Saturday, June 1, 2013

Reinhart And Rogoff's Pro-Austerity Research Now Even More Thoroughly Debunked By Studies

Mark Gongloff @ Huffington Post:
The debunking of Carmen Reinhart and Kenneth Rogoff continues.

The Harvard economists have argued that mistakes and omissions in their
influential research on debt and economic growth don't change their ultimate austerity-justifying conclusion: That too much debt hurts growth.

But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.
In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff's data and found "not even a shred of evidence" that high debt levels lead to slower economic growth.

And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.

The Unemployed Need Bold, Creative Moves from the Fed

Mark Thoma @ Fiscal Times:
The Federal Reserve has increased the size of its balance sheet nearly four-fold
since the onset of the financial crisis, from around $870 billion in 2007 to $3.35 trillion today. This has caused people like Peter Schiff to predict that we are headed for a severe outbreak of inflation. An inflation problem is just round the corner we’ve been told again and again since 2008, yet inflation remains below the Fed’s 2% target, long-run inflation expectations are well-anchored, and there is little evidence in recent data that inflation is or will be a problem. 

Why is inflation so low?

More on the persistence of low inflation

Catherine Rampell @ New York Times Economix:
The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)

When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.                             Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.

Low inflation may be one reason that consumers have proven so resilient in recent months (in addition to the lift they’re getting from rising home prices). A measure of consumer sentiment released Friday by the University of Michigan surged in May, and is at its highest level since July 2007.