Rethinking Macro Policy II: Getting Granular

The IMF has released a new paper here, in tandem with its major macro conference today and tomorrow.



22 thoughts on “Rethinking Macro Policy II: Getting Granular”

  1. If the executive summary is any guide, it promises to be a very interesting, if not something of a watershed, event.

    “Macroprudential tools may provide a new policy lever to curb dangerous booms and contain imbalances. But evidence about their effectiveness is mixed and we are a long way from knowing how to use them reliably. Their relation with other policies is not yet fully understood; they are fraught with complicated political economy issues; and there is little consensus on how to organize their governance.”

  2. An easy, quick and important read. This is paper No II, as the title indicates i.e. an update of views in the light of developments since the first “Rethinking” paper by Messrs Blanchard, Dellariccia, and Mauro. It is just 18 pages of light text – no tables or charts – and accessible to a wide public (even politicians).

    It tries to reframe the debate on monetary, fiscal and macroprudential policies in the light of professional research over the past two years. It asks questions of key interest e.g. What Are the Dangers of High Public Debt? (frightening dangers); At What Rate Should Public Debt Be Reduced? (surely if prudently); Can We Do Better Than Automatic Stabilisers? (yes). It stops short however of giving much of a detailed answer, or taking a political stance, leaving that for debate at today’s IMF conference. { }

    So it is interesting to see that the IMF is increasingly lucid over the dangers of persistently high and growing levels of public debt. It is troubling – if unsurprising – to see that the IMF has no good solutions, other than allowing citizens taking the pain on the chin, and figuring the best way of channelling the inevitable hardship.

    Interestingly the IMF only uses the word “austerity” once in the paper. “By the end of 2012, the median debt-to-GDP ratio in advanced economies was close to 100% and was still increasing” (up 40% in a mere six years), the paper notes. So hard to qualify the past six years as a time of austerity. Rather I’d call it “hysterity”, i.e. rapidly growing debt levels under the pretence of austerity, accompanied by timid efforts to cut the pace of the growth of public debt.
    Re Ireland, the paper suggests that “the need to rescue [its] oversized banking system led to [an] unexpected increase in [the] debt ratio of 25 percentage points”. And only 25%. Which begs the question why and how the rest of the increase in public debt is (still) occurring. And ought to be food for thought for those in favour of SOE pump priming over the past several years.

    And that “need to rescue” I’d see as badly worded (one of the few undiplomatic wordings in the document). Even in the lapse between the announcement of the 2008 guarantee and its later signing by the President, there was some time to write legislation that would have left the door open to additional means of resolution other than near 100% socialisation of bank debt, as it transpired.

  3. meanwhile
    “We replicate Reinhart and Rogo (2010a and 2010b) and nd that coding errors,
    selective exclusion of available data, and unconventional weighting of summary statis-
    tics lead to serious errors that inaccurately represent the relationship between public
    debt and GDP growth among 20 advanced economies in the post-war period. Our
    nding is that when properly calculated, the average real GDP growth rate for coun-
    tries 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 Rogo . That is, contrary to RR, average
    GDP growth at public debt/GDP ratios over 90 percent is not dramatically di erent
    than when debt/GDP ratios are lower.
    We also show how the relationship between public debt and GDP growth varies
    signi cantly by time period and country. Overall, the evidence we review contradicts
    Reinhart and Rogo ’s claim to have identi ed an important stylized fact, that public
    debt loads greater than 90 percent of GDP consistently reduce GDP growth

  4. @BL,I put it up on KOR’s tread lies damn lies and a few other bits…you must be having a terrific day regards.

  5. @ CO’H: “So it is interesting to see that the IMF is increasingly lucid over the dangers of persistently high and growing levels of public debt. It is troubling – if unsurprising – to see that the IMF has no good solutions, other than allowing citizens taking the pain on the chin, and figuring the best way of channelling the inevitable hardship.”

    So debt is the problemo? Well fancy that! Now remind me of the many, many recessions, depressions etc., all sorts of different economies have endured – since Sumerian times! And now the IMF is ‘concerned’. WOW!

