[confluence]

You would be surprised how many things that exist around you are based around faulty models based on incorrect data - that's the problem with higher dimensional fields like economics and finance - it's hard to separate cause and effect and extract principal signals for an arbitrary phenomena, without getting bogged down in correlation hell.

You have been warned - the further fields get from pure mathematics and isolated systems - the faultier they must become, and the harder they are to verify (although in this case - it was trivially easy - but then again IIRC the paper wasn't published in a peer-reviewed journal).

Hence, before accepting X new fact in higher dimensional fields - do your own verification first.

Also - who on earth thought austerity was ever a good idea?

If you can afford to borrow - and consumer spending is dead - bring it back. The US should load up on as much debt as possible - I'd love to get cash at a 1-2% interest rate - it's a freaking awesome deal.

[ctdonath]

who on earth thought austerity was ever a good idea?

Lots of sensible people.

The point of austerity is to stop spending money you don't have on stuff which does not clearly contribute to economic improvement. Every increase in debt must be balanced with a reasonable objective expectation that it will facilitate specific & significant increase in revenue greater than the debt and servicing thereof. If you've spent your paycheck, you buy rice & beans cooked at home instead of swiping the credit card on an expensive dinner out; if your car is out of gas, you borrow just enough to buy just enough get to work (or try walking/biking if at all sensible) instead of filling it up and heading out for an impromptu road trip.

National economics is of course complex and subtle, but the point is basic principles apply: if you don't have the money, don't borrow any unless not doing so will cost you much more, and unless you have a clear plan to pay it off. The Ryan plan (and plans of other austerity backers) is "stop spending money where it won't pay off", as in stop paying people to not work when they could, stop funding obscure/pointless/offensive projects/research/art which wastes money, stop hoping that prolific spending will change for the good.

Wealth is not durable. Spending $1,000,000 to create a $50,000/year job is stupid (and yes, there's a lot of that going on).

[RyanMcGreal]

> the point is basic principles apply

You make the common mistake of assuming macroeconomics is just microeconomics at scale. A national economy isn't just a really big household.

There has been no correlation between public debt ratios and the Great Recession or its recovery. The Recession was not triggered by high debts, it has not affected countries with higher debts more severely than countries with lower debts, and attempts to reduce debts since the Recession have resulted in slower growth and - oops - higher debts.

[laughfactory]

Hmmm, not true. Your simplistic statement falls short of the facts and research. Here's a quote from a very recent paper which refutes (in part) your statement:

"The results of this paper have two important policy implications. First, since the results indicate a positive effect of government investment and a negative effect of government consumption, a reallocation of resources from consumption expenditure to investment expenditure is likely to reduce the growth impeding effects of public spending. Second, as government investment crowds out private investment, US policymakers are faced with a difficult task of finding a combination of public and private investment that minimizes the crowding out effect of public investment. According to the 2009 CBO report [1], all components of government expenditure will continue to grow over time. Therefore, it is imperative to assess the growth effect of government spending, particularly, the effects of key components of government expenditure on growth because the impacts of different types of government expenditure are not the same." Source: http://www.hindawi.com/journals/econ/2012/383812/

Did you catch that? Government consumption (which is, I would argue, the vast majority of government spending these days and more and more each year) impedes growth; Government INVESTMENT (and not the pseudo-investment that Obama is famous to talking about) enhances growth, but empirically also crowds out private investment.

And yes, while it's much larger and more complex, a national economy really kinda sorta IS a really big household. It still faces very real constraints and consequences. It is not God.

[gph1]

Could you lay out the casual mechanism that this study is claiming, and how they make the distinction between govt consumption and investment?

I'd also like to see an empirical example of the crowding out thesis. The idea that public deficits bid up borrowing rates and reduce private sector borrowing opportunities has been pretty thoroughly debunked.

[rtfeldman]

It's actually not sensible to assume that basic principles apply to things that are complex and subtle.

For example, a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly. Simple, basic, and completely wrong - see for example today's airplanes.

