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Article Artículo

Quick Thoughts on Reinhart and Rogoff's Response

Carmen Reinhart and Ken Rogoff (R&R) responded to the paper I noted earlier by Thomas Herndon, Michael Ash, and Robert Pollin (HAP), which showed that their famous result associating high debt levels with slow growth was driven by spreadsheet errors. The gist of the response is that HAP also find that high debt is associated with slower growth, and that other studies (including one of theirs) found the same result anyhow.

The first point is highly misleading. It is true that in most of their specifications HAP found growth was slower in periods with debt levels above 90 percent of GDP than below, but the gap was relatively small and nowhere close to statistically significant. Furthermore, they found a much bigger gap in growth rates around debt-to-GDP ratios of 30 percent. If we think that R&Rs methodology is telling us something important about the world then the take-away should be that we want to keep debt-to-GDP ratios below 30 percent.

If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.

Dean Baker / April 16, 2013

Article Artículo

Violence by Opposition Sectors Leads to Divisions

Opposition protests turned deadly yesterday, with at least seven people having been reported killed and over 61 others injured as opposition groups reportedly burned the homes of PSUV leaders, community hospitals, and mercales (subsidized grocery stores), attacked Cuban doctors, attacked state and community media stations, and threatened CNE president Tibisay Lucena and other officials. Violence is likely to continue today, as both Capriles and Maduro have called for their supporters to demonstrate in the streets. Maduro and other senior government officials have condemned the acts and have warned that the opposition is attempting a coup d’etat. PSUV legislators have suggested they may pursue legal action against Capriles for promoting instability.

The campaign of violent protest, in conjunction with opposition candidate Henrique Capriles’ refusal to recognize the election results, represents the first major extra-legal destabilization attempt by Venezuela’s opposition since the failed coup in 2002 and oil strike in 2003. It is also significant in that the U.S. is backing Capriles’ position, thereby helping to provoke conflict in Venezuela – even though most Latin American nations and many other governments around the world have congratulated Maduro on his victory and called for the results to be respected.

The opposition strategy is predictably divisive, however. Factions within Venezuela’s opposition have long opposed extra-legal and especially violent methods of attempting to force change. Some in the opposition have also hinted that Capriles’ cries of “fraud” are not credible. Opposition-aligned CNE rector Vicente Diaz has said that while he supports a full audit of the votes, he has no doubt in that the results given by the CNE are correct. Diaz made comments to this effect on opposition station Globovision yesterday; the TV hosts then quickly concluded the interview.

CEPR / April 16, 2013

Article Artículo

How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?

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 story line is that 90 percent is a cutoff 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 percent.

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 World War II. 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.

Dean Baker / April 16, 2013

Article Artículo

Latin America and the Caribbean

As Paraguay Prepares for Elections, Unanswered Questions about a Massacre, a Coup and the United States

On June 15, 2012 a violent eviction of campesinos from occupied land in the Curuguaty region of Paraguay left 17 people dead, including 6 police officers. A week later, President Fernando Lugo was impeached without due process by an opposition controlled legislature, in what most of the rest of the region would regard as a coup. The reason given was Lugo’s poor handling of the situation in Curuguaty.

Next Sunday Paraguay will hold presidential elections, the first since the removal of Lugo. The election pits the Colorado party, which ruled Paraguay for 61 years until the 2008 election of Lugo, versus the Liberal party of current President (and Lugo’s Vice President) Federico Franco. Yet, 6 months after the clash in Curuguaty, and on the eve of presidential elections the Paraguayan government has done little to investigate what happened on June 15. As Natalia Viana of Publica, a nonprofit investigative journalism center in Brazil writes in this week’s edition of The Nation, “As Paraguay prepares to elect a new president on April 21, a growing number of citizens believe that answering the question of what happened in Curuguaty is the key to the truth behind Lugo's impeachment.” What’s more, Viana notes, is that “it is increasingly clear that his ouster was facilitated by entities in Paraguay who not only wanted him gone from the moment he was elected, but who enjoyed financial support from the United States.”