    The solution – if one could be implemented is to have a constitutional prohibition on governments enacting deficit budgets to fund day-to-day spending. They are incorrigible spendthrifts – of other folks money. Stop the rot at source.

    Mind you, some meaningful reform and re-regulation of commercial banking and speculative trading in derivatives is long overdue. Fiat credit creation is hazardous.

  6. @ Ciarán O’Hagan

    ‘Hysterity’ – what a terrific neologism.

    So debt is growing rapidly and, in Ireland, it can’t all be accounted for by the bank bailout. I wonder what would happen if Ireland implemented policies to reduce public debt?

    This IMF paper is unsettling. As a lover of conspiracy theories and from reading this blog I was convinced there was a shadowy group of right-wing theorists somewhere who were organising and planning this whole crisis. If someone is writing the script it must be Charlie Brown and not Dan Brown. Does anyone really know what to do or what’s going on? The Fed and the BoE cranked up the printing presses – how did that work out? And what if the research Brian Lucey quotes is correct and public debt may not be all that bad anyway?

  7. @ john gallaher

    As an exercise in muddying the waters, or drowning the fish as the French say, the response of RR is commendable. However, while I am not an admirer of PK, or of RR for that matter, I must hand it to the former for the last sentence of his blog post;

    “But the really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research, because it said what they wanted to hear.”

  8. @DOCM oh I never understood it myself…I’m comment free on it !
    The FT piece was quite balanced,but its a little difficult to understand that level of data error which coincidentally supported the premise,lets wait and find out.
    I’m sure a more detailed explanation will be provided.
    But it’s certainly creating quite the controversy stateside,who knows there may be a tread on here.

  9. @ Bunbury: “And what if the research Brian Lucey quotes is correct and public debt may not be all that bad anyway?”

    Bad? Which debt? For salaries, wages and welfares? Long-term infrastructure? The whole thing is a piece of string of indeterminate length!

    Deficits caused by day-to-day expenses are disastrous in the long-term (30 year frame). But that works out at approx 7 electoral cycles. So, more than enough time for the politicians to bankrupt their taxpayers!

    On a more theoretical note: normal economic activity will (in the longish-term) increase arithmetically but debt levels increase geometrically. That’s Boom! Boom! time. And here we are. Enjoy!

    “The thing that economics does best is rationalizing as you wish after the fact” [Jesse @ Cafe Americain]

    Cave lectori!

  10. R&R in their response to the UMass critique summarized by Brian Lucey state that hey never claimed the association between the debt/GDP ratio and economic growth was anything more than that – an association that does not necessarily imply causation.
    Surely the claim that here is a tipping point at 90% was always suspect?

  11. There’s another important conference on today too.

    The Federal Reserve Bank of Philadelphia will be hosting:

    ”Fixing the Banking system for good – The global Monetary and Banking Systems remain fragile. This conference will present solutions.”

    Speakers include:
    Lord Adair Turner, former head of the FSA UK.

    Jeffrey Sachs, Director of The Earth Institute at Columbia University
    Michael Kumhof, Deputy Division Chief, Modeling Unit, Research Department, IMF

    Laurence Kotlikoff, William Fairfield Warren Distinguished Professor at Boston University

    Uli Kortsch, President of Global Partners Investments

    Domenic D’Ginto, Senior Vice President at PNC

    David Kotok, Co-Founder and CIO of Cumberland Advisors

    Some of the speakers will be discussing how inaccurate the model of banks taking in deposits, keeping some on reserve and lending out the rest is.

    (M Kumhof starts at 3pm, L Kotlikoff at 3:45pm, A Turner at 6:30pm)
    Click on to watch.

  12. What country with high debt has an impressive growth record other than in post major war situations?

    At the end of the Napoleonic and second world wars, UK public debt was close to 2.7 times GDP.

    The historic interest rate lows have been a big help to Italy with its debt of 127% of GDP. It also helps when foreign ownership is low.