This is not to say that the opponents of austerity must have it all figured out, but rather that history has not been kind to ideas of the form "this complex system must surely follow certain common sense principles".

[adolph]

a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly

Do you have any source for this, or are you making it up? For many centuries, the state of the art in metallurgy was not sufficient for making watercraft, much less aircraft. However this did not stop people using the available technology to make such flying things as arrows.

[ctdonath]

I didn't say "common sense principles", I said "basic principles". Most complex systems surely follow certain basic principles.

Apparently "don't spend money you don't have on negative-return investments" isn't common sense.

[gph1]

The idea that the US is running out of money or spending money it doesn't have is a non sequitor. The USG is monetary sovereign that issues it's own currency, and therefore has infinite ability to spend in dollars. Really, it's not even accurate to say the government "has" or "doesn't have" any money. We have an institutional arrangement whereby we cover all spending in excess of taxation by debt issuance, but that is just that--an particular institutional arrangement. The constraint is only inflation--is the USG spending in excess of what the economy's productive capacity can absorb? All available evidence suggests no.

Not to say that waste, corruption, poor capital allocation, etc aren't all legitimate problems. But that's not the question at hand.

[ctdonath]

Don't confuse currency with wealth.

[gph1]

I'm not. The private sector generates wealth. One purpose of the government is to facilitate that wealth creation by running deficits to ensure there is sufficient demand for what our productive output supplies (due to growing capacity, income leakages from savings and trade deficits, distributional inequalities, etc)

[slikts]

Sensible people like Paul Ryan? Now, that's rich.

[ctdonath]

What's wrong with Paul Ryan?

[RyanMcGreal]

You mean aside from the essentially unserious nature of his fiscal proposals, which promise to balance the budget by cutting both spending and revenue in such a way that the numbers don't come anywhere close to adding up?

[ctdonath]

Laffer Curve. Look it up. Even JFK understood it.

[RyanMcGreal]

I'm familiar with the Laffer curve, but I'm not sure what point you're trying to make. Under every incarnation of the Laffer curve that has even a passing acquaintance with empirical data, the Ryan tax cuts will sharply cut overall government revenue. That's because the US is already far to the left of the revenue peak. (Indeed, it was already to the left of the peak during the Reagan tax cuts, which also failed to increase government revenue. There's a reason even George H. W. Bush called it "voodoo economics".)

There is no plausible mechanism by which any versions of the Ryan plan we've seen can actually balance the books. It's nothing more than a generous gift to the country's most affluent taxpayers couched in hand-wavy ideological nonsense.

[ordinary]

Faulty generalization: Paul Ryan is not sensible, so everyone who agrees with him on anything must also be unsensible.

[slikts]

Straw-man much? I just said that it's funny to hold up Paul Ryan as an exemplar of sensibility.

[ordinary]

I should have read the post you replied to, all the way through. My apologies.

[kyllo]

IF that job last longer than 20 years and the salary increases at least in pace with inflation, then why is that so stupid? It's no stupider than a home mortgage lender spending $1,000,000 to create a $5,000/month 30-year mortgage...

[caseysoftware]

The salary increases don't have to keep pace with inflation... they need to keep pace with the interest rate on the $1M which is generally going to be higher than the inflation rate.

Regardless, that's an interesting perspective. My follow up would be "do you think the government is well-informed and future-thinking enough to pick the jobs with 20+ year lifespans?"

Personally, I don't think anyone is. Ten years ago, Microsoft was nearly unbeatable, Google hadn't IPO'd, Facebook didn't exist, and Apple was still a bit player. Ten years from now, who knows what it will look like.

(Granted, that's one field.. but outside of tech, the home construction market was the other boom.)

[kyllo]

Yeah, the thing about investing in job creation is that there is so much churn in the job market--not just in terms of employment rate, but in terms of the jobs themselves being created and destroyed, as we figure out how to use technology to automate them.

And I'd like to point out that just because that hypothetical job being created pays $50,000 per year, doesn't mean it only contributes that amount of value to the economy.

