Rogoff and
Reinhart have given more academic credibility to the pro-austerity brigade over
the last few years than almost anyone else. And their spreadsheet error has not
dampened their ardour. So what’s the secret of their success?
Well an
important element in their armoury involves a trick (or maybe it’s a mistake)
which I noticed
some time ago and which Simon Wren-Lewis
has recently noticed in a Financial Times
article by Rogoff. It involves erecting an argument based on the bizarre
assumption that a monetarily sovereign government cannot or won’t print money –
or “do QE” if you like.
Now if you
are particularly innocent, you might think that an assumption that absurd can’t
be slipped into an argument without anyone noticing. Well the truth is that is
the easiest thing in the world to slip a false assumption into ABSOLUTELY ANY
moderately complicated argument and get away with it. Slip the right false
assumption into an argument, and you can prove whatever you like. (In fact Nick Rowe and John Cochrane in reviewing the above FT article failed to spot the above assumption.)
Just to
take a simple example, if you want to prove that it’s easy to make cars fly,
you can assume that the average car weighs about 10kg rather than something
nearer 1000kg. Just knock a couple of noughts off the “Kg” figure – easy!
But
supposing someone DOES SPOT your false assumption? You’re scuppered aren’t you?
The answer is: “not at all”. And this is where the Hitler “big lie” trick comes
in.
Adolf
Hitler.
Hitler and
his propaganda minister Goebbles made the point, which is obvious to anyone who
understands human beings, namely that if you tell a big enough lie, hardly
anyone notices it.
In fact the
big lie trick is exactly the same as the “emperor with no clothes” phenomenon.
That is if you say something sufficiently absurd, about 95% of the population will
believe you because most people are well meaning and hence don’t like accusing
others of saying something totally absurd. Or in the case of emperors with no
clothes, no one believes the emperor would go around in public naked, so they
just refuse to believe their own eyes when they see a naked emperor.
In fact the
above process of rejecting an absurd assumption that seems to be in what you
are reading may easily be subconscious or semi-conscious: that is you read the
passage where the assumption is made, and SORT OF SPOT IT. But you immediately
realise the assumption is absurd, plus you know you are reading something by a
well-qualified individual, so you immediately reject the idea that the absurd
assumption is there.
Or perhaps
Rogoff and Reinhart are stupid?
The above “big
lie” is a POSSIBLE explanation for what R&R do. But there’s actually
another equally plausible explanation, namely that it’s quite common for so
called “professional” economists to set out arguments which make the above absurd
“governments can’t print money” assumption. I listed a few of them here.
That bears
repeating. I.e. bizarre as it might seem numerous so called professional
economists write articles making the absurd assumption that governments cannot
print money.
But professional
economists aren’t that stupid are they? Well Lars Syll thinks they are! Lars has published several
articles etc suggesting that a significant proportion of “professional”
economists are charlatans, e.g. here.
What’s the
attraction of the “no printing” assumption?
Hopefully
you’ll have noticed the attraction of the “governments can’t or won’t print
money” assumption. But if not, the big attraction (at least for R&R) is
that deficits can become much more serious if a government cannot print (think
Greece). That is, if a government wants to do stimulus, they have to run a
deficit which initially increases the debt. Now that doesn’t matter if the
interest rate paid is negligible. But if the rate reaches Euro periphery
proportions, the country has a problem – unless it can print money and buy back
debt.
So if you’re
of an R&R frame and mind and you want to impose austerity or you’ve got a
phobia about debt, the “can’t print” assumption suits you down to the ground.
Incidentally,
as regards the above idea that R&R are motivated by debt-phobia and nothing
else, I’m not the only one to make that suggestion. Paul Krugman said:
“So where
does Ken’s call for short-run austerity come from? As best I can tell, it comes
from a generalized sense that debt is dangerous…”.
So, are
R&R liars or incompetents?
It’s
honestly hard to tell. Certainly Rogoff is not a stickler for the truth
according to this Huffington
article. Plus he is in the pay of Pete Peterson, the multi-billionaire anti
deficit propagandist. Those two points make him look like a liar.
But against
that, the above “governments can’t print” assumption or mistake seems to be a
common one. Plus if you Google “Rogoff” and “Ralphonomics” you’ll find various
blog posts were I’ve set out the flaws in other material penned by Rogoff.
My guess is
that Krugman is right. That is, R&R are basically incompetent: a common
characteristic amongst so called professional economists, as pointed out by
Lars Syll. And that intellectual sloppiness results in their writing stuff that
includes any old convenient assumption, even if the assumption is patently absurd.
"As to PRIVATE PENSION schemes, they aren’t by definition funded by taxpayers or people who lend to government."
ReplyDeleteThey are. In the aggregate they need the interest from Gilts, and ongoing contributions from current workers to make the numbers add up. Hence we get 'automatic enrollment' policies in defined contribution schemes, and the pointless issuing of Gilts.
Neil: You commented on some paragraphs which weren't supposed to be in the above post and which I've now removed. C*ck up on my part!!!! Sorry.
Delete