42 thoughts on “Krugman and Wells on Reinhart and Rogoff”

  1. Kevin is too modest to note that they laud , and rightly so, his work with Barry Eichengreen as being “hugely influential” in how we think about this crisis.

  2. A recurring theme in the Reinhard-Rogoff book is that wealthy developed nations have sovereign defaults – there was a short historical window poast 1980 when sovereign defaults were confined to developing nations but this was a short-term aberation. Today’s Greek call for assistance is the first stage of a drawn-out restructuring/default or bail-out. Who in Europe might be next? Time for some tough-minded decision-making in Ireland to prevent it being us.

  3. One lessson that could be arguably learned from the crisis is that it is not in the national interest to have a net national debt.

    Whether it be a financial crisis, a terrorist attack, a volcanic eruption or whatever, a country with a strong financial position is far better placed to avoid the worst fallout.

    Havng to cut government spending in the face of a recession is a circumstance that needs to be avoided, even if this implies slower income growth while the adjustment is made.

    An ability to stabilise output, employment and the provision of government services in the event of a negative shock is highly desirable.

    In the same way that there was broad consensus on the partnership process, there should now be broad consenus that, once stability is restored to the economy, that other economic and social policy aims must yield to goal of gradually eliminating the national debt.

  4. @BL

    Kevin was modest enough not to mention that his work is praised in the article.

    However, he did post the link!!!

    I would say rightly so, “The pride that apes humility” and all that…

  5. Reinhard and Rogoff have assembled a formidable set of empirical data, but were inevitably constrained by the discplinary limits of the economics profession. Karl Polanyi would have taken a broader view. There is no economy which is not also a political economy, and as the classical and mediaeval philosophers regularly reiterated, one of the central purposes of government is the regulation of animal spirits.

    This time is different in one important sense. The driver of global growth was the ‘western mass consumer’, and the pyramid of private sector indebtedness which was designed (or evolved) as an economic habitat for the new species. That has never happened before, or at least not in such a globally pervasive, co-ordinated and culturally mediated (media driven) manner. Mass hypnosis is scarcely too strong a term.

    ‘Consumer power’ is intoxicating, but it is a poisoned chalice. The negative equity, unemployment or shattered credit ratings of individuals is tragic, but the damage to ‘western’ body politic has been much more systemic. Popular political participation has been hugely damaged by the ‘ private lifestyle’ model.

    It si obvious that our political culture is in dire need of renovation, and not just in Ireland. That problem cannot be resolved by renewed econonic growth, but its solution is a prerequisite for any genuine recovery.

  6. In the same way that there was broad consensus on the partnership process, there should now be broad consenus that, once stability is restored to the economy, that other economic and social policy aims must yield to goal of gradually eliminating the national debt.

    Entirely disagree. The long-suffering PAYE workers should be demanding the very reasonable quid pro quos of universal healthcare and universal pensions in return for the ‘sacrifice’ being forced on them now and for decades to come. Fund it by removing the generous tax breaks of the middle classes now being bailed out.

  7. “…but the damage to ‘western’ body politic has been much more systemic. Popular political participation has been hugely damaged by the ‘ private lifestyle’ model.

    It is obvious that our political culture is in dire need of renovation, and not just in Ireland. That problem cannot be resolved by renewed economic growth, but its solution is a prerequisite for any genuine recovery.”

    Yes, the whole system, especially since the end of the gold standard, has been built on fraud. Contracts cannot be trusted and neither can our “leaders”. Rebuilding needs to come from families and communities. Taxes need to be abolished except for a small amount for the justice system. Contracts need to be made trustworthy once again. Social aid needs to come from the charity of families. Infrastructure needs to come from the organization and contracts of local families and communities. The system needs trust and justice not taxes. Even a sick poor man can lead “the good life” if he has trust and justice.

  8. Yes, the whole system, especially since the end of the gold standard, has been built on fraud. Contracts cannot be trusted and neither can our “leaders”. Rebuilding needs to come from families and communities. Taxes need to be abolished except for a small amount for the justice system. Contracts need to be made trustworthy once again. Social aid needs to come from the charity of families. Infrastructure needs to come from the organization and contracts of local families and communities. The system needs trust and justice not taxes. Even a sick poor man can lead “the good life” if he has trust and justice.