    France currently has low funding costs but how long will that last?

    Italy experienced a marked economic slowdown in the 1990s, with real GDP growing by an annual average of only 1.2%, down from 2.2% in the 1980s. The decline in Italy’s trend growth rate was much greater than that experienced by EMU (European Monetary System) countries: on average GDP increased at an annual rate of 2.3 % in the euro area, down from 2.4 % in the 1980s. Italy’s GDP increased by less than 3% in 2001-2010 — an annual rate below 0.3% and compared with a euro area average of 1.2%

    Italy has struggled to reduce national debt as a % of GDP since government debt rose over 100% of GDP in the late 1980s

  13. So for the last few years the hypothesis has been that high and rising debt burdens lead to or are associated with low growth in future periods presumably as fiscal policy is tightened to slow debt accumulation. That makes intuitive sense. Japan and Itlay come to mind
    But, you can find examples where that hypotheis does not hold. that makes sense. It depends on where you are in the economic cycle, your demography and other policy levers. Ireland inthe early 1990s. Ok I get that.
    So then we move to the next step and conclude that debt accumulation does not matter, we can borrow, spend and we will grow our way out of the current morass. Ok, now that seems to me to be a high risk gamble.
    Thank God no one will lend us the money to do that.

  14. This discussion misses the point.
    This is all we need to know;
    How much money does Ireland have?
    How long will it last?
    What do we do whenit runs out?

  15. @ Tull: “So then we move to the next step and conclude that debt accumulation does not matter, we can borrow, spend and we will grow our way out of the current morass. ”

    I wish!. They are all ‘missing’ the real point (well, my version of it) – its the energy needed and consumed by economic activity. If your economy declines, energy use goes down (but with a caveat about population change). Ditto if your economy ‘grows’. You can have all the money you want, but if energy resources are lacking – its no growth. There is another caveat which involves changes in technology, but its a tad complicated.

    However, back to the debt bit: –

    Its not: Y = C + G + I +Nx but Y-D = C + G + I + Nx

    where D is some function of existing debt + the additional (or reduced) debt for the year in question + the interest payments on the debt.

    Each of these three HAVE to be subtracted from Y (GDP). This is NOT taught in undergrad econ. Apparently debt overheads are mistreated in Enron style – kept off the balance sheet. Hence they are of no account! 😎 Steve Keen gets apoplectic about this.

    Debt (no matter what size) detracts from GDP. The papers are for academic consumption only. Its really basic arithmetic. But that is too simple for professors!

  16. RR may be wrong about a tipping point but one thing for sure , running a near double digit deficit with a debt /GDP ratio north of 120% and an over reaching sense of entitlement by PS employees is not sustainable without the help of a generous uncle. What do people think bond yields would be if fhere was no hint of OMT?

  17. @ Seafóid: “Any chance of a discussion on SIPTU and how CP2 is apparently holed below the water line?”

    I have been attempting to imagine where the government and the trades union can go from here. The government pauses – they are politicians after all, and waits to see what happens elsewhere. I am sure they have rehearsed this. And the unions also (at least I hope so!).

    Would Enda threaten a runner to Michael D and put it up to the other parties? Or do a ‘side-deal’ with some major unions and leave the others to fight over the crumbs? One side has to ‘blink’ or we face a very difficult few weeks. My guess: the unions blink. Citing Force Majeur, etc.

    Reality would suggest that accepting 90% of something is better than stonewalling for 100% of nothing. Despite the puffery all round, the gov still has the upper hand. However if 5/6 Labour deputies ‘bolted’ that might alter the situation. I expect FG have rehearsed this also. No one appears to have a Plan B. I doubt this. We’ll see.

    40 mil a week – and change, is a sizable sum to ‘save’. How long can we sustain this level of borrowing to pay wages, salaries, allowances and expenses? A 1000 mil reduction (planned over 3 years) is only half what is needed. So where does the other 1000 mil come from? The taxpayers? That’s nice!

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