April 23, 2013
An Economy Of Error?

Lynn Stuart Parramore discusses the work of an economics grad student who recently blew the lid off Reinhart and Rogoff’s infamous study concluding that a 90% or higher GDP-to-debt ratio results in dramatic reductions in economic growth:

Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in political and economic circles. These two Harvard economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country’s gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad.

Parramore notes that austerity advocates have used the Reinhart-Rogoff study to justify the implementation of austerity measures in multiple countries.  There is one tiny problem, however: the Reinhart-Rogoff data spreadsheet contains a massive error:

Enter Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts, Amherst, the heroes of this story. Herndon, a 28-year-old graduate student, tried to replicate the Reinhart-Rogoff results as part of a class excercise and couldn’t do it. He asked R&R to send their data spreadsheet, which had never been made public. This allowed him to see how the data was put together, and Herndon could not believe what he found. Looking at the data with his professors, Ash and Pollin, he found a whole host of problems, including selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and this jaw-dropper: a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.

What’s the end result?

In their newly released paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Herndon, Ash and Pollin show that “when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to R&R, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

I imagine that Reinhart and Rogoff are gearing up for a response.  Meanwhile, Parramore also links us to Daniel Schuchman at Forbes, who appears to have quickly respun this fairly devastating academic take-down as simply a sign that “academic economics, like many social sciences, is grounded in hubris and pseudo-precision.”  

Perhaps so.  But but I don’t think this requires throwing the baby out with the bathwater.  Indeed, we needn’t draw any conclusion from this episode other than the narrow one it stands for: there’s nothing automatically devastating about the 90% GDP-to-debt ratio.  It would be a mistake to conclude that this justifies terminal apathy about the size of the public debt, just the same as it would be to conclude that discrediting the Reinhart-Rogoff study leaves austerity policies with no other legs to stand on.  Nonetheless, it seems proponents of the latter will have to rely on other metrics going forward, as the methodology of the Reinhart-Rogoff study appears to be terminally flawed.

10:11pm  |   URL: http://tmblr.co/ZMMjnxjPKx4V
(Notes: 22)
  
Filed under: politics economics economy 
May 29, 2012
What Recession?

Cord Jefferson discusses an alarming upward trend in people robbing banks in order to keep their heads above water:

In Mississippi this week, a man walked into a bank and handed a teller a note demanding money, according to broadcast news reporter Brittany Weiss. The man got away with a paltry $1,600 before proceeding to run errands around town to pay his bills and write checks to people to whom he owed money. He was hanging out with his mom when police finally found him. Three weeks before the Mississippi fiasco, a woman named Gwendolyn Cunningham robbed a bank in Fresno and fled in her car. Minutes later, police spotted Cunningham’s car in front of downtown Fresno’s Pacific Gas and Electric Building. Inside, she was trying to pay her gas bill.

More examples:

The list goes on: In October 2011, a Phoenix-area man stole $2,300 to pay bills and make his alimony payments. In early 2010, an elderly man on Social Security started robbing banks in an effort to avoid foreclosure on the house he and his wife had lived in for two decades. In January 2011, a 46-year-old Ohio woman robbed a bank to pay past-due bills. And in February of this year, a  Pennsylvania woman with no teeth confessed to robbing a bank to pay for dentures. “I’m very sorry for what I did and I know God is going to punish me for it,” she said at her arraignment. Yet perhaps none of this compares to the man who, in June 2011, robbed a bank of $1 just so he could be taken to prison and get medical care he couldn’t afford.

It’s an old trope that wealth and poverty breed immorality in equal measure.  The only difference is, in the latter case, they’re doing it to survive.  In the former case, they do it because they can.

h/t Sullivan

1:47am  |   URL: http://tmblr.co/ZMMjnxMLYLde
(Notes: 45)
  
Filed under: politics recession fiscal crisis economy bank robberies 
May 19, 2012
Oh?  Do tell.

Oh?  Do tell.

6:18pm  |   URL: http://tmblr.co/ZMMjnxLnG7V4
(Notes: 7)
  
Filed under: politics economy fiscal policy fiscal crisis zero hedge 
May 3, 2012
"

The life of a 19th-century steel worker was grueling. Twelve-hour shifts, seven days a week. Carnegie gave his workers a single holiday-the Fourth of July; for the rest of the year they worked like draft animals. “Hard! I guess it’s hard,” said a laborer at the Homestead mill. “I lost forty pounds the first three months I came into this business. It sweats the life out of a man. I often drink two buckets of water during twelve hours; the sweat drips through my sleeves, and runs down my legs and fills my shoes.”

For many the work went without a break; others managed to find a few minutes here and there. “We stop only the time it takes to oil the engine,” a stop of three to five minutes, said William McQuade, a plate-mill worker in 1893. “While they are oiling they eat, at least some of the boys, some of them; a great many of them in the mill do not carry anything to eat at all, because they haven’t got time to eat.

The demanding conditions sapped the life from workers. “You don’t notice any old men here,” said a Homestead laborer in 1894. “The long hours, the strain, and the sudden changes of temperature use a man up.” Sociologist John A. Fitch called it “old age at forty.”

For his trouble, the average worker in 1890 received about 10 dollars a week, just above the poverty line of 500 dollars a year. It took the wages of nearly 4,000 steelworkers to match the earnings of Andrew Carnegie.

"

—

PBS American Experience: The Lot Of A Steel Worker

To put this in perspective: a minimum wage worker in 2012 who worked 12 hour days, 7 days a week, would receive 40 hours straight pay, and 44 hours overtime.  that’s 768.50/week, at 52 weeks/year, meaning he or she would be earning just under $40,000/year.

When folks complain that government has too much of a role in the economy, I take them at their word that many of the harms they associate with said involvement are real.  But in terms of increasing the welfare of the poor, history seems to tell a cautionary tale about removing all economic intervention completely from the picture.  Uncle Sam was not telling Andrew Carnegie what he had to pay his workers in 1890, or whether he a had a legal duty to let them unionize.  Yet if you compare Carnegie’s steel workers to a person making minimum wage flipping burgers at McDonalds, it’s pretty clear who’s in better shape.  And it’s not the guy working 12-hour days for America’s most famous steel Magnate under comparatively laissez-faire industrial policies.

With all this being said, there’s no question that potential problems can crop up with minimum wage laws.  As fellow Tumblogger Jakke said back in October:  

Minimum wage is NOT about forcing employers to pay more than worker productivity. This would just result in mass layoffs for people in low-productivity jobs, and banning layoffs would drive those employers out of business. For raising wage levels above marginal productivity, this isn’t the right approach. You’ll most likely need to look at government subsidies instead.

Personally, I’m on record for repealing the minimum wage and replacing it with a Basic Income Guarantee (also known as a “Guaranteed Minimum Income” or “Negative Income Tax”).  However, the analysis doesn’t end there.  Any number of circumstances will change the empirical impact of a minimum wage law.  For example, there is evidence that minimum wages have helped drive industrialization in developing countries.  So it is difficult to make sweeping declarations about when or under what circumstances a minimum wage becomes detrimental.  The devil, as they say, is in the details.

Yet what seems clear is that not a single modern thriving 1st-world economy has failed to introduce some sort of regulated wage floor, or alternatively, an organized system of collective bargaining, like that which exists in many European countries.  Indeed, institutional trade unionism has helped countries like Germany increase the wages of unskilled workers without stymieing economic growth.  Many countries have gotten by just fine without minimum wage laws by making Unions an indispensable player in labor relations.  I see no issue with this approach, but I don’t see it taking hold in America anytime soon.

As in all things, there is a line to be crossed when regulating economic activity.  many of the choices we face in economic policy are not simply a matter of “best” or “worst,” but rather, take the form of trade-offs.  The challenge of policy is to discover a way in which to make that trade-off inherent in any regulatory proscription worth the effort.  I know there are people who think that any attempt to do so is a waste of time.  But Carnegie’s beleaguered steel workers prevent me from seeing the wisdom of that proposition.

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(Notes: 25)
  
Filed under: politics economics economy labor unions andrew carnegie gilded age industrial revolution minimum wage 
April 27, 2012
Socialism! via Krugman

Socialism!

via Krugman

8:15pm  |   URL: http://tmblr.co/ZMMjnxKRxkhH
(Notes: 10)
  
Filed under: politics economy obama public sector 
March 16, 2012
All this highfalutin economics talk is getting me all hot and bothered.

All this highfalutin economics talk is getting me all hot and bothered.

2:28pm  |   URL: http://tmblr.co/ZMMjnxI4ekUC
Filed under: politics economics economy nouriel roubini dan alpert 
March 14, 2012
Another Example Of The “Toxic Culture” At Goldman Sachs

Matt Taibbi reports on a new Goldman recruit, Jeffrey Verschleiser, who once made millions shorting bad investments that he sold to clients in bad faith:

Remember the story about the Wall Street guy who rented out all 94 rooms of an Aspen hotel for three days for his daughter’s Bat Mitzvah?