    Good luck with all that. I’m sure that we could spare an island off the coast for the experiment, and come back in a generation to pick up the ragged, Road Warrior-esque survivors (if any).

  9. @ All,

    For an audio version of some insights Krugman has to offer, I suggest the LSE podcast linked below. In one of the June 2009 lectures to the London School of Economics, Paul Krugman describes automobiles as capital. My criticism of economics, is that they have not read Isaiah Berlin works such as ‘The Crooked Timber of Humanity’. People do not decide to replace capital goods only because they are like Paul Krugman’s 20 year old Volvo. Society changes, society decides of its own accord what it wants to do – to become divorced from fossil fuels or whatever. Then it is up to overall policy makers to try and manage this behaviour in society, so that investments are funnelled in the right way, into some capital good, which might represent a future saving for that society. No one really knows why all of the Irish population at the same time, became raving mad for buying homes that they didn’t need. If economics could stop trying to explain capital goods in terms of wear and tear, and simply decide that people are daft as a brush, then perhaps policy makers could get on with the serious business of guiding investment better. Where investment is seen as future savings for the society as a whole.

    An archaeologist Christine Finn, wrote a book about her year living in Silicon Valley around the time of the dot.com bust. She finds technological devices, a very useful way to describe to kids, the idea of archaeology. As kids look at something that might only be a couple of years old, as ‘ancient’ stuff etc. I tried to assemble my thoughts together at my ‘Designcomment’ blogspot website, in an entry I called, Large Scale Thinking. BOH.

    http://cep.lse.ac.uk/_new/interviews/default.asp

  10. My biggest worry is that Ireland could be caught in some kind of a liquidity trap. In the June 2009 London School of Economics talk linked above, Krugman mentioned that deficit spending by the government in the united states was a good thing. Because there is no investments being made any more by the private sector in America. Krugman wrote a blog entry in April 2009, where he was talking about Ireland and comparing it to problem in the United States. My biggest problem of all, when I listen to Krugman though, is that we tries in vain to find some logical economic explanation, such as wear and tear to replace his 20 year old Volvo. Wow he says, the windows go up and down by electricity, and there are CD players in cars now. I really wish that economists could accept, that society has a mind of its own, which leads to changes in the way it consumes – acceleration of one thing, and decceleration in consumption of another thing. Look at the way that social networking web sites seem to come and go for instance. Even look at the Irish Economy blog site itself. It went from no market share at all, to huge market share in no time. Explain that. At the end of my comments in Richard Tol’s thread, Wave Power Again, I was trying to make that point about renewable technologies that people can mount on their roofs. Some of the time, they are purely decoration. The idea of a utility scale rollout of renewable energy generation, means more productive use of capital, but doesn’t give the same warm and fuzzy feeling inside as a windmill on one’s roof does. BOH.

    http://krugman.blogs.nytimes.com/2009/04/19/shabby-celtic-tigers/

  11. At much the same time as Krugman was talking about Japanese style liquidity traps and depression economics, in March 2009, Bill Moyers interviewed Mike Davis. Davis’s book In Praise of Barbarians: Essays against Empire, came up in the discussion. I think Davis has his own take about the depression and its outcomes, which is wrote noting also. Here is a quote from the interview transcript which can be found at the link below. BOH.

    Every dollar he was paid by the federal government, 98, 99 cents of it went on products that were made in the United States or grown in the United States. One of my nephews who’s unemployed today, just lost his job in Seattle, he takes his unemployment money down to Wal-Mart or Sam’s Club. And probably 40, 45 cents of that money is stimulus to the Chinese or the Korean economies. So it the stimulus in this country, Keynesian stimulus, doesn’t necessarily have the multiplier effect. That is, it doesn’t create as much jobs or circulate in the extent that it did before. And this is, of course, the huge difference between the situation today and the 1930s, which is that in the 1930s the United States had the largest, most productive industrial machine in the world. It could make almost anything. The question was how to put the workers and machines back at work.

