As many mainstream macroeconomics try to reinvent themselves after their reputations were trashed during and in the aftermath of the GFC, some are still trying to stay relevant by recycling the usual trash about deficits, public debt and bond yields that defines the New Keynesian orthodoxy in macroeconomics. That approach has been emphatically exposed as fake knowledge by the fact that none of the predictions that can be derived from that framework have proven to be accurate. On December 9, 2019, the UK Guardian took a rest from imputing anti-semitist motives to Jeremy Corbyn and published a sort of dinosauric-type article from Kenneth Rogoff – Public borrowing is cheap but ramping up debt is not without risk. Yes, the same character that claimed during the crisis that there was a public debt threshold of 90 per cent of GDP, beyond which, governments would face insolvency. When it was discovered the spreadsheet they had used to come up with that conclusion had been incompetently (or fraudulently) manipulated and that the actual data did not show anything of the sort, Rogoff should have slunked off and shut his mouth forever. But that is not the way these characters operate. Memory is short. Their position as an agent for their elites is well paid. And so they keep recycling the nonsense. Eventually, their influence will decline. But as Max Planck noted in 1948 “Die Wahrheit triumphiert nie, ihre Gegner sterben nur aus”, which has been reduced to ‘science advances one funeral at a time’, which is not a verbatim translation but an accurate depiction of how change is slow to come to the academy.
As a reminder, Rogoff has not laid down a very convincing track record in macroeconomics.
I considered Rogoff’s contribution to the debate in these blog posts:
1. Elementary misuse of spreadsheet data leaves millions unemployed (April 17, 2013).
2. It’s simple math (April 10, 2013).
3. Watch out for spam! (January 25, 2010).
Remember the sort of headlines from 2010 – “Countries with debt over 90 percent of GDP enter a danger zone”.
The 90 per cent threshold entered the media coverage as a result of a paper released by Harvard economists Ken Rogoff and Carmen Reinhart” – Growth in a Time of Debt.
That paper talked about “debt intolerance limits” arising from “sharply rising interest rates” – and then “painful fiscal adjustments” and “outright default”.
It also talked about the “obvious connection” between inflation and high public debt ratios – which had me laughing at the time because no-one has really shown that to be a robust relationship at all.
Everyone started quoting the paper, even though at the time it had obvious flaws which I covered in the blog posts cited above.
When their paper came out in 2010, I immediately tried to replicate the results and failed. I wrote to Carmen Reinhart because I had met her a few years earlier at a function in the US. I requested the data. It appears I was in a queue of researchers asking for the data. I received no reply.
As a long-standing researcher you learn that if an author will not send you their data then something is wrong. Perhaps they were too busy. Perhaps they didn’t want anyone getting their exact dataset because they knew what might be found.
It wasn’t clear to me how they generated their results despite my laboured attempts to reverse engineer them. But without having the exact dataset it becomes meagre surmise and legal considerations then prevent one from shouting fraud!
But a few years after it was published, someone did get hold of the data and then the world found out what Rogoff and Reinhart had been up to and it wasn’t pretty.
The study (April 15, 2013) – Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff – from the Political Economy Research Institute (at University of Massachusetts) – written by Thomas Herndon, Michael Ash and Robert Pollin, provided a devastating critique of Rogoff and Reinhart because it exposes major errors in their basic handling of the data.
The PERI authors discovered the reason for being unable to replicate the R&R results lay in “mistakes” made by the original authors.
Was it a simple spreadsheet coding error? Or was it a case of academic fraud? We will never be in a position to distinguish between incompetence or fraud. At the very least it is very sloppy work.
The policy advice forthcoming from the Rogoff and Reinhart work is exactly the opposite to the policy advice that would have been implied if they had used the data appropriately.
The PERI authors found that nations who have public debt to GDP ratios that cross the 90 per cent threshold experienced average real GDP growth of 2.2 per cent rather than -0.1 per cent as was published by Rogoff and Reinhart in their original paper.
More recently, Rogoff took aim at Modern Monetary Theory (MMT) in this article – Modern Monetary Nonsense (March 4, 2019).
It was just another part of the ‘Project Syndicate’ misinformation campaign where they are trying to resurrect the failed analysis of many mainstream economists.
But, in the stream of articles in the popular press that followed earlier this year, the journalists or junior economists intent on attacking MMT, felt the need to seek the authority of Rogoff, quoting this article relentlessly.
I couldn’t be bothered in responding to it at the time, not the least because ‘Project Syndicate’ wanted me to subscribe and then start spamming me with their pathetic articles.
Rogoff has a thick skin though.
He has been predicting disaster for decades and his stint as the chief economist at the IMF between 2001 and 2003 was not crowned in glory.
And he was at it again this week in the UK Guardian article (December 9, 2019) – Public borrowing is cheap but ramping up debt is not without risk – where he rehearses all the failed doctrines that characterise the failure of mainstream macroeconomists to provide any relevant information or analytical tools to help us understand the real world.
But, the problem is, that while his work provides no relevant understanding, it palays into the prejudices of the elites and the media arms they control – so it gets airplay and there will be multiples of wannabee journalists who will quote him.
We are up against a phalanx of misinformers and it is not easy breaking through.
We can be brief.
Rogoff is reprising his debt threshold arguments without appealing to any specific threshold.
He also reprises the standard argument that government pensions work like this: young people pay tax, government says they will get a pension when they get old, they get old, so they expect the debt the government owes to be paid.
If the public debt defaults, so will these pension commitments.
