[Politics] Economic Schools Debates

Severian · Post by **Severian** » Sat Apr 21, 2012 4:39 pm

I've finished reading some introductory Austrian literature. Frankly, I think the school has some interesting ideas that I'd like to see them develop further. However, their rejection of empiricism puts them in a pretty weak position - if they tried to combine praxeology with real-world statistics their theories may evolve into something useful over time. It's a shame that what could be a worthwhile endeavor is crippled by partisanship and reductionism.

Lago PARANOIA · Post by **Lago PARANOIA** » Thu Jul 05, 2012 1:35 pm

So. The term 'debt to GDP ratio' gets thrown around a lot but I still just plain don't understand why it's fetishized so damn much. For any economic standard -- especially fiat economies but this applies even to the gold standard -- the factors don't seem to be strongly or even modestly related. At least in the sense of 'moderate' and conservative economists implying that it's a hyperinflation warning number. Like I said, I think you have a stronger relationship between government surpluses/deficit reductions and recessions and non-MMTs don't see those being related at all.

To me, it's like trying to track riots with ice cream sales. Or blood transfusions with bullet sales. While they come from the same causative factor (hot weather and war) and in the end will track each other to give the impression of correlation, it's a meaningless relationship. A confounding factor, in other words.

FrankTrollman wrote:Honestly, it wouldn't really surprise me if Krugman actually did fully understand and embrace MMT and even did MMT analysis at home, but felt that for political reasons he had to place his discussions in non-MMT terminology. Because when he wrote out his "objections" to MMT, it was actually just the limits that MMT already says exist on policy, not really any new objections from outside the theory.

-Username17

Even if so, this is a rather lame excuse. Krugman has no objections hitching his trailer to the #OWS wagon (see his 'End This Depression Now!' book) and has already pretty much declared war against economic orthodoxy with his New Keynesian. He may as well take the final plunge.

Ancient History · Post by **Ancient History** » Thu Jul 05, 2012 1:46 pm

It's basically loanshark mentality. The whole world runs on supplying credit, giving someone else money with the expectation that they will pay it back (with interest), but none of the people with money like the risk involved in giving money away and trusting people. So debt-to-GDP-ratio is a relative indicator cooked up for how in debt a country is given the size of its economy - not that any country would theoretically devote all their surplus to paying down a debt, but it is a measure of the reasonable ability of a country to meet continued interest payments on a debt.

Lago PARANOIA · Post by **Lago PARANOIA** » Thu Jul 05, 2012 2:00 pm

So why instead people don't look at inflation and productivity and (if you really want to go the extra mile) political stability instead of debt-to-GDP ratio? It is, again, a ratio that masks a confounding factor considering that there are/were many at-risk economies that had this ratio relatively low (Bangladesh, Indonesia, Spain) and many economies not at risk that have this ratio high (Japan, Singapore, U.S.).

Ancient History · Post by **Ancient History** » Thu Jul 05, 2012 2:11 pm

Bond junkies do look at all of those factors. Really, the various debt-to-GDP ratios are efforts to derive additional information from a system, sometimes independent of underlying factors. Granularity is lost in an effort to identify trends in the data.

For example, the debt-to-GDP ratio of the United States is more than the sum of the debt-to-GDP ratios of each individual state. On a national level it considers the country as a whole, and any distortions of local economic imbalances are smoothed out to give bond buyers or economists an idea of the relative debt load of the nation.

Username17 · Post by **Username17** » Thu Jul 05, 2012 4:47 pm

If Greece owes a billion dollars, that hurts them. If the United States owes a billion dollars, they might not even notice. And the reason is because the United States has a lot of monies and Greece has relatively few monies. The Debt to GDP ratio is basically a measure of the following concept:

If the country decided to pay off their debts in X amount of time, how high would they have to raise their taxes to do that?

Now, obviously countries are probably not going to declare a Moon Shot program on debt and pay off all their treasury bonds as they become due over the next 10 years. But they could, by virtue of raising taxes that covered some percentage of the economy and then pumping that money back into the economy by paying off the bond holders.