    Today, so much of our national wealth, so much of our employment is dependent on services linked to the financial role of the U.S. But unlike Roosevelt, who could undertake institutional reforms that would reduce the control of banks over industry, now we’re part of an integrated, interlocked system where what we can do on a national scale is ultimately limited by our creditors and by the dollar. And internationally, where every part has become so interdependent that it’s hard to think about a general recovery without some kind of simultaneous and coordinated effort. And that seems to be utterly utopian at this moment.

    http://www.pbs.org/moyers/journal/03202009/watch2.html

  12. This looks like another artful performance from Professor Krugman. So how are public deficits going to reverse a debt-deleveraging recession, as opposed to palliating it or generating an echo bubble? By filling a hole of private indebtedness that’s several times larger than all the gravel the public finances could possibly afford? Or by reviving animal spirits and causing private indebtedness to increase to new highs beyond the level that caused the existing debt crisis?

  13. Furthermore: the last 10, 20, or 30 years of apparent economic growth and stability were in reality a bubble generated by unsustainable economic policies, but the last two years of distinctly spotty-looking economic recovery conclusively vindicate the wisdom and sustainability of our new economic policies? Even though they basically amount to doubling down on our old economic policies, this time with more sovereign debt?

  14. @ anonym,

    Very useful comments certainly.

    I haven’t even begun to digest the deeper implications of Krugman’s analysis. I have only looked at his writing, speeches very recently. I used to read Krugman’s books a long while back, and used to think to myself, that Asian Tiger stuff – it could never happen over here. I never thought the same kind of turmoil would come so close to my own doorstep. BOH.

  15. […] but the last two years of distinctly spotty-looking economic recovery conclusively vindicate the wisdom and sustainability of our new economic policies? Even though they basically amount to doubling down on our old economic policies, this time with more sovereign debt?

    The Great Depression and the New Deal – you’ve heard of these things, right?

  16. By filling a hole of private indebtedness that’s several times larger than all the gravel the public finances could possibly afford?

    The debt of the rich is gone (hey, when you let high-stake gamblers operate without any limits). Investing money in infrastructure gets wages and optimism back for the everyday folk who pay the PAYE taxes and duties that the country ultimately runs on (as opposed to leaving it in the hands of rich parasites who hoard their money away in foreign parts and tax evasion schemes).

  17. Summary: no one knows why but there was a lot of debt involved…..!!!!

    Right. And they say no one saw it coming, too! MSM victory!

    Bob Chapman saw it coming! He sold his NY house in c 2004. Too early! http://www.theinternationalforecaster.com

    He has blogged for years, fearlessly, setting out the next steps. The cover up continues. Everything in the msm is suspect. Their model is dead and they want it to walk the earth like a zombie.

  18. Does Ireland need Krugman? the Dáil Éireann and the Śeanad Éireann? the prime minister and cabinet?

  19. “Nothing has been easier than to treat with contempt all the legislative provisions for the protection of the monetary standard. All governments, even the weakest and most incapable, have managed it without difficulty.”

    The Problem of the Freedom of the Banks: http://mises.org/daily/4260

  20. Ok, should we trust the likes of Krugman over many?

    If he has been right (and the “many” who cheerleaded on yet another round of bankers gambling away fortunes were wrong), then yes – wouldn’t you think?

    or families over few?

    I’m not sure what you mean.

  21. The Great Depression and the New Deal – you’ve heard of these things, right?

    The New Deal was a pretty poor excuse for an economic recovery. In any case, apart from the abandonment of the gold standard, how much does the New Deal actually particularly resemble the policies being pursued in the US today? Wage and price controls, increased taxes, protectionism, government-coordinated industry cartels? It seems that the most obvious point of comparison for the present US (or UK) situation and policy response is Japan during its two lost decades.

  22. @ BO’H
    ‘I really wish that economists could accept, that society has a mind of its own, which leads to changes in the way it consumes – acceleration of one thing, and decceleration in consumption of another thing’

    There are social processes which are not primarily economic, but even in art and culture, we find all sorts of businesses which underpin and structure the artistic activity. Social networking is a social and technical innovation, but the social networking business model is about marketing and market segmentation. Ads.

    ‘No one really knows why all of the Irish population at the same time, became raving mad for buying homes that they didn’t need. If economics could stop trying to explain capital goods in terms of wear and tear, and simply decide that people are daft as a brush, then perhaps policy makers could get on with the serious business of guiding investment better………..’