Spot the problem.
The only way a currency-issuing government would renege on its nominal pension commitments would be if the political process led to the younger generation denying the older generation – their parents or grandparents – access to the pension entitlements they had acquired.
It might happen.
But it will have nothing to do with any financial capacity of the government.
It did happen in Greece as a result of the bastardry of the Troika. But then Greece uses a foreign currency and its experience has no relevance to the capacities of currency-issuing governments.
As in his earlier work, where Rogoff present examples of sovereign defaults way back in history without any recognition that what happens in a modern monetary system with flexible exchange rates is not commensurate to previous monetary arrangements (gold standards, fixed exchange rates etc), and, that a currency-issuing government is quite different to a currency-using government, he continues to use examples like Italy and Greece to claim pension entitlements are under threat in OECD countries.
He also says that:
… many governments have been trying to adjust pensions downward gradually, as Europe did during the financial crisis … Unfortunately, slow growth and ageing populations mean much remains to be done.
Ageing populations present no pension risk in terms of the capacity of currency-issuing governments to pay them in nominal terms. The risk is that governments cannot necessarily guarantee entitlements in material (real) terms.
That becomes an issue of available real resources and productivity growth.
As I have written often, austerity mindsets, like Rogoffs, undermine the solution to the real problem, by imposing ‘solutions’ to the non-problem.
Of course, a scare campaign wouldn’t be the same without the deficits cause higher interest rates and yields which will render the government insolvent narrative.
So while Rogoff and his ilk can no longer deny that they were completely wrong about the movement of interest rates and yields during and after the GFC, they just cannot let the myths of the mainstream go.
So he writes:
… the current complacency regarding much higher debt implicitly assumes that the next crisis will look just like the last one in 2008, when interest rates on government debt collapsed. But history suggests that this is a dangerous assumption. For example, the next wave of crises could easily stem from a sudden realization that climate change is accelerating much faster than previously thought, requiring governments simultaneously to stall the capitalist engine and spend vast sums on preventive measures and remediation, not to mention dealing with climate refugees. And the next global conflagration could be a cyber war, with unknown ramifications for growth and interest rates.
He doesn’t dare say that interest rates will rise if governments use fiscal deficits to address climate change.
But that is what he is implying.
History doesn’t suggest that implication.
Japan has demonstrated over many decades the opposite.
When I was in Japan recently, some journalists kept running the line that eventually interest rates would accelerate out of control. This is a paranoia that is not ground in any real world causal processes.
We hope the governments do take up the climate challenge and reconfigure the state to take greater control of resource allocation and regulation.
That will require larger deficits.
That has no necessary implications for interest rates or bond yields.
Governments, through their central banks can control both should they desire. Moreover, they do not even have to issue debt if that was seen as an issue.
To think that fiscal deficits cause interest rates to rise (through higher yields in the bond markets pushing up other borrowing rates along the yield curve) you have to invoke the classical loanable funds doctrine, which was categorically debunked by Keynes and others in the 1930s.
It is fake knowledge.
My bet is that if there is another financial crisis that interest rates will stay low and governments will use their capacities to ensure that.
And the bond markets are now receiving negative rates for long term loans to governments around the world.
As I mentioned in Japan recently, in the not too distant future, the entire debt servicing burden of the Japanese government, which Rogoff lists as the worst of the advanced economies in terms of its public debt levels), will become negative as the old debt matures and the new debt is issued at negative yields.
If the bond markets were in control, then that reality would be impossible.
I was waiting for him to introduce the ‘tax the rich to pay for services’ story. And I wasn’t disappointed.
He claims that:
If the aim of government policy is to reduce inequality, the only sustainable long-term solution involves raising taxes on high earners; debt is not a magic shortcut for giving to the poor without taking from the rich.
The ‘only’ = TINA.
1. No taxes need to be raised to give the poor better services and better prospects unless, in doing so, the nation is pushed beyond the inflation constraint.
Rising inequality is typically related to rising labour underutilisation. So a good place to start would be to pursue full employment and that requires no tax increases.
2. Where we want to tax the rich more has nothing to do with getting their ‘money’ but everything to do with reducing their power and influence.
3. Currency-issuing governments do not even have to issue debt when they run deficits. So Rogoffs dichotomy – taxes or debt – is not a reflection of the true choices that governments have.
They just reflect the straitjacket the mainstream pressures the governments to remain within, unless, of course, there is a crisis that requires government bailouts for the top-end-of-town or some military contract that their corporations depend on, in the manner of parasites, for their viability.
The point is that when Rogoff writes that “Interest rates are ultra-low in part because global investors are starved of “safe” assets that will still pay out in the event of a sharp downturn or economic catastrophe” he is confusing causality again.
The reason the yields on these are “safe” assets is because they are backed by the currency-issuing capacity of the government and the reason the yields are low (and negative) is because the governments have been using that capacity in rather profound ways – massively expanding the assets held by central banks, for example.
The global investors have little choice as a result.
Their discretion is limited and if they want higher returns they have to risk insolvency.
They know there is no risk of insolvency from governments and so they are drawn in times of uncertainty to those assets.
And finally, the Rogoff scaremongering – there are apparently different classes of debt holders – and the government will rank them when they choose to default:
… how sure can investors be that they will come first in line in the next crisis, as they did in 2008? Will the US government again put Wall Street before Main Street and honour debts to China ahead of obligations to pensioners?
Mindless input from an economist who proved long ago that he couldn’t even deploy a simple spreadsheet accurately.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.