Replies to post #202798 on Tornado Alley (PROG)

[StephanieVanbryce]

Pete Peterson Linked Economists Caught in Austerity Error

by Mary Bottari — April 18, 2013 - 11:59am

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Study Used to Justify Harmful Cuts and High Unemployment

It is hard to understate the importance of the study. It has been cited around the globe by academics, politicians, and the mainstream media. In the U.S., it is one of Paul Ryan's favorite justifications for his draconian Path to Prosperity budget, for GOP rejection of further stimulus, and the Fix the Debt crowd's frenzied calls for urgent action. President Obama is now on the austerity bandwagon, enacting numerous cuts and proposing new cuts to programs like Social Security in order to achieve a "Grand Bargain" on deficits. As a consequence, mass unemployment is a new normal.

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Pete Peterson's Fingerprints

It will come as no surprise that Reinhart and Rogoff have ties to Wall Street billionaire Pete Peterson, a big fan of their work. Peterson has been advocating cuts to Social Security and Medicare for decades in order to prevent a debt crisis he warns will spike interest rates and collapse the economy. (Peterson failed to warn of the actual crisis building on Wall Street during his time at the Blackstone Group.)

When Washington Post writer Suzy Khimm pointed out to Peterson that the U.S. built significant deficits during the financial crisis but maintained very low interest rates, Peterson responded that America still needed to be on high alert: "you know [Kenneth] Rogoff and [Carmen] Reinhart -- I've talked to them, and they say [debt crises] are sudden, they're sharp, they're very substantial. The risk is simply too big. At some point, if we lurch from crisis to crisis, then confidence will decline on our economy in general."

As the Center for Media and Democracy detailed in the online report, "The Peterson Pyramid," the Blackstone billionaire turned philanthropist has spent half a billion dollars to promote this chorus of calamity. Through the Peter G. Peterson Foundation, Peterson has funded practically every think tank and non-profit that works on deficit- and debt-related issues, including his latest astroturf supergroup, "Fix the Debt," which has set a July 4, 2013 deadline for securing an austerity budget.

Reinhart, described glowingly by the New York Times as "the most influential female economist in the world," was a Senior Fellow at the Peterson Institute for International Economics founded, chaired, and funded by Peterson. Reinhart is listed as participating in many Peterson Institute events, such as their 2012 fiscal summit along with Paul Ryan, Alan Simpson, and Tim Geithner, and numerous other Peterson lectures and events available on YouTube. She is married to economist and author Vincent Reinhart, who does similar work for the American Enterprise Institute, also funded by the Peterson Foundation.

Kenneth Rogoff is listed on the Advisory Board of the Peterson Institute. The Peterson Institute bankrolled and published a 2011 Rogoff-Reinhart book-length collaboration, "A Decade of Debt," where the authors apparently used the same flawed data to reach many of the same conclusions and warn ominously of a "debt burden" stretching into 2017 that "will weigh heavily on the public policy agenda of numerous advanced economies and global financial markets for some time to come." (Note that not everyone associated with the Institute touts the Peterson party line.)

Bankrupt Analysis

The authors have issued two rebuttals to the Amherst study. In their latest, they object that anyone would think they were "misconstruing analysis to support austerity" or a political agenda. Perhaps it had to do with pieces like this one entitled "Too Much Debt and the Economy Can't Grow" that warns against further stimulus at a time when mass unemployment is wreaking devastation on the lives and livelihoods of workers young and old.

Economists like Herndon, Ash, Pollin, Baker, and Krugman have never bought the argument that economies can cut their way out of a crisis, and now data from the Reinhart-Rogoff study, from numerous European countries, from the IMF, and even from CMD's home state of Wisconsin (now ranked an astonishing 44th in job creation), support their contentions.

If only they had half a billion to spread the word.

MUCH MORE! ..
http://www.prwatch.org/news/2013/04/12065/pete-peterson-linked-economists-caught-austerity-error

This report above is devastating and 100 PERCENT documented!

[arizona1]

AUSTERITY CALAMITY


http://www.huffingtonpost.com/2013/04/25/spain-unemployment-hits-record-high_n_3153508.html

[StephanieVanbryce]

you know I'm not 'conspiracy minded', as a matter of fact I know you know, I SHUN them... even though beloved members in my family indulge in a couple .. (eeekkkkkkks ..;) ) ... However, in this case, I'm getting 'one of those thoughts' .. . that this was planned! ... . NOT an 'unknown' EXCEL 'mistake' .. but a Planned OP. ... I know .. I know ..........I'm going nuts! ... . ;)

[StephanieVanbryce]

How much unemployment did Reinhart and Rogoff's arithmetic mistake cause?

All because two famous economists whose work is used
the world over to justify austerity cuts just got their sums wrong


Kenneth Rogoff and Carmen Reinhart

Dean Baker
Tuesday 16 April 2013 14.20 EDT

That's the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their storyline is that 90% is a cut-off line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90%.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after the second world war. In other words, these were not bad economic times; the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts: would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant. Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.

But HAP tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.

After being unable to reproduce R&R's results with publicly available data, HAP were able to get the spreadsheets (zip) that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90% debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6%, compared to the -7.6% that R&R had entered in their calculation.

Since R&R country-weight their data (each country's growth rate has the same weight), and there are only seven countries that cross into the high-debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high-debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, but the missing New Zealand years are the biggest part of the story.)

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment.

In the United States, many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10% for the eurozone as a whole and above 20% in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of four years of data from New Zealand.

If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.

• This article was first published on 16 April on the CEPR blog and is crossposted by the author's permission

http://www.guardian.co.uk/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause