Archive for April, 2013
If you were one of those people who were not persuaded that the U.S. debt level was reaching growth-threatening levels, pat yourself on the back.
One of the major studies supporting the austerity position was a 2010 paper titled Growth in a Time of Debt by two well-known economists, Carmen Reinhardt and Kenneth Rogoff (R & R). As Mike Konczal reports:
Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.
This conclusion, that countries with debt-to-GDP ratios over 90 percent actually suffer negative growth, quickly became a staple in the arguments of those pushing for cuts in government spending.
Well, it turns out that R & R’s work was seriously flawed. Once the flaws are corrected, the conclusion no longer holds; growth remains positive even at debt ratios over 90 percent and the difference in growth rates for countries below and above that level is not statistically significant.
R & R finally agreed to share their data with three professors from the University of Massachusetts at Amherst, Thomas Herndon, Michael Ash, and Robert Pollin (HAP). HAP published their evaluation of R & R’s work in their recently published paper titled Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” As Konczal summarizes, HAP found three serious problems with R & R’s work:
First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.
You can read Konczal or Michael Roberts for a fuller discussion of these points. However, just to give you a flavor of how poor R & R’s methodology was, let me briefly summarize the second point. R & R divided up each individual country’s data into several selected debt-to-GDP groupings, and then calculated an average real growth for all the years in the specific debt grouping. Then they determined a global average rate of growth for a given debt-to-GDP level by averaging all the growth rates across countries at that specific debt level.
Konczal gives the following example to illustrate how sloppy this approach is:
The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.
Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.
As noted above, after HAP adjust for the errors they found, which include an Excel spread sheet error, R & R’s conclusion of negative growth at debt levels over 90 percent goes away. More specifically, they found that “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 [R & R claim].”
Now, have R & R backed off from their conclusion? Well, they admit the mistakes but still claim that the basic point is true. But as Dean Baker notes: “If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.”
What we have here is politics in command. R & R, as well as other advocates of austerity, continue to argue for cutting government spending despite having based their position largely on a study that is now shown to be wanting. So, it goes.
The economist Ed Dolan sums up the current state of the U.S. economy in a recent blog post with the following headline: “Latest US GDP data show economy weak at year’s end but corporate profits near record high.”
The chart below, taken from that post, illustrates the steady rise in corporate profits. As Dolan comments, “both before-tax and after-tax profits, stated as a percentage of GDP, reached their second highest level ever recorded, falling just short of their all-time highs of Q4 2011.”
One reason for this trend has been the ability of corporations to squeeze labor. Fred Magdoff and John Bellamy Foster highlight this corporate success in their Monthly Review article “Class War and Labor’s Declining Share.”
The following four charts are taken from the article. The first chart looks at total labor compensation as a percent of GDP. The downward trend is visible but the extent of the attack on workers is somewhat masked since the data includes all workers and total benefits. The second chart looks just at wages and salaries, again for all workers.
Chart 3 looks just at production and nonsupervisory workers. These workers account for approximately 80 percent of all private sector workers. We can see that while their share of total employment has remained relatively constant, their share of payroll has dramatically fallen. Chart 4 compares wage and salary trends for production and nonsupervisory workers with trends for management, supervisory, and other nonproduction employees.
These last two charts make clear that the war on labor has been focused on production and nonsupervisory workers, and has been going on for decades. And it doesn’t take much of a stretch of imagination to connect these trends with the growing suffering of most working people, the explosion in income inequality, and the rise in corporate profits.
But what are corporations doing with their profits? As it turns out they are using their gains not to strengthen the economy but rather to reward their already wealthy stockholders (with dividends) and managers (with higher bonus boosting stock prices).
As the Wall Street Journal reports: “Firms Send Record Cash Back to Investors.” The article explains the headline as follows:
U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally. Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year’s $282 billion. . . .
American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., General Electric Co. and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares. . . .
In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by cutting costs or taking advantage of low interest rates to borrow funds. . . .
“Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” said Rob Leiphart, an analyst at Birinyi. “Companies have to do something with it.”
Clearly, all is well for those at the top. And that is the problem for those of us opposing austerity.