It would be stupid to do that. There would be huge losses as sudden tax shocks or tremendous government cutbacks iced demand, and simultaneously there would be huge losses to inflation as suddenly all the bond holders were left with piles of cash and no government treasuries to save their money in. It would be a disaster. But it could be done.

At least, it could be done if the country's total Debt was some amount that was less than the GDP of the country over the next ten years. And as long as it's something that could be done, the risk to any of the bond holders that money won't be there at the other end of the bond maturity is close to zero.

Perhaps more importantly, what countries actually do is they pay off the bonds as they come due and issue new bonds to cover some or all of those maturities. That means that the countries are actually only paying some small amount of the debt value to hopefully stay steady or improve the debt picture over time. To check to see if that's a realistic expectation, you'd look at:

The total debt.
Times the Real Interest Rate of treasury bonds.
Divided by the GDP of the nation.
Minus the Real GDP Growth.

That number is the percent of the economy that has to be assessed as taxes and then fed to the bond holders in order to keep the country's bond position stable. If the government cannot be expected to run that kind of surplus (note that if the economy is growing, that could be a negative number, but it's still finite), then at least for now the country is in a "musical chairs" scenario where the debt will grow and the government must eventually repudiate debts, print money, or find another source of revenue.

And if someone tells you the Debt to GDP ratio and you look at the Treasury Rate, you can calculate yourself whether their straights are dire or not. For example, Spain is super fucked. They have a treasury rate of 6.77% today and they have a Debt to GDP ratio of 68.5% except, they also let the ECB and ESM get preferred lender status on another ~400billion Euros, which puts them at about 100% GDP of "real" debt. That's a problem, because their inflation rate is 1.9%, their growth is negative, and they cannot print money.

So let's run the numbers. To stay on an even keel, they'd have to take about 4.9% of their economy out as taxes and pay it to bond holders. That's just to stay even. Holy shit! And their actual surplus is... negative 8.5%. They would have to raise taxes by more than 13% of GDP just to stop from falling behind. That's absurd. There is no fucking way they can do that. Meaning that they need one of three things:

A real bailout like the ones US states get, where countries that have money simply hand them a satchel full of money.
A default on some or all of their debt.
A massive money printing order by the central bank. Oh snap! They are in the Euro and can't do that, I meant leaving the Euro and getting some actual fucking fiat money.

Problematic. So that's why Spain's treasury bonds are rated as "unsafe". Because bond holders are basically expecting Spain very likely default on some or all of that nominal debt, so they demand that the nominal interest rate be very high.

On the flip side, you can also see why Japan is cool as a cucumber with a Debt to GDP ratio of 230%. Their real interest rate on 10 year treasury bonds is about 0.5% (yes, really), and with their rocket powered GDP growth of 1.2%, they need to put aside... 0% of their GDP in tax revenue to keep debt ratios constant. Seriously, that's it.They don't need austerity measures at all and can keep chugging along like this indefinitely. And they could just print up a bunch of Yen if they cared. Which they don't.

-Username17

sabs · Post by **sabs** » Thu Jul 05, 2012 5:01 pm

Here's the thing though. What if Spain, just didn't pay out on Bonds that expire, and didn't renew them at a ridiculous 6.62%. What if they freeze the bond interest at where it is, and ignore them except for people who actually cash them in, and turn them around.

Ancient History · Post by **Ancient History** » Thu Jul 05, 2012 5:07 pm

Then nobody would buy their bonds, and the people that did hold the paper on their debt would fucking panic, and raise all kinds of shit. So Spain would be unable to raise more money from bonds unless they promised even more ridiculous interest rates, which would just exacerabate the problem and make them go down the toilet faster.

Username17 · Post by **Username17** » Thu Jul 05, 2012 5:20 pm

sabs wrote:Here's the thing though. What if Spain, just didn't pay out on Bonds that expire, and didn't renew them at a ridiculous 6.62%. What if they freeze the bond interest at where it is, and ignore them except for people who actually cash them in, and turn them around.

