Monday, April 29, 2013

Randy Wray — The Absolutely Final and Definitive Destruction of Reinhart And Rogoff

Two UMKC students have provided what I think is the most destructive empirical work to date on the simply awful book and articles by Reinhart and Rogoff that purported to find a magical debt ratio beyond which economic growth plummets to negative territory. They are Matthew Berg and Brian Hartley and their piece is at New Economic Perspectives:

Before presenting a quick summary of their findings, let me make two preliminary notes. First they validate what Yeva Nersisyan and I first pointed out three years ago: the crappy empirical research of Reinhart and Rogoff was driven by a small number of outliers, and by confusion of causation and correlation. Yes, some countries–Japan most notably–have high debt ratios and slow growth. R&R aggregated in such a way as to give very high weights to those countries. And those countries had high deficits and thus high accumulated debts because growth was low. Hence, there was never any support for their claim that 90% marks a causal turning point.
Economonitor — Great Leap Forward
The Absolutely Final and Definitive Destruction of Reinhart And Rogoff
L. Randall Wray | Professor of Economics, UMKC

Randy's definitive statement on MMT and the claim that MMT says deficits don't matter. 
But note that no UMKC-affiliated faculty member (and probably no student) has ever said something as silly as “no deficit can be bad”. I do not even know what that could mean. Deficits can be bad. Very bad. Very very bad. A sovereign country that issues its own currency cannot be forced into involuntary default so long as it floats its currency. That is certainly a true statement–accepted by anyone who knows anything about sovereign currencies. Whether it is talmudic I have no idea. If you’ve got the magic porridge pot, you can provide the porridge.
Can too much porridge be bad? You betcha–just read the damned story. Inflation? Yes. Currency depreciation? Probably. Leave too few resources for the private purpose? No doubt. Create a nation of couch potatoes? You’ve got it. Bury everything under a thick layer of suffocating porridge? Read the story.
Where do people like Epstein get this stuff? I have no idea.


Matt Franko said...

"Deficits are mostly nondiscretionary–the outcome of the automatic stabilizers. We could ramp up government spending today, and cut tax rates, and might find deficits actually go down. Or up. Or stay the same. Who cares? "

This is good... ie "Who cares?"

Technical issue though:

If we are defining the "Deficit" as "G-T" and "G" is defined as (from wiki): "G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits [Ed: and Medicare?, Medicaid, the interest income channel, etc..]."

Then the "automatic stabilizers" (by definition) cannot be included in "the deficit" (again, if we define the deficit as "G-T")...

So does "the deficit" really matter in of itself?

I think not... it's not fully descriptive of what the govt is really doing wrt the non-govt....

Like Wray asserts: "Who cares?" ie "the "deficit" doesn't matter" imo....


Adam2 said...

The Deficit doesn't matter.. What it is paying for does.

Matt Franko said...


"it" being "the deficit" is not what "pays for things"... if we define "the deficit" as "G-T", for some of what govt "pays for" is included in "G" not "G-T".

Govt spends first and then collects the taxes...

this is the point Wray is making imo...


Jose Guilherme said...

The T in "G-T" is really Net Taxes.

And Net Taxes = Gross Taxes minus Transfer Payments.

That is, Transfer Payments are negative taxes.

So automatic stabilisers do impact the budget deficit - not through G but rather via T.

More unemployment benefits mean, ceteris paribus, a decrease in Net Taxes (a decrease in T) and an increase in the deficit.