by Eli Epstein-Deutsch
Carmen Reinhart and Kenneth Rogoff’s famous ratio of 90% debt-to-GDP, above which countries allegedly begin to experience negative growth, has been cited widely as a justification for austerity by politicians from American Senators Paul Ryan and Tom Coburn to European Commisioner Olli Rehn. Thus the commentariat have lit up at the recent discovery by Robert Pollin, Michael Ash and Thomas Herndon that Reinhart and Rogoff’s 2010 paper Growth in a Time of Debt contained serious errors, including methodological problems and unwarranted omissions of key data. In their new paper, the University of Massachusetts economists challenge the original growth-rate at the 90% debt-level, which may have been over two percentage points too low: a notable difference. Pundits such as as Paul Krugman have seized on this rebuttal as fresh evidence for a long-standing suspicion that the 90% case was overstated (the correlation never proved the direction of causality, he points out). Defenders of Reinhart and Rogoff such as a Douglas Holtz-Eakin claim that nothing in the takedown really rocks their world (the idea seems to be that debt is intrinsically known to be bad anyway, like sin). With the political tensions over austerity ratcheted up of late, the debate is only likely to heat up from here.
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Reinhart-Rogoff, Continued
Thomas Palley, Guest Blogger
Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do.
Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and Chicago school economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration and MIT economics.
Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the New Deal wing of the Democratic Party and labor movement, but it has no standing within major economics departments, owing to their suppression of alternatives to orthodox theory.
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Jonathan M. Harris, Guest Blogger
In the wake of the global financial crisis, Keynesianism has had something of a revival. In practice, governments have turned to Keynesian policy measures to avert economic collapse. In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New Classical theories.
This theoretical and practical shift is taking place at the same time that environmental issues, in particular global climate change, are compelling attention to alternative development paths. Significant potential now exists for “Green Keynesianism” : combining Keynesian fiscal policies with environmental goals.
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Robin Broad
Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”
It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear. And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.
Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.
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Thomas I. Palley, Louis-Phillipe Rochon and Matías Vernengo
It is widely recognized that economic crises can trigger enormous change, with regard to both economic theory and the politics of governance. Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007–2009. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score, the profession failed catastrophically, revealing fundamental theoretical inadequacies.
This intellectual failure has prompted us to launch the Review of Keynesian Economics (ROKE), the first issue of which is fully available here. At a time of journal proliferation, some may wonder about the need for another journal. We would respond there is a proliferation of journals, but that proliferation is essentially within one intellectual paradigm. As such, it obscures the fact that the range of theoretical inquiry is actually very narrow. A journal devoted to Keynesian economics is therefore needed, both to correct this narrowness and because events have once again confirmed the profound relevance of Keynesian theory. As noted by Robert Solow, a member of the board of ROKE, our project is “counter-cultural, and god knows the current culture needs to be countered.”
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Nancy Folbre, Guest Blogger
Some of the most vivid political rhetoric of 2012 reflects a debate that has lasted centuries. Who are the makers and who are the takers? Much economic theory revolves around efforts to distinguish the two. The conceptual effort is motivated by noble intent: presumably, a good economic system encourages making (creating more to go around) and discourages taking (redistributing what others have made).
Yet it is surprisingly hard to create a consensus about these labels, and past disagreements, still unresolved, lurk in the background. History is shaped by contending claims over who is more productive than whom. Powerful groups like to describe themselves as makers rather than takers, partly to glorify themselves and partly to discourage take-backs.
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Alejandro Nadal
In 1964 Mr. Jerome Daly took a mortgage for $14,000 US dollars from the First National Bank of Montgomery in Minnesota. In 1967 he was $476 in arrears, the bank initiated foreclosure proceedings and bought the property at a sheriff’s sale. The bank then sued for possession and a jury trial was held in December 1968 in a township with a very appropriate name, Credit River.
Daly argued that the mortgage contract was null and void because it lacked consideration on the part of the bank. In legal parlance this means that in any contract both parties must exchange something of inherent value. When the bank had granted the loan it had simply inserted an entry in a ledger, thus “creating money out of thin air.” Because the bank did not commit anything of value into the contract, there was no consideration and the contract was null and void. The plaintiff had no legal base to claim Daly’s house.
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Gerald Epstein
Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.
John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.
Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”
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Gerald Epstein
On the last day of 2012, we note the passing of two brilliant economists who have done much to contribute a broad and deep understanding of economic history and institutions. Triple Crisis has written of the passing, life, and work of Alice Amsden, the brilliant development economist from MIT, who contributed enormously to our understanding of technology and industrial policy to the dramatic rise of Asian economies, among others.
We also recognize here Albert Hirschman, the brilliant political economist, who crossed disciplinary boundaries and had a deep commitment to learning from economic history and political institutions. Hirschman died on December 11, 2012 at the age of 97.
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