    You have clearly got practical experience, but are you seriously suggesting that:

    There is no property marketing industry
    Credit conditions are not subject to human decision making
    The financial services sector does not have a dynamic of its own
    Banks and other corporations don’t try to ‘guide’ politics in their own interests
    No one knowingly blows asset bubbles ?

    Insofar as people went ‘stone mad’, isn’t that because they were drawn into an economic process which, like all bubbles, played on fear and greed. That was an abuse of power.

    If housing is to be regarded as ‘capital goods’ a question must arise as to what is the ultimate product, and what sort of investor we are imagining ? Joe Public isn’t really up to speed on macroeconomics, because that’s what governments are supposed to be for.

    It is obvious that political and professional institutions, especially in the UK and US, failed abjectly to protect the public or the state from predatory business interests. Notwithstanding the huge EC support we have received, we are still tied by language and culture to crumbling Anglo Saxon economies. That now leaves us equally short of ideas, as well as cash.

    @ Anonym and PD
    Yes, but where to next ?

  23. “Entirely disagree. The long-suffering PAYE workers should be demanding the very reasonable quid pro quos of universal healthcare and universal pensions in return for the ’sacrifice’ being forced on them now and for decades to come. Fund it by removing the generous tax breaks of the middle classes now being bailed out.”

    I’m far from convinced that removing tax breaks to the middle class would raise enough revenue to fund substantial improvements in the provision of public services, like health and education, and/or substatntial increases in entitlement spending such as guarenteed pensions.

    However, my point is simply that we ought to fully fund all spending out of revenue.

    The provision of high quality health & education for all, coupled with social safety net spending that is sufficent to allow for a reasonable and dignified standard of living for those in need of it is, of course, one of, perhaps the principle goals of public policy.

    As our productivity improves, our incomes rise and the attainment of these goals becomes increasingly more possible.

    However, an attempt to provide these high quality services, before we have the underlying productivity that allows for their provision is self defeating and reckless.

    Clearly there are issues, relating to equity and efficency, with respect to how government spending is funded. However, parking the distributional issues for the moment, my point is simply that we must live within our means, and we must stop attempting quick fixes or fudges or succumb to wishful thinking and truely accept and internalise in our decision making processes and public debates that there are limits to the quality of the services that the state can provide at any given level productivity.

    Further, in my view, the crisis has shown that there is a significant national interest in allowing for fiscal breathing space. We must try to ensure hat when our samll open economy is hit by the next major negative shock, that we are in an exceptionally good position to deal with the consequences.

    A key question is whther we can justify borrowing for public investment such as roads etc. I would argue that we should fund those expenditures from current revenue, save in situations where the proposed investment is likely to yield exceptional returns.

    The so far paltry nature of the bailout for greece, (which is arguably harsher than it would have received from the IMF acting alone) has shown that, to a large extent, we are “on our own out there”. Therefore we need to make planning for adverse contingencies a core part of our public policy.

  24. With respect to the greek situation, (and at the risk of doing a BOH on it), I would argue that the approach taken by the EU has been ill advised.

    The Greeks should be bailed out. Full stop.

    Specifically, the new EU foreign affairs czar, should land in Athens airport, with full fanfare, and announce that the monies being advanced need not be repaid until Greece is in a position to do so.

    Solidarity is not just about dollars and cents, but sometimes that is precisely what it is about.

    The EU foreign minister should say on arrival, to a press conference, hopefully packed full of Greek journalists, that the ball is now in the Greek court. It is up to them and their political class to decide if they wish to abuse the bailout by failing to take the neccesary measures to remedy their fiscal position. The commission should then proceed to publish, each quarter, with full fanfare their opinion as to whether the Greeks are in fact abusing their bailout.

  25. @ Paul Quigley,

    There is no property marketing industry.

