much.

Second, he argues in the final two paragraphs that tax increases or public spending cuts will be needed so as to reduce the debt and those will be what he calls “painful acts”.

Well as Keynsians have pointed out for decades (and MMTers more recently), tax increases are only needed when demand and inflation get excessive. I.e. those tax increases simply remove money from the private sector which, were it spent, would exacerbate inflation and make us WORSE OFF. And an “act” which prevents you becoming worse off is not “painful”. Taking an asprin to stop an oncoming head ache is not “painful”.

Anonymous said...

"Time to declare total victory."

Would that it were!

Actually, it is time to press home the advantage. Either get political leaders to abandon austerity, or get them kicked out as soon as possible.