That's called a default. If you don't honor the terms of the contract, people are going to be extremely leery of making contracts with you. Countries that can print their own money tend to be able to claw themselves back from this - it only took Argentina a few years to get back in the good graces of the bond market - but countries that have to borrow in foreign currencies or gold (like Spain) have historically been proper fucked.

I mean, would you buy Greek debt right now? The bond market is currently pricing their word at over 25%.

-Username17

Lago PARANOIA · Post by **Lago PARANOIA** » Thu Jul 05, 2012 5:30 pm

Ancient History wrote:Really, the various debt-to-GDP ratios are efforts to derive additional information from a system, sometimes independent of underlying factors.

What additional information is derived from the comparison? Knowing that northern hemisphere summertimes drives up ice cream sales and increases the incidence of riots is helpful economic/policy information depending on who you are. But having a chart of ice cream sales versus riots for 600 months not only does not impart any new information but has a high chance of actually increasing disinformation.

On a national level it considers the country as a whole, and any distortions of local economic imbalances are smoothed out to give bond buyers or economists an idea of the relative debt load of the nation.

Even with the smoothing out, how does this impart information that bond buyers/economists wouldn't know from analyzing the individual statistics? It's not even a convenient shortcut, you still have to look at other factors. Like inflation, government spending (GDP masks this), interest rates, etc..

Ancient History · Post by **Ancient History** » Thu Jul 05, 2012 5:41 pm

Debt-to-GDP ratio does not chart a causal relationship, only an indicative one. And yes, it is only one number among many you can and probably should look at when buying/pricing bonds. But this is soft math economics, it deals less with the actual ability of a country to pay its debts than the perceived ability for a country to pay its depths. Countries that are perceived as wealthy and stable have an easier time selling debt, and at lower rates. Debt-to-GDP can bolster or diminish that image, tempering perceived ability versus some actual numbers - not all the numbers and perhaps not the best ones, but as Frank pointed out you can do calculations on a ten-year-rate pretty damn quick.

Username17 · Post by **Username17** » Thu Jul 05, 2012 8:14 pm

Also, if you graph debt to GDP over time, it shows you whether a country is becoming more in-debt or less in debt. Inflation, Population, Technology all go up to one degree or another if you take the long haul into account. So just looking at total debt numbers can give you extremely useless numbers. If there's 50% more debt but twice as many people, or the people are twice as wealthy, or the dollars are worth half as much, then the debt position is actually a lot rosier.

Debt to GDP is a good comparison because GDP includes population and inflation and wealth. Three things that would make the debt burden of any particular set of nominal dollars less onerous on the nation as a whole.

-Username17

tussock · Post by **tussock** » Thu Jul 12, 2012 1:30 am

FrankTrollman wrote:
The total debt.

Times the Real Interest Rate of treasury bonds.

Divided by the GDP of the nation.

Minus the Real GDP Growth.
That number is the percent of the economy that has to be assessed as taxes and then fed to the bond holders in order to keep the country's bond position stable.

Just in case anyone missed the gaping wound in this theory (real that it is, deciding the fate of billions): when you use the equation
[*]Growth >= Rate * Debt / GDP
to set the Rate, that's called circular logic. Greece has a high bond rate because they can't pay their debt, because they have a high bond rate, because they can't pay their debt, because they have a high bond rate, ....

In reality, Greece is getting fucked because they were a socialist country with a low real tax rate, and the German bankers don't believe in such things. They were allowed to do it for a while because it helped the Europe myth and everyone sort of assumed that they'd spawn some useful industry thanks to the low taxes.

But they didn't, because those low-tax theories are all bullshit, and now the Germans are busy blaming Socialism and the Greek people rather than reconsider the tax theories that keep their wallets fat.

They sell it to the world as that Rate * Debt/GDP thing, but that's mostly post-facto setting some country's rates high enough to break them for whatever other reason.