    I take your point, but I would question how ‘skillful’ or sophisticated the same property marketing industry in Ireland had to be, to score big wins during the boom years. We must not confuse sophistication with something else, parochialism. The property marketing industry in Ireland can be described as parochial at best. Many of the land and property professions are cornered in, by small communities of people who all know one another. The property industry is different from other communities such as technology say, where it is much more global in scope. That small community of property professionals in Ireland behave very much in their own interests. Within the community, there is courtesy and civilised manners practiced, which is nice. But I would not credit the same with any extreme ability to influence masses in the direction of buying. The small property professional communities are inward looking. They seek to maximise their own benefit above that of society, for sure. In doing so, they may even work against themselves and only keep their markets small, when they could be expanded some. If you are looking visions for a better society, you probably will not find direction from the property professions. No matter how many slogans they come up with about the art of gracious living. I mean, a statement such as that, could only be invented within the cozy confines of an encumbant professional class. The marketing was all in very bad taste from society’s point of view. There is no doubt about that. But society is not made up of helpful fools either. It is my own view, that society had more than discounted the knowledge property professionals were misbehaving during the boom years – when money (or rather household debt) was put on the line. No, there wasn’t undue amount of influence by a marketing industry on society. But I do think, society had decided as a whole, for itself upon some future that was going to be bright and wonderful, and where our children could look forward to the wealth we would pass on to them. My guess is, our children will say to us in a few years time, thanks, but we would rather that you had not bothered, trying to do us favours. Especially when future generations realise they have re-capitalisation burdens and an aging population demographic to cope with. I know many highly trained financial professional people who have got stuck with multiple properties now in huge negative equity. Single people, who were part of the so-called mobile talent pool, of labour, which according to economists and taxation experts, travel around the world, doing the precise sums of where they can earn the most and pay least tax on premium incomes. Those were meant to be smart, highly trained, upwardly mobile people. Those were the kinds of people caught by the price bubble in property, and no second rate group of property professionals in Ireland, were sophisticated enough to have any influence in that transaction. Maybe the universities should provide a module in common sense for undergraduates from now on, to avoid a repeat of the last bubble? BOH.

  26. @ Brian

    Your detailed response opens up a whole raft of issues about the nature of the bubble/bust. My non-economist’s understanding of the span of the economics discipline is that psychological and social factors have been ruled out in the dominant neoclassical paradigm. They have been reintroduced in the growing sub-discipline of ‘behavioural economics . That real world stuff lets the cat out of the professional bag, so it is resisted by the leading lights and their sponsors.

    Gallileo was also resisted in his day, but he was right. Any social science which is deliberately blind to the facts of its neighhbouring sciences has to be heading into a cul de sac. Irrespective of whether one calls it sociology, social psychology, journalism or behavioural economics, the experiences you are writing about are relevant. At a minimum, you are providing an account of the subjective worldview which you have perceived amongst those who ‘inhabit’ the local residential property sector.

    Of course we have to distinguish not only between different kinds of processes, but also different levels of the same process. Dublin is not Manhattan or Dubai. Marketing credit, via minimal income checks and 100% mortgages, is not the same as marketing houses. Selling a hundred houses in Carlow is not the same kind of operation as developing as a chunk of Ballsbridge. In every case, however, the end consumer has been sold some sort of aspiration, and not just bricks and mortar.

    It seems fairly clear that the vision, as marketed/sponsored by the financial services industry in the US and Britain, was something like this:

    The main job of government is to safeguard private property, keep income taxes low, and get out of the way of people who are making money. The way to have social status (lifestyle) and security is to get a slice of equity as early as possible, and live from the proceeds of the rising asset values. The minimum requirement for equity participation is to own a residence, and benefits will accrue in proportion to the location.

    As far as Ireland is concerned, we remember the poet Patrick Kavanagh’s distinction between parochial and provincial. Dublin is a sizeable place, but our blind following of US and British trends marks us out as a provincial capital. The view from the IFSC may be global, but our own banks appear to have put all their eggs in one rotten basket. The reality is that they were always property, rather than enterprise focussed, but never had access to cheap wholesale funding.

    There is no environment more favourable for looting than institutions which are characterised by conservatism, secrecy, and emphasis on rank. Safe pair of hands and all that. The irony is that is it the very perception of conservatism and ‘safe’ property investing which led to the absence of meaningful regulation. We may not have had a run on our banks but it looks like we had a riot in them.

    Our local bubble was an old fashioned property bubble, but it was all new to us. It’s not very pleasant to say, but that’s a measure of our provincialism and naivety as a people.

    I agree that the boom was not really driven by our local property professionals, although some had a big finger in the pie. Most simply fished while the salmon were running, and some have been trapped in the nets. Recourse lending and negative equity is a lethal combination, for which an equitable remedy will be required.