For some time about 70 landless people had been occupying 2,000 hectares of land. Viana notes that the “supposed owner of the land, Blas Riquelme, was a known land grabber and former president of Paraguay's conservative opposition party, the Partido Colorado (Colorado Party). But it was Riquelme who was occupying the land unlawfully; its rightful owner was the Instituto Nacional de Desarollo Rural y Tierra—the Paraguayan Land Institute—which tried to fight the eviction, only to be ignored by the local courts.” Paraguay has long been dominated by large landholders and is the fourth largest exporter of soy in the world; according to Viana two percent of the population controls over 75 percent of the land. Eventually, 14 of the landless Paraguayans were arrested. Then in December, Vidal Vega, who was a key witness in the investigation into the violent eviction, was assassinated. 

Jake Johnston / April 16, 2013

Article Artículo

Latin America and the Caribbean

Venezuela

World

Venezuela’s Presidential Elections 2013 Live Blog

10:12 PM EDT: The National Electoral Council (CNE) officially declared Nicolás Maduro president. Tibisay Lucena, CNE’s president, made the announcement with Maduro standing by her side.

According to unconfirmed reports, after being declared the winner, Maduro suggested that the equivalent of a coup is being prepared by those who will not respect Venezuelan constitutions. Jorge Rodríguez, the governing PSUV’s campaign manager, has been quoted saying that Capriles, by disregarding the CNE’s results, “is calling for a coup against Venezuelan democracy.” 

Regarding a potential audit or re-count, Professor David Smilde reports that an audit of a majority of the votes is always conducted after an election: 

Venezuela uses electronic voting machines that emit a paper ballot which the voter then deposits in a sealed box. In all elections 53-54% of these boxes are subject to citizen audit immediately after the election. Citizens who were selected to work a given election table and witness from political parties go through the votes one by one. That process takes a couple of hours.

Mark Weisbrot noted this in his response to initial reports of the White House’s statement in support of a full re-count, which he called "calculated" and "very suspicious." Since then, the State Department press office released the transcript for its daily press briefing, which demonstrated the U.S. government’s insistence on calling for a recount despite no indications that the CNE was considering such a move. Reporters present at the briefing attempted to get a firm answer from the State Department as to whether it was suggesting that the U.S. would not recognize the election unless all votes were re-counted, as only the opposition has demanded. Here is an excerpt from that exchange. 

CEPR / April 14, 2013

Article Artículo

Government Spending on the Rich Versus Government Spending on Kids

One of the best guilt trip tactics of the gang trying to cut Social Security and Medicare is to compare government spending on these programs, which primarily benefit the elderly, to government spending on children. By showing that the former is much higher than the latter, those of us old-timers or soon to be old-timers are supposed to feel guilty and willingly agree to surrender our Social Security and Medicare for the good of the children.

There are many serious problems with these sorts of calculations, but let’s play along for a while. If it’s interesting to compare what we spend on each senior to what we spend on each kid then it should also be interesting to compare what we spend on each rich person to each kid.

The basis for this comparison would be the amount of money that the government spends on the fastest growing entitlement: interest on the debt. This is projected to grow from $224 billion (1.4 percent of GDP in 2013) to $857 billion (3.3 percent of GDP in 2023). The main reason for this projected growth is not the larger debt burden. Rather the main reason is the Congressional Budget Office’s projection that as the economy recovers interest rates will rise substantially from the current near record low levels.

We can get a ballpark measure of how much of this interest will go to the rich by simply assuming that their share of the government debt is proportionate to the share of all wealth in the country. According to a recent paper by Ed Wolff, the richest one percent in the United States own 42 percent of non-housing wealth.

If we apply this number to interest paid on the debt, it means that 94.1 billion will be paid as interest to the wealthy in 2013. Dividing that by the 3.16 million people in the richest one percent gives us $29,800 per rich person. That compares to $12,300 per kid according to the Urban Institute.

CEPR / April 14, 2013

Article Artículo

Economic Growth

Government

Labor Market Policy Research Reports, March 23 – April 12, 2013

The following are the most recent labor market policy research reports:


Center for American Progress

The High Cost of Youth Unemployment
Sarah Ayres

Growing the Wealth: How Government Encourages Broad-Based Inclusive Capitalism
David Madland and Karla Walter


Center on Budget and Policy Priorities

Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds
Chuck Marr, Jimmy Charite, and Chye-Ching Huang


Demos

Stuck: Young America's Persistent Jobs Crisis
Catherine Ruetschlin and Tamara Draut      

CEPR and Will Kimball / April 12, 2013