But you certainly wouldn't want to bet on any job that is repetitive (or "concave" to use a michaelochurch-ism) being around longer than a few years, because that work will be distilled into a software program and handed off to a machine sooner or later. It only makes sense to invest in creating jobs that involve creative, "convex" work, which has a smaller chance at a bigger payoff in terms of value creation.

[laughfactory]

If the interest rate on the $1M is 2% then each year the "cost" of the $50,000/yr job is $20,000. So even if we don't factor in inflation (which would certainly change these calculations), it would take more than 33 years to "pay off" the $1M. You'd have to have someone work well over 33 years at $50,000 to recoup much return on your initial investment of $1M. Besides which, as you pointed out, a lot can happen in 33 years...how many jobs remain today that were around 33 years ago? Some of them, certainly, but many of the current crop of high paying jobs have been created in the last 10-20 years by innovation occurring organically in the private sector.

[kyllo]

This is again assuming that the person who fills that $50k/year job contributes exactly $50k/year in value to the economy.

And at some point, when you are talking about investing public funds to create jobs in a period of high unemployment, you need to think of it in terms of subtracting the cost of that person's potential unemployment benefits, medicaid, and other costs that an unemployed person imposes on the public.

So, it's kind of complicated to do a full cost/benefit analysis of this.

[tunesmith]

It stuns me that you think the government doesn't do this. Arpanet, medical research, technological research, the list is endless.

[kyllo]

Yeah, this is all convex, creative/research work with a small chance of a huge payoff in terms of value creation. Companies focused on quarterly earnings won't invest in this sort of R&D type work anymore, so the government has to.

[laughfactory]

This is a great comment. Thank you for leaving it. Very well thought out and concise.

This is one of the biggest problems I have with Obama (and politicians in general): they apply the word "investment" to things that aren't "investments." Have they ever acquainted themselves with the definition of the word? Because the definition of the word is like you said, something which is expected to yield a return. It isn't an "investment" if you're just pouring money into a pit and burning it. Or giving it to people. Or creating or sustaining $50,000/year jobs at the expense of $1,000,000. But "investment" sounds good. So politicians bandy it about. All they're doing is spending.

[jeffdavis]

"Also - who on earth thought austerity was ever a good idea?"

First of all, spending a lot of money only helps solve an aggregate demand problem. It's not clear that it is (or at least not entirely an aggregate demand problem). Economies can have many problems, some deep, some subtle, some ephemeral. Some problems are plausibly solved through spending, and some are not. Sometimes, people talk about economics as though they could apply Keynesian principles in Somalia and it would be a thriving economy in 5 years. It's not that simple.

Second of all, 1-2% interest sounds great, and like a good opportunity to do some infrastructure projects. However, we have to consider that the debt is not stable now. Given a trillion dollar deficit, that 1-2% money is going to be borrowed anyway. We don't necessarily want to borrow it now, because it could make it more expensive to borrow the money in the future that we already know we need to borrow.

Third, people don't necessarily trust economists. Economies are complex, and a bunch of smart people saying they have the answers is not convincing to many people. On its face, a statement like "borrowing and spending and consuming are good for the economy" sounds like something for nothing, and triggers skepticism more so than "saving and investing is good for the economy". Even if the principles are sound, people don't trust the implementation, which is sure to be twisted for political gain. A trillion dollars being spent brings people out of the woodwork to manipulate it to their advantage, perhaps sacrificing the country in the process.

Last, many people see that a lot of borrowing, spending, and consuming have been happening over the last decade or so; and we still have problems. It's only natural that people are considering a change of direction that involves less borrowing and spending and consuming.

[pmorici]

In the case of economics it seems there might also be large conflicts of interest at play. The 2010 documentary, "Inside Job" http://en.wikipedia.org/wiki/Inside_Job_(film) about the economic crises talks about how several prominent academic economists are essentially paid to author studies that amount to not much more than puff pieces supporting a political view point of a political party or corporation.

