Fake deficit hawks as ideological austerity-pushers
By Wilberne Persaud, Financial Gleaner Columnist
Hawks, falcons, eagles - raptors - are majestic creatures, even the smallest of them. Fitting perfectly into ecosystems of this remarkable creation that is our planet, they exhibit unbelievable strength, grace in flight, uncommonly precise vision and care for their helpless young in ways some readily but wrongly consider 'denial-of-self'. Not true. In nature, this behaviour guarantees success - persistence of the species.
It's hard to describe people peddling austerity in the face of downturns in economic fortunes and high unemployment, among people struggling to survive, as hawks. Yet, I must: that's the name they're christened. Raptors relentlessly pursue their prey, yet never do so indiscriminately, for the mere fun of it, or as a corollary to greed. That much cannot be said of some austerity hawks advocating austerity despite all evidence to the contrary.
Austerity hawks are many. The vocal set populates the US Republican party - particularly the Tea Party wing. Government must reduce deficits but cut taxes. Spare corporate welfare, cut or privatise the immensely beneficial social-security system, sink Obamacare, defund education, health - all expenditures benefiting the poorer classes. They advocate these policy views on the basis not of ideology but 'common sense' - smaller government is best, people know how best to spend their own hard-earned cash. Plus, deficits ruin the economy. Shrinking government to the size of a rubber duck you might drown in the bathtub makes economic sense.
But Republicans don't follow 'deficit-is-the-enemy' when in office. Their standard-bearer Reagan certainly didn't and George W. Bush famously gave the wealthiest Americans big tax cuts, wiping out the surplus Bill Clinton left, before engineering two off-budget wars waged on credit card, exhorting Americans to attend the mall. Finally, he bails out Wall Street with naught for often criminally duped homeowners, while Wall Street moguls of derivatives and leverage on steroids plundered the spoils of influence.
The deficit hawks, 'moochers' as candidate Romney famously termed them, need stopping. The 47 per cent who overburden government produce nothing yet always present palm up. A beautiful thing happened. In 2010, Congressional Republicans get an unsolicited but welcome gift. Two respected economists, Carmen Reinhart and Kenneth Rogoff (RR), published Growth in a Time of Debt.
Their work claimed discovery of the 'stylised fact' - a term named for late Cambridge economist Nicky Kaldor, one-time adviser to Guyana's Cheddi Jagan - that debt burdens beyond 90 per cent of GDP nuke growth. A rare occurrence, Congressional Republicans find 'science' as the wind beneath their sails. RR's paper became hard evidence of the clear danger US deficits signified.
But on April 15, Thomas Herndon, a young graduate student and two supervisors published Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff. (University of Massachusetts Amherst, Political Economy Research Institute Working Paper Series). Herndon used RR's data set, attempting to replicate their results. He found that "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period." When corrected, "average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 per cent is actually 2.2 per cent, not -0.1 per cent" as RR claim. Actually, "average GDP growth at public debt/GDP ratios over 90 per cent is not dramatically different than when debt/GDP ratios are lower."
One error in RR's spreadsheets excludes "Australia, Austria, Belgium, Canada, and Denmark from the analysis. The omitted countries are selected alpha-betically and, hence, likely randomly with respect to economic relationships." Put simply, RR stylised fact is fiction.
Throughout all this, Herndon has been respectful, never implying unethical behaviour - making no attempt to tarnish the professors' academic reputation. Indeed, appearing on the 'Colbert Report', he steadfastly avoids judgemental speculation. Yet, Aslund Anders (Financial Times, April 19, 2013) describes the Amherst researchers as having "in their vicious review" found some "errors in the maths underlying Prof Reinhart and Prof Rogoff's warning about the precipitous decline in economic growth associated with debt ratios of more than 90 per cent. But one cannot read their analysis and then conclude that the case for austerity - and a tough line on debt - is much weakened."
No. One can't, for actually, the case is demolished. But Aslund's description: 'vicious review' screams, nay, shrieks of high-octane ideology, not econometrics. RR's findings feature in Paul Ryan's budget proposals and Britain's Chancellor of the Exchequer George Osborne quotes them. Rogoff actually ridiculed the idea of expanding already "large deficits" as a "risky proposition, not the cost-free strategy that simplistic Keynesians advocate." Ironically, a simplistic fact taught undergraduates in statistical and econometric techniques: correlation doesn't necessarily establish causation escaped RR.
Interestingly, Keynes thought the "ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." RR are not defunct. Their support for austerity in current US circumstances is.
the race problem
The core problem, unmen-tionable by most American pundits, the GOP elephant in the room, is race. Even MSNBC's Rev Al Sharpton describes vicious right-wing attacks on President Obama's daughters as responses to their being too 'uppity'. Their critics are 'schoolyard bullies crossing the line' in asking whether the President's daughter, Malia at 15, is on birth control, criticising their spring break vacations as extravagant. None of this vitriol attended the Bush daughters' vacations and personal choices.
Republicans crave President Obama's failure, offer no respect, doing anything to make him White House butler, not President. Cripple job growth and he fails. Too bad the US economy falters in the process - mere collateral damage.
But Jamaica, take care and walk good. Stimulus is viable for the US economy with unemployed resources, infrastructure projects using domestic technology and resources in a country that France's General de Gaulle's finance minister Valery Giscard d'Estaing described as having the 'exorbitant privilege' of issuing the world's currency. All these conditions differ markedly from balance of payments-constrained Jamaica. There are different things we need to, can and should do.
Wilberne Persaud, an economist, currently works on impacts of technology change on business and society including capital solutions for innovative Caribbean SMEs.Email: firstname.lastname@example.org