The main character in that tale was an individual named Jeffrey Verschleiser, a former Bear Stearns executive who was instrumental in helping blow up that venerable firm. Verschleiser among other things was reportedly involved with an elaborate Wall Street version of a merchandise return scam, only instead of taking the proceeds from returned TVs and stereos, his unit was pocketing the cash from crap mortgages sold back to banks on behalf of investors.

Verschleiser also made a bundle burning Bear’s bond insurers, whom he bet against after inducing them to insure his crappy mortgage bonds, nicknamed “Sack of Shit” bonds by one of the funny dudes in his department. Verschleiser reportedly bragged that he made $55 million shorting his own bond insurers in the space of three weeks. Those interested in the whole sorry story should check out reporter Teri Buhl’s excellent Atlantic magazine piece entitled, ”E-mails Suggest Bear Stearns Cheated Clients Out of Billions.”

Keep in mind this was reported two days ago, before Greg Smith’s NYT Op-ed this morning announcing his resignation from Goldman due to their “toxic” leadership culture.

I have no doubt that plenty of extremely talented people of honest demeanor work at Goldman Sachs.  But it seems pretty clear that Greg Smith’s “leadership culture” thesis is dead-on.  It’s difficult to justify hiring a guy for an executive position who made money off his own clients if that weren’t the case.

Oh, Verschleiser’s new position?  Global Head of Mortgage Trading.

2:39pm  |   URL: http://tmblr.co/ZMMjnxH_HgOh
(Notes: 3)
  
Filed under: politics goldman sachs fiscal crisis economy 
March 14, 2012
"

[Goldman Sachs achieves success] using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.


If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.

"

—

Matt Taibbi, The Great American Bubble Machine (April, 2010)

linked in Greg Smith’s blockbuster polemic editorial against Goldman Sachs this morning.

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(Notes: 18)
  
Filed under: politics goldman sachs fiscal crisis economy matt taibbi 
March 12, 2012
"[A]fter the military, the top four employers listed by twenty-somethings were Walmart, Starbucks, Target, and Best Buy."

—

Nona Willis Aronowitz, Will Gen Y’s Career Waiters Occupy The Service Industry?

h/t

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(Notes: 16)
  
Filed under: politics income inequality economy 
March 8, 2012
If College Isn’t For Everybody, What Is?

thecallus:

The no-opportunity bubble.

I was told to go to college because it was my only option. There’s a reasonable basis for that belief. If you don’t have a degree, you have 0 job security and drastically higher unemployment rates:

Look at the red line, and forget about how much higher it is - watch the slope during the gray recession. That’s one hell of a roller coaster. And not only are more people without college degrees unemployed, they’re far less likely to even be in the workforce. These series are somewhat distorted for a lot of reasons (sex, race, one-income families, etc.) but just the basic difference in who’s actually looking for a job is incredible:

It’s one thing to be against private education and subsidizing for-profit institutions. There is also a huge college bubble; I don’t dispute any of that. But look at the statistics! There’s a college bubble because the job market for anyone with less than a bachelor’s degree is an unmitigated disaster. It’s a crisis.

The student loan explosion is a symptom. It’s a symptom of the global economy, currency manipulation, automation, and the high skillset bar required to compete in the modern world. If you don’t go to college? You’re screwed, for the most part. This is why the Tea Party and Occupy Wall Street have sounded similar at times - the Tea Party is the people who never went to college and OWS is the kids who are trying to pay back the ridiculous loans.

LTMC: Well said.  But one question warrants further analysis: why is one screwed?  Why is the non-college job market so abysmal?  That’s one of the questions that needs to be answered in order to solve the problem.  And frankly, the changing nature of our economy has a lot to do with it.

There’s a lot of folks (particularly in libertarian circles) who tend to ridicule people who suggest that technology advancements kill jobs.  And as a matter of strict economics?  Of course it doesn’t.  But that doesn’t end the analysis.  There’s a matter of whether workers in transition have the actual capacity to fill those new jobs.  The new positions created by Tech expansions often require some degree of sophistication to perform, e.g. the Mailman whose position is nullified by society’s newfangled penchant for E-mail can’t immediately become a Systems Admin.  Human beings aren’t infinitely malleable that way.  He needs to be re-trained, and usually, that means going to college.  In America, that means more debt.  And a lot of it.

Of course, other countries do things differently, and student loan debt isn’t such a problem.  But…you know.  Socialism and all that.

9:50pm  |   URL: http://tmblr.co/ZMMjnxHhUB51
(Notes: 57)
  
Filed under: politics economics economy student loans college higher education 
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