On another note, given that the Fed has been "quantitatively easing" (seems to be a polite term for printing money) since the financial crisis and currently holds over 3 Trillion in government and mortgage debt those actions have to be keeping interest rates lower than they otherwise might be. It's kind of burying the lead to say interest rates are super low we should borrow a bunch of money when they are being intentionally kept that way through government action.

[jbooth]

As far as the rates that the feds have to pay to borrow money -- that's set by the market. They can issue bonds at 0.25% and people will buy them, therefore the interest rate is that low. It's not like they're forcing people to buy. The feds aren't setting the price for that interest rate -- well, they are, but what people are willing to pay is actually what sets the price.

Quantitative easing actually should, in theory, lead to inflation and higher interest rates. It's basically printing money. I think you have it confused with counter-cyclical fed reserve short-term lending rates which, by virtue of being very low, induce banks to lend money at only a little higher.

[laughfactory]

It'd be one thing if "people" were buying the debt they're issuing as you suggest. But a lot of the Treasury debt is being purchased by the Fed. So they're keeping it all in-house. Can you say, corruption? It's an artificially low rate which few people in their right mind would pay. Which is why the only taker is another arm of the government. Currently the Federal Reserve holds $1.825 TRILLION of US debt (Treasury Securities). I.e., the Fed owns more US debt than anyone else. China holds $1.22 Trillion, Japan hold $1.097 Trillion. http://research.stlouisfed.org/fred2/series/TREAST?cid=32218 http://www.treasury.gov/resource-center/data-chart-center/ti...

[cynicalkane]

If you look at the data, QE announcements and expectations have caused interest rates to rise, probably due to implied inflation.

It's alarming how people think low rates -> loose money. This has never been true in the history of central banking. Nobody would suppose Japan has loose money, or that the 70s had tight money.

[fyi80]

Is there a way to quantify QE in personal finance terms? Like, can I saw "QE is an X% inflation" for some X, so I can apply that to my personal understanding of the purchasing power of my savings once people try spending their inflated dollars and send ripple through the economy?

[knowtheory]

> Also - who on earth thought austerity was ever a good idea?

David Cameron, Angela Merkel and Paul Ryan to name just three prominent politicians.

Additionally EU central bank policy has been geared almost solely around this principle. This is why after identifying that the Greek, Cypriot and Spanish economies were the victim of cheating, malfeasance and incompetence, all of the rescue plans involved pretty severe cuts to social welfare programs and government services.

Remember, ALL Cypriots had to take a haircut on their savings in banks greater than 100k euros. International finance scammers fucked the Cypriot economy, and then the pro-austerity EU forced all Cypriots to choke down the bailout.

It's like robin hood in reverse.

[dualogy]

Well it DOES send a message to these countries for the future. Wouldn't be surprised if the ECB --supranational and quite independent from day-to-day voter-pleasing politics-- had a longer range view.

They do demonstrate to the world now two things:

(A) the core tenets / stability principles backing the original EUR currency idea and philosophy are not sacrificied to the current temporary economic mismanagement of one individual nation state that chose to participate in the currency, knowing fully well broad / long-range philosophy of ECB. No quick fixes, no "reckless printing" (at least not without limit or getting the country to change its ways).

(B) Big savers are encouraged to rediscover "the old ways" of saving, preserving or investing wealth -- not to hold it in "the US(D) way" of a self-feeding ever-expanding intransparent web of future promises, counterobligations, speculation. Aka "your bank account" these days.

A small country such as Cyprus is ideal to send such a strong and lasting message. People in "bigger" countries get a strong signal to "rethink their ways". Everyone learns that EUR ways are different from the USD ways in some (important) respects. And should the world ever lose confidence in the USD and/or in markets driven largely by currency debasement, deficits, debts -- the world may well remember those "early stories of the young EUR".

[AutoCorrect]

and then there's Iceland. They did it right and told the banks to go pound sand.

[dualogy]

A national currency being used as the international reserve and trade settlement currency affords the US quite a few unique perks, doesn't it? And has so for decades, indeed.