Sashi · Post by **Sashi** » Thu Jul 12, 2012 8:31 am

There's a definite Bond Rate Death Spiral going on in Greece, but the reason Greece is actually in trouble is because their economy is built on using expansionist monetary policy to dig themselves out of Bond Rate Death Spirals and the German Central Bank is fundamentally opposed to that action. As Frank said, an incredible Debt/GDP can be absorbed if you're Japan, but it's incredibad to have basically any debt at all when your primary industry is owning beaches.

Greece's economy is deeply flawed. Cheating the Tax Man is part of Greece's national identity and Greece only managed to be a "socialist" country through an extremely weird economic cycle of:
a) Run a deeply dysfunctional mixture of Socialism and Crony Capitalism
b) let the economy tank
c) fire up the printing presses and shit Drachma into the economy until the currency is thoroughly debased.
d) Receive a "secret bailout" from the rest of Europe in the form of tourists taking advantage of the shockingly favorable currency conversion rates.

It's an economic model that really only works if you don't have any industry to speak of (or else it would get snapped in half by the currency debasement), a population that takes paying for everything "under the table" to avoid paying taxes as a fact of life (so they can survive the "tax" of currency debasement every 5 years), and a bunch of big fat neighbors who delight in trading their Hard Currency for your Monopoly Money as long as they can get sunburns on beaches (so that you don't die of hyperinflation)

It's an economy that does not work as part of the Eurozone because the ECB is really the German Central Bank and will explicitly refuse to bail Greece out, that's practically their Mission Statement, and it's exactly what's happening right this minute.

Username17 · Post by **Username17** » Thu Jul 12, 2012 1:21 pm

Greece is actually one of the least socialist countries in Europe. Their budget problems really have essentially nothing to do with "socialism". Even Germany's problems with the way they do things has pretty much nothing to do with "socialism".

And no, it doesn't have anything to do with governments racking up a lot of debt (see Spain), nor does it have to do with the Greek people being congenitally more inclined towards indebtedness, because:

Greece's primary budget woes come mostly from this:

That's right, they spend a greater proportion of their GDP on the military than the United States. But that just explains why the country is vulnerable, it doesn't explain why the country is actually getting attacked right now. Back when Greece had the Drachma, they ran high interest rates and high inflation rates. During the 2000s, they were part of the Euro and ran low inflation rates and low interest rates and that is functionally the same thing (a manageable real interest rate). This only started being a problem after the crisis hit and suddenly Greece started being priced as a risky asset (high interest rates) and had a depression (low inflation) - that's not a manageable interest rate at all.

But that still doesn't explain why Greece started being perceived by the market as extremely risky. And that comes down to two things: the behavior of the Greek governments during the Bush administration, and the people who chose to finance that behavior during that period. It is of course well known that the Greek governments of the early 2000s spent money quite profligately and issued bonds that they did not have the electoral mandate to raise taxes to cover. These bonds were supposed to be paid for out of future growth rather than tax increases, which means that any bank stupid enough to buy their bonds was in essence betting that Greece would have future growth. And the banks that gave them these loans were, wait for it... primarily German private banks. The same banks that invested heavily in Spain's property bubble during the same period.

So when the crisis came and the "expected" growth of the Greek and Portuguese economies and the housing prices of Spain and Ireland failed to materialize, the German Banks were in a lot of trouble. They had made billions of dollars of risky loans and a much higher than expected number of them were going belly-up. Without intervention, the German banks were going to straight up die on lack of cash flow.

Intervention did come however. The government of Germany, backed up by its sock puppet the European Central Bank, came a knockin to Greece, Portugal, Ireland, and Spain, and convinced them that they had no alternative but to pay their debts to German banks on time and in full. And they did this through a combination of bribing government and bank officials and outright threats to bring down the entire European financial system if they didn't get their way.

New problem: countries like Ireland and Greece aren't actually big enough to cover the kinds of losses that they had been put on the hook for. And in any case, taking huge chunks out of the economy to pay through to over-extended German banks in the middle of a depression is not conducive to growth. And when the bond market saw the ludicrous nature of the pact that the PIGS countries had signed to keep the German banks from falling apart, it started treating those countries like a crap shoot - high risks that had better come with equally high returns.