    On a historical note, the ‘art of gracious living’ was first used as a property market tag at least two centuries go. Lawrence James describes the ‘genteel chimney pieces’ in The Middle Class: a history. For a thorough exposition of social status and its mechanisms, there is no better account than Distinction by sociologist Pierre Bourdieu.

  27. I don’t know if I read the same article as the other commentators here but I have some moral qualms about the implicit suggestion that we should invade “Abyssinia” as a way ot of our problems.
    Seriously the US should never experience a recession if military spending could prevent it.
    @BOH
    try and keep it short – no doibt you have much of interest to say but life is too short

  28. Reading Reinhart and Rogoff is a reminder of how often economists take the easy road—how much they tend to focus their efforts on times and places for which numbers are readily available, which basically means the recent history of the United States and a few other wealthy nations.

    The economic historian, Angus Maddison, has produced some very interesting past economic data on Asia, some of which is covered here:

    Globalisation and Asia’s return to economic supremacy

    http://www.finfacts.ie/irishfinancenews/article_1019524.shtml

  29. @ EWI

    The long-suffering PAYE workers should be demanding the very reasonable quid pro quos of universal healthcare and universal pensions in return for the ’sacrifice’ being forced on them now and for decades to come. Fund it by removing the generous tax breaks of the middle classes now being bailed out.

    Included among PAYE workers were bankers etc.

    Brain Lenihan said when presenting last Dec’s Budget that 50% of earners paid no income tax at all.

    Living standards in the West may or may not return to pre-crisis times at some stage. However, demands for new public spending without seriously knowing how it will be paid for, is voodoo economics.

    Jobs in the main engine of the Irish economy – – the foreign-owned sector – – are back to the 1998 level, at a time when emerging economies in Asia are challenging the dominance of debt-laden advanced countries in many sectors.

    On Monday in Cork, two ministers will announce plans for “high level” research jobs at UCC in a collaboration with a foreign firm. State funding for the UCC and foreign company will likely amount to 75% of total planned expenditure – – good PR but such projects will have little impact or return.

    @ All

    Consumer credit has been the essential fuel for the development of the modern economy.

    Apart from imprudent credit practices, Greece like Ireland, are classic cases of the impact of monumentally misgoverned countries.

    However, Ireland at least made big improvements in its tax collecting system in recent decades.

    Bribery, patronage and other public corruption costs Greece 8% of its GDP or more than €20bn annually:

    http://www.finfacts.ie/irishfinancenews/article_1019472.shtml

  30. @Michael Hennigan

    Very accurate comment Michael on the employment PR offensive. Soon a major chip manufacturer will annouce the siting of new plant in Israel so expect plenty of positive spin to counterbalance that.

    In reality most indigenous technology companies find themselves in competition with extraordinary salaries offered at third level. It is totally ridiculous, if not insane, but no one inside government or in the public service wish it to change. The government channels huge inflationary salaries into third level and sits back waiting for the rabbit to emerge. Is it any wonder that ISME is at the end of its tether over of industrial development policy. Soon it will be 30 years since the Telesis Report was first completed and opposed tooth and nail by the IDA. So little has been learned in the meantime.

  31. @zhou: now is not the time for the State to take onto its shoulders all the debts of Seanie Fitzpatrick and the rest of them — its own debt is enough for it to worry about IMO.

  32. @K.O’R.

    I think you are right. I think this is particularly the case because our private debt which is another important metric isn’t in great shape. I don’t know how much we can avoid though.

    If we use a resolution scheme on Anglo then we will only make savings on certain of the senior debtors debts and only to the extent that the NAMA money doesn’t cover them. We will also have to fund it up front. If we withdraw the guarantee for Anglo then we will default on many domestic businesses and depositors. Our sovereign debt rating will likely be affected pumping up our interest payments and untold damage will be done to the real economy. Rogoff and Reinhart tell us that the costs of damage to the real economy dwarfs the costs of the bailouts.

    We are between a rock and a hard place. If we keep doing our best and keep taking the medecine prescribed by the EU then we will probably suffer the least amount of damage in the medium term. The only problelm is that I don’t know if that is politically sustainable here or elsewhere though.

  33. Might we be better off restructuring our national debt then reneging on guarantees?

    I pray that the department of finance / NTMA is actively preparing various contingency plans in this regard.

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