The USD being the international "yardstick" other currencies are measured in, "valued" against allows for a surprisingly large trade deficit. Why have inflation at home when you can just "export" your fresh paper for real goods the world over?

This is not lost to the rest of the world, but for the sake of the lesser evil they've played along as necessary. All the while creating a new supranational currency (EUR) and central banks the world over turning into net gold buyers.

I agree, the US should milk this situation for all it's worth while it lasts, which is incidentally exactly what they've been doing for the last few decades.

Global US debt is not a worry to them as it's denominated in the same currency that the US can "print" (to use the simplified wording here).

Austerity (delevering) is not a worry, they'll rather buy failing debts with more freshly produced notes --- this way, no one loses their "savings" in nominal terms, no cascading defaults etc.

Shouldn't this lead to (hyper)inflation? Not as fast as you might think --- if/as long as the rest of the world still takes them as viable reserves and for settling international trade..

[khuey]

If the EUR is the replacement people have in mind for the USD America is safe for a long time.

[dualogy]

You will think much about this :)

I don't think the EUR is designed as a competitor or alternative "equivalent" to the USD. Rather, it is a "readily available" option --differing in a few substantial aspects (rather than outright mimic USD)-- for anyone, anywhere to consider at their own pace.

Even if "they" wanted to, they couldn't just, as in the past, once again "compel" the world to use their national currency for your reserves and trade-settling, then remove the backing, break promises and debase and inflate for 4 decades straight. No one would fall for it again, nor is it really desirable anyway for any productive (say, net-exporting) country.

[Houshalter]

This is what Austrian economists have been arguing forever. They base their models on simple assumptions. Trying to figure out how an economy works just by observing it's macro behavior is insane. There are so many factors, economic models change over time as market actors use them to make decisions, and the sample size is incredibly small (not many countries to look at) and biased (differences between countries are huge, differences in time within a country are huge too.) Economists of all types are terribly inaccurate at making predictions, even in the short term.

>Also - who on earth thought austerity was ever a good idea?

Who on Earth thought spending was ever a good idea?

>The US should load up on as much debt as possible

This is ludicrous. How on Earth would you pay it back? The only way you could justify such spending is if it created more wealth than the amount of debt and interest. Which depends entirely on where the money is spent. Just creating new roads and bridges may produce some value to the economy, but it's no where near enough to justify it (and in the end most of it would have to be taxed back of course, to pay for the debt and interest.)

[eli_gottlieb]

Because obviously America needs zero improvements to its infrastructure. No high-speed rail, no electrical grid improvements, no roads or bridges, no fixing or improving the water system, no blue-sky scientific research, no teachers to hire to decrease class sizes.... NOTHING, YOU HEAR ME, NOTHING YOU STUPID LITTLE LIBERAL!

Oh, I'm sorry, I thought I was supposed to sound like an Austrian "economist".

[Houshalter]

This is a pointless straw man argument. No one is claiming we should never invest in infrastructure. Some improvements in infrastructure have value certainly. It depends on the specific project. Spending for the sake of spending is ridiculous though.

[eli_gottlieb]

Actually, the Austrians basically do advocate that the public sector should not exist, and should certainly not be constructing infrastructure, because if it was at all worthwhile, someone would make a private profit off it and do it that way!

No god but Capital, say the Austrians, and the Market is His Prophet.

[Houshalter]

You are confusing Austrian economics with anarcho-capitalism. Many anarcho-capitalists subscribe to Austrian economics, but certainly not all Austrians are anarcho-capitalists.

[rz2k]

>that's the problem with higher dimensional fields like economics and finance - it's hard to separate cause and effect and extract principal signals for an arbitrary phenomena, without getting bogged down in correlation hell.

While I agree with you about the difficulty of understanding complex systems, your post sounds despairing. Accepting the inherent difficulty is vital to better analysis, but isn't a reason to avoid actual analysis.

