As part of the effort to rehabilitate their image, Reinhart and Rogoff have taken the additional step of trying to distance themselves from austerity altogether by claiming they were never advocates. In a Financial Times piece on Wednesday (subscription required) and in a New York Times op-ed last week, they argued that "austerity is not the only answer" to the oh-so-serious problem of government debt. In fact, a whole toolkit must be used -- a little austerity here, a little financial repression there, maybe a little inflation.
And with Wednesday's FT column, a surprising new tool appears in the kit: More government debt! Although not too much more, and only if it's used for the right things....
But Reinhart and Rogoff never argued, in many of the high-profile columns they wrote following the release of their paper, that governments should take on moredebt for infrastructure spending, or for anything else. In fact, they strongly suggested that governments had better hurry up and start cutting their debt, tout de suite, lest a new financial crisis hit....
Now that their thesis has suffered a potentially fatal blow, and the "fiscal tsunami" of soaring interest rates they predicted has still not materialized, Reinhart and Rogoff are re-writing history and appearing to get a little cozier with the idea of debt. Given the damage that austerity has already caused, any apparent abandonment of it is welcome. Still, there's no better proof that the intellectual case for austerity has always been empty.The Huffington Post
Reinhart, Rogoff Backing Furiously Away From Austerity Movement
Mark Gongloff
And with Wednesday's FT column, a surprising new tool appears in the kit: More government debt!
ReplyDeleteEven that is not necessarily true since monetary sovereigns need not borrow.
Hope their hindsight is better than their foresight. Hopefully, they backed out of their blinders!
ReplyDeleteF.Beard is right: monetary sovereigns don’t need to borrow. But it’s worse than that. Monetary non-sovereigns don’t need to borrow to fund infrastructure either!!!!! Rogoff and Reinhart are talking total bullsh*t here.
ReplyDeleteWhat those pair of idiots actually say is “: “Borrowing to finance productive infrastructure raises long-run potential growth…”. And that sounds reasonable. In fact the latter idea is a common mistake that so called “professors of economics” shouldn’t make.
It’s actually perfectly feasible to pay for investments out of income rather than borrow. That will “raise long-run growth” to exactly the same extent. So the “growth” point IS NOT an argument for borrowing: it’s an argument for investing. Doh!
To illustrate, if you have well over $20,000 in the bank, and you want to invest in a new car or small truck costing $20,000 , why borrow? Only numbskull Rogoff and moron Reinhart would borrow in those circumstances.
In fact a Swiss academic some years ago looked at exactly that question, namely whether a government should fund investment from income or from borrowing. The conclusion was that borrowing did not make sense. See:
http://econpapers.repec.org/article/eeepoleco/v_3a23_3ay_3a2007_3ai_3a4_3ap_3a1088-1104.htm
The conclusion was that borrowing did not make sense. Ralph Musgrave
ReplyDeleteBut neither does taxation if there is spare capacity in the economy. In that case, deficit spending (but without borrowing!) is the solution.
But the problem is that once the economy starts to recover that the banks will pile on with their form of money creation (lending deposits into existence) and cause price inflation that will be blamed on the deficit spending?
Ralph right...
ReplyDeletesee what I think might happen if govt just directly spent on projects and to maintain incomes (JG/BIG, or equivalent) is that people wouldnt save as much, so there would not build up savings and what I think the academe of economics believes represents "pent up demand" in the form of these savings...
Another "ox to be gored" out there imo is this false belief being sold by the academe that if people and firms save, there can be all of a sudden a rush to spend these savings and everyone will bid up prices... I flat out do not believe this falsehood.
Nobody saves to just all of a sudden splurge on over-priced items.... Bill M. has described 'savings' as 'a hedge against uncertainty' and I agree with this assertion...
rsp,
F.,
ReplyDeleteGenerally agree with your assessment there but remember as far as "inflation" it is about 'price' and not 'quantity'....
So even if system credit increases if the banks/regulators do not allow the price levels for the collateral values of the loans to increase there will not be any so-called 'inflation'...
The use of the word 'inflation' by the corrupt/moron academe of economics is misleading in of itself... it is monetarist/metallist at core ... the whole concept of "inflation" is BS, it is about 'price' not 'quantity'...
FD: I am in NO WAY libertarian....
rsp,