And then there's Italy. Poor Italy doesn't even have a deficit, they just have a high public debt overhang left over from previous generations of short term governments. And when the bond market saw how flippantly the ECB was allowing the peripheral countries to slide into self-fulfilling panics and debt spirals, rats started leaving that ship too.

-Username17

DrPraetor · Post by **DrPraetor** » Thu Jul 12, 2012 1:54 pm

Couple of minor points.

The banks that finance Greek debt are actually-mostly-FRENCH, rather than German. Lots of German debt as well, and of course the French and German banks are mutually insured, and French and Germans are the same thing anyway, but still.

Second, that's NATO expenditures, not total defense spending. Counting our non-NATO military expenditures we spend a slightly higher fraction than Greece.

sabs · Post by **sabs** » Thu Jul 12, 2012 2:45 pm

Them's fighting words.
Btw, with that kind of logic, EVERYONE in Europe is German.
Italians and Spanish are really just Goths.
Hell, the British Monarchy are Germans.

ishy · Post by **ishy** » Tue Jul 17, 2012 10:25 pm

If only Greece was more like Iceland :
http://www.bloomberg.com/news/2012-02-2 ... story.html

Lago PARANOIA · Post by **Lago PARANOIA** » Wed Oct 24, 2012 2:27 pm

I was kind of holding out hope that Australia would be the last bastion of sanity for economics. You know, after the ECB-fellating countries, U.K. U.S., Japan, Russia, and China have failed mankind utterly. But no.

Oh, well, there's always Argentina. And Canada! Poland maybe!

The Vigilante · Post by **The Vigilante** » Wed Oct 24, 2012 4:13 pm

Lago PARANOIA wrote:I was kind of holding out hope that Australia would be the last bastion of sanity for economics. You know, after the ECB-fellating countries, U.K. U.S., Japan, Russia, and China have failed mankind utterly. But no.

Oh, well, there's always Argentina. And Canada! Poland maybe!

Sorry to disappoint you, but the government of Canada has been cutting its budget for a while now, mostly because Harper engineered a deficit before the Great Recession hit....

Username17 · Post by **Username17** » Wed Oct 24, 2012 7:55 pm

Lago PARANOIA wrote:I was kind of holding out hope that Australia would be the last bastion of sanity for economics. You know, after the ECB-fellating countries, U.K. U.S., Japan, Russia, and China have failed mankind utterly. But no.

Oh, well, there's always Argentina. And Canada! Poland maybe!

Australia isn't at the zero lower bound. Fiscal tightening by the government isn't disaster, it's just kind of dickish.

Monetary Policy can (to a limited degree) mask changes in fiscal policy. When the government reduces spending by one dollar, the central bank can lend out one dollar and keep the economy from shrinking by one dollar. This dollar goes to rich bankers who don't really need it, and then ideally they lend it out to someone who does - so it's a lot less effective at creating social justice than having the government spend a dollar to help build a road or provide health insurance to children or something. But in principle the total GDP does not have to shrink when the government saves a dollar. At least, as long as the central bank still has money it can lend out.

The Australian central bank has a lending interest rate of 3.25%, which is three hundred basis points higher than the lending rate of the United States Federal Reserve. So they are living in the 1980s where the government can slash social spending and the central bank can make it look like that isn't a bad thing by keeping overall GDP stable by lowing interest rates.

The United States and Europe do not live in a world like that. They already have central banks that are hard up against the zero lower bound. So when they cut spending, GDP simply falls. In addition to the social justice problems that spending cuts cause. In Australia they are cutting government spending and incentivizing corporate spending to try to make up for it - the net result of which is that government's balance sheet looks better even while more of the economy is moved into private hands. In Britain they are cutting government spending while they have no more means at their disposal to increase corporate spending, so the economy is shrinking and they aren't even improving their balance sheets.

-Username17

Koumei · Post by **Koumei** » Thu Oct 25, 2012 12:38 am

FrankTrollman wrote:So they are living in the 1980s...