Note for example that you wonder why austerity was ever considered a good idea. How do you "know" that austerity is a bad idea without analysis. It's only been about 80 years that we've had a better understanding of how a single household's economic considerations are fundamentally different than an economy's solely as a result of scale.

The naive analysis from classical economics would draw a parallel between a decrease in GDP and a decrease in household income, whereby it is prudent to decrease your consumption. However, while a households income is an exogenous factor, GDP is a product of the economy itself. During a contraction, there is generally the same amount of labor, capital equipment and technology as before the inflection point, it simply isn't being utilized or employed at the same rate.

Today, informed policy debates may weigh the continued harm that comes from leaving underutilized people and capital idle, against the reduction in signalling for needed structural change that may result from stimulus. Just as an example, it is easy to argue that rescheduling bridge and road construction that will be needed later to a current period when labor is cheaper and equipment isn't being used elsewhere is prudent. Yet on the other hand, doing so may signal over-investment in construction careers and heavy equipment.

In the past, policy debate would have focused on balancing well-meaning charity of helping out people on hard times against austerity which was believed to be beneficial for the economy as a whole. How can you even begin to determine whether assumptions about belt-tightening being constructive are flawed without economic analysis?

I think the lesson to be learned from this event is first the importance of more rigorous scrutiny of results, but more importantly to be distrustful of the type of politician who searches for studies to support their preconceived conclusions. A good portion of policy makers advocating austerity, have done so from a stance of dismissing the analysis that doesn't fit their ideology, rather than a scientific approach of starting with a hypothesis and assessing the available competing analysis in good faith.

[laughfactory]

Your last sentence is frighteningly flawed. Because it suggests that the US is borrowing from other economies around the world at obscenely low rates. This is not true. Sure, we're borrowing a little bit from China as we've always done, but they're less and less interested in loaning us money (essentially).

So now what we have is a powder-keg with a fuse which has already been lit. We've started borrowing from OURSELVES. This is who we can make it look like we're only paying 1-2%. When you pay one hand from the other, you can say whatever you want about how much it's costing you.

The reason this is a profoundly bad idea is because essentially we're diluting the value of every dollar already out there floating around. As we print more money, and issue more IOUs in exchange for it, all we're doing is creating shadow-inflation by diminishing the value of each existing dollar. The only reason we're getting away with it so far is that the rest of the world is worse off (fiscally) than we are and so our dilution of the dollar is essentially a tax on everyone who comes into contact with dollars. This is essentially our way of extracting wealth not just from our own citizens, but from abroad.

If however dollars start being kicked to the curb abroad, then the shadow tax will begin being felt more acutely here in the form of inflation and suddenly higher prices.

Again, there is no free lunch. It's the single truest thing that economics has to say. Yet people somehow persist in believing that there MUST be one, if they could just figure out how to have their cake and eat it too.

[gph1]

Increasing the money supply is not in and of itself inflationary, nor does it logically imply a depreciating exchange rate. This is true no matter how many times Austrians and confused monetarists say so.

[laughfactory]

I suppose we'll just have to agree to disagree on that.

[gph1]

I'd be delighted to revise or update my views in light of any evidence you could provide.

[pasbesoin]

> higher dimensional fields like economics and finance

As I've gotten older, I've become -- through experience -- more cognizant of how this is the case also in medicine and other fields. And in many aspects of "hard science", as well.

There are a lot of people out there who want to believe certain things. Being a "scientist" doesn't seem -- in general, across the population of scientists -- to confer any great immunity to this.

On the one side, there are the "faith-ers". ("We just need the evidence. Or... I'll "extrapolate" to a conclusion.)

On the other side, the "deniers". (If it hasn't been explained/proven (in some cases, down to the level of quantum fluxuation), it can't possibly exist and I'm going to ignore any anecdote, supposition, or empirical evidence to the contrary.)

Both of these can drown out the actual, intelligence conversation around a topic. And they can grossly mis-inform a public that would be much better served by same.

If the public weren't so busy listening to the "extremists". Perhaps there is the rub.