Posted tagged ‘Budget woes’

You Can Always Tell A Harvard Man (And Woman)…

September 16, 2011

…You just can’t tell how much damage they will do.

The reality-based community took it on the chin again this week in a whole bunch of ways.  One that caught my eye came in this exchange, reported in TPM:

“[I]f you want a role that has benefit programs for older Americans, like the ones we’ve had in the past, and that operate for the rest of the government like the ones we’ve had in the past, then more tax revenue is needed than under current tax rates,” [Congressional Budget Office chief Doug]Elmendorf said. “On the other hand, if one wants those tax rates, then one has to make very significant changes in spending programs for older Americans” or all the rest of the government’s functions.

Given where Congress finds itself — a separate story that began over a year ago — that’s the debate Democrats want to be having. Should we roll back safety net programs in order not to increase taxes on the wealthy?…And it’s precisely the debate Republicans do not want to have. So they spent Tuesday trying to reorient the conversation: instead of arguing in favor of their preferred and informed decisions about the future of the country, they posited a scenario where crisis is upon us already and the only plausible way to avert fiscal catastrophe and help the country end its economic slump is to cut, cut, cut right now.

“There’s a recent report by Alberto Alesina of Harvard University,” noted Sen. Rob Portman (R-OH), “showing that the most successful and pro-growth deficit reduction took place in countries that relied chiefly on austerity programs, spending cuts. And nations that relied more on tax increases were less successful in reducing the deficits and had slower economic growth.”

Ah, one more zombie lie — or rather an error, or failed analysis turned into a public lie by those who repeat it.

Alberto Alesina and Silvia Ardagna published this paper in 2009.  Portman accurately described what it claimed to demonstrate.  To say, as Brian Beutler does in the TPM piece, that this work is controversial is surely true — just as remarking that a blue whale is large is a valid statement.  Here’s Krugman discussing it shortly after publication, capturing the flavor of informed (as in, statistics-competent) criticism.  There are, of course, a wealth of other takes a google’s length away.

But the real problem is that Krugman’s and others’ initial questions of the work, were, of course correct.

To put it in the way natural scientists do when confronted by similar challenges to well-established knowledge, extraordinary claims require extraordinary proof.  Here, if you want to say something contrarian about experiences as empirically well documented as the effects of fiscal austerity on economies, you need to nail every facet of the argument.  You don’t just get to say the speed of light in a vacuum in the early universe was different from that speed now (a real claim).  You gotta prove it.  So far, eighty years of trying to do so for both the tired light hypothesis and the anti-Keynsian fairy-dusters have been unsuccessful.

This latest attempt to assert (spherical) cows are (spheroidal) chickens is no different.  The most recent analysis of Alesina and Ardagna’s claims comes  in this report from the IMF research shop.  Essentially, the new work shows, the Harvard team constructed their data universe in way that led them into a fundamental mistake, as Krugman’s describes:

…results purporting to show economic expansion following spending cuts and/or tax increases were based on a statistical illusion: an expanding economy can often lead to rising revenue and/or falling spending (e.g. because safety-net spending falls or because the government cuts back in an attempt to cool off inflationary pressures). And as a result, what the Alesina-Ardagna results capture is muddle by reverse causation.

The IMF authors say something similar with proper professional decorum r — which makes their conclusion yet more rhetorically devastating:

Estimation results based on measuring discretionary changes in fiscal policy using cyclically-adjusted fiscal data––a practice often used in the literature––suggest that fiscal consolidation stimulates private domestic demand in the short term, providing support for the hypothesis. This result is consistent with a literature that finds that fiscal contractions can be expansionary. However, our analysis suggests that using cyclically-adjusted data to estimate the effects of fiscal consolidation biases the analysis toward overstating expansionary effects.

In contrast, estimation results based on fiscal actions identified directly from contemporaneous policy documents provide little support for the expansionary austerity hypothesis. In particular, we compile an international dataset of fiscal policy adjustments motivated by a desire to reduce the budget deficit and not in response to current and prospective economic conditions using the Romer and Romer (2010) historical approach. Based on the fiscal actions thus identified, our baseline specification implies that a 1 percent of GDP fiscal consolidation reduces real private consumption by 0.75 percent within two years, while real GDP declines by 0.62 percent. The baseline results survive a battery of robustness tests. Our main finding that fiscal consolidation is contractionary holds up in cases where one would most expect fiscal consolidation to raise private domestic demand. In particular, even large spending-based fiscal retrenchments are contractionary, as are fiscal consolidations occurring in economies with a high perceived sovereign default risk.

Put that more simply:  you need to look at what really happened during the actual events you want to understand if you are going to make any sense of the situation.  When you look at a derived model of those events, you miss what people actually said and did, and you are vulnerable to a whole host of methodological traps to which any act of model-making is subject — and hence you screw up.  Which is what the Harvard pair appears to have done.

I don’t know what Alesina and Ardagna will say to all this, or about the use of their conclusions by Senator Portman.  But, of course, once it’s out there, they could issue mea culpas from the balcony in St. Peter’s Square, and it wouldn’t matter.

That’s the nub:  the real issue is that credentialed economists produced work that does not conform to reality — but does conform to what our friends in the Comfort the Comfortable lobby would wish to be true…and hence, it will never die.  Just to repeat:  it is not true that cutting demand in an economy with a demand gap in the gazillions will magically conjure up folks willing to spend.

Oh — and one more thing:  Portman knew, or should have, that the work he cited was, to say it most nicely, unproven. The IMF research, only the latest in a series of demonstrations of flaws in the Alesina-Ardagna conclusions, was released early in the summer, more than two months before the hearing this week.

If Portman did not pick up on work of direct relevance to their argument about the proper course for our country to steer, then he and his staff are incompetent, and should have no role in setting policy for a rowboat, much less for a society and economy on which the lives and happiness billions at home and abroad depend.  If he did know about it, then he’s a lying scum who has no business in any position of power.

You make the call.

So, just to get back to the underlying reality (and to belabor the obvious one more time): as the British Chancellor of the Exchequer George Osborne was reminded this week, starving an already famished economy of someone, anyone, the government willing to spend is the way to screw your economy, and especially those most vulnerable in it.

Which, of course, is exactly what the Republican deficit hallelujah chorus is trying (and mostly succeeding) in doing to us.

Images:  David Vinckboons, Distribution of Loaves to the Poorbefore 1650.

Viktor Oliva, The Absinthe Drinker, 1901