This is more true than you think. Basically, in 20-30 years we will suffer the exact same problems the rest of the world has discovered. Our housing bubble hasn't even burst yet, so it really is a case of Australia being kept behind the rest of the world due to a time vortex or something.

Username17 · Post by **Username17** » Thu Oct 25, 2012 2:36 pm

To understand the 80s (and Australia), you really have to go look at Monetarism. Milton Friedman envisioned a world in which having the central bank loan out a dollar to cover every dollar that the government didn't spend was not only sufficient to cover the GDP losses from government austerity programs - it was sufficient to cover the necessary GDP gains from required stimulus programs that the government elected to not take! In short, the Monetarists claimed that there was no possible shock to the economy that couldn't be rectified by having the central bank lend out more (or less) money.

So confident was he in this claim that Milton Friedman frequently made the claim that the Federal Reserve had caused the Great Depression. That was hyperbole on his part (which right wing economists of today nonetheless repeat as if it was great wisdom rather than a deliberately deceptive talking point) - what he really meant was that in his model it would have been trivial for the Federal Reserve to stabilize the economy in 1930 by simply reducing interest rates far enough. Which means that when he said that the Federal Reserve caused the Great Depression, he really meant that the Federal Reserve, acting alone, could have fixed the Great Depression.

Now many people said that Milton Friedman was crazy, that it was impossible for the central bank to make up for a large enough drop in output because there is a finite demand for borrowed funds even at (effectively) zero interest rates. Also, many people said he was evil, on the grounds that shifting all of the stabilization into the banking sector would leave the newly unemployed starving in the street - whether the aggregate GDP was kept on an even keel or not. Friedman's answer to the second charge was the typical Libertarian canard that things being in the economy because people chose to buy them was freedom, while things being in the economy because people chose to vote for them was slavery. But his answer to the first group was more interesting: Quantitative Easing. He claimed that even when nominal interest rates were zero, the central bank could still lower real interest rates and get money moving by doing unconventional purchases and credit swaps that pumped temporary cash into the system and sent inflation expectations up and increased the demand for borrowed funds to any level they wanted.

The interesting thing here is that not long after he died, we had a genuine chance to test this theory: the Great Recession. Ben Bernanke used the full Friedman playbook (which right wingers now Orwellianly condemn on the grounds that we have always been at war with Oceania a Democrat is in office and it would terrible if that shit actually worked). And you know what? The economy is still depressed. Monetary actions, contrary to what the Libertarians wanted to believe, are literally incapable of stabilizing the economy in the face of a large shock.

But they are capable of stabilizing the economy in the face of a small shock. For example: simple jerking around with interest rates would have been plenty to deal with the 2001 Recession, just as they will probably prove adequate to deal with Australia's 2012 budget cuts.

The right wing really wanted to believe that you could do away with the welfare state entirely and rely on simply central banking shenanigans to keep the economy working. Failing that, they really wanted to believe that all fiscal stimulus could be handled by raising and lowering taxes. Neither of these things turn out to be true. Even above and beyond the fact that doing away with the welfare state is deeply immoral and leads to literally millions of deaths.

-Username17

Lago PARANOIA · Post by **Lago PARANOIA** » Mon Nov 05, 2012 3:06 pm

So.

Assuming that Obama wins tomorrow, rejects Simpsons-Bowles, and lets the Bush tax cuts expire while simultaneously letting the massive Tea Party spending cuts go into effect:

What's next? I mean, as much as I hate the MIC and tax cuts for the rich, reversing that spending would be austere. So the obvious thing would be to enact a new round of spending towards more ostensibly liberal areas like infrastructure and school. Or at least more tax cuts/rebates towards the poor and middle class. But the problem with that is then getting Republicans on board.

Ancient History · Post by **Ancient History** » Mon Nov 05, 2012 4:34 pm

Obama's a moderate; he bent over backwards to try and get a budget deal the first time around, and he'll probably do it again. The only question is the composition of Congress - if the Republicans want to play brinkmanship, Bad Things will happen.