Policy makers in the US and Europe seized on the paper as proof that cutting stimulus and social programs was a good idea, and proceeded to do so with abandon. Of course, right wingers wanted to cut money to social programs anyway, and would have done so regardless, but the paper was held out as scientific proof that it was a solid plan of action.
I won’t comment on how strange it was that Republicans were interested in science at all, given recent efforts to politicize the NSF and micromanage the grant decision process.
The trouble was that the results presented in RR were shown to be based on the selective use of data. Thomas Herndon, a 28-year-old graduate student, obtained the dataset from RR themselves and couldn’t reproduce the results.
In fact, he found that the only way to accurately reproduce the results in RR’s paper that showed that high debt restrained economic growth was to exclude important cases. When including the missing data, high debt was associated with consistently positive growth, though modestly slowed.
Originally, I took the view that this was a case of sloppy science. RR had a dataset, got some results which fit the narrative they were pushing and didn’t pursue the matter any further. Reading Herndon’s paper, however, I changed my mind.Herdon took the data and did what any analyst would do when starting exploratory analysis, he plotted it (see figure on the right). Debt to GDP ratios and growth are both continuous measures. We can do a simple scatterplot and see if there’s any evidence that would suggest that the two things are related.
To me, this is a pretty fuzzy result. Though the loess curve (an interpolation method to illustrate trend) suggest that there is *some* decline in growth overall, I’d still ding any intro stats student for trying to suggest that there’s any relationship at all. There is no way that RR, both trained PhD’s and likely having the help of a paid research assistant, didn’t produce such a plot.
Noting that the loess curve drops past approximately 120%, I calculated the median growth for each country represented. Only 7 countries have had debt to GDP ratios greater than 120% in the past 60+ years: Australia, Belgium, Canada, Japan, New Zealand, the UK and the United States. Out of these only two had (median) negative growth: Belgium (-.69%, effectively zero) and the United States (-10.94%), which has only had a debt to GDP greater than 120% one time. All other countries has positive growth under high debt, even beleaguered Japan. New Zealand can even claim a strong 9.8% growth under high debt. The US, then, is a major outlier, possibly bringing the entire curve down.
As this doesn’t fit their story, RR’s solution was to categorize debt to GDP ratios into five rough classifications, and calculate the mean growth within each group. This is a common trick to extract results from bad data. It’s highly tempting for researchers (and epidemiologists do it far too often), but a bad idea to present it without all the caveats and warnings that should go with it.
I’m not surprised that ideologues such as RR would be so keen to produce the result they did. After all, they published the popular economics work “This Time Is Different: Eight Centuries of Financial Folly” where they try to suggest that budget policy of the US in 2013 should somehow be informed by the economy of 14th century Spain.
I am, however, surprised that reviewers let this pass. If I would have been a reviewer, I would have:
1) pointed out the problems of categorization, where data doesn’t require it
2) noted that categorizing the data (or even plotting it) tears out temporal correlation. For example, one data point from 2008 (stimulus) may be put in the high debt category, but another from 2007 (crash) in the low debt category. While budgets of one year may have little to do with the budget of another, the economy of one year is likely related to the economy of the previous year.
3) questioned the causal mechanisms behind debt and growth. This is obviously a deep question for economists (and not epidemiologists), but of particular import. When does the economy start to react to debt? I’m pretty sure that there is a lag effect as spending bills tend to space disbursements over the course of the fiscal year.
The RR debacle should be a lesson, not only to economists, but to all scientists. While we may always be under pressure to produce results and hope that those results fit and support whatever position we take, shoddy methods don’t get us off the hook. In RR’s case, I would call this fabrication. A good many studies are merely guilty of wishful thinking, but the chance always exists that someone will come out of the woodwork and expose our flaws. After all, that’s what science is all about.
I was just checking out an article by Mark Buchanan on Bloomberg about the need to abandon the idea of economic markets as being inherently stable.
For several decades, academics have assumed that the economy is in a stable equilibrium. Distilled into a few elegant lines of mathematics by the economists Kenneth Arrow and Gerard Debreu back in the 1950s, the assumption has driven most thinking about business cycles and financial markets ever since. It informs the idea, still prevalent on Wall Street, that markets are efficient — that the greedy efforts of millions of individuals will inevitably push prices toward some true fundamental value.
Problem is, all efforts to show that a realistic economy might actually reach something like the Arrow-Debreu equilibrium have met with failure. Theorists haven’t been able to prove that even trivial, childlike models of economies with only a few commodities have stable equilibria. There is no reason to think that the equilibrium so prized by economists is anything more than a curiosity.
It’s as if mathematical meteorologists found beautiful equations for a glorious atmospheric state with no clouds or winds, no annoying rain or fog, just peaceful sunshine everywhere. In principle, such an atmospheric state might exist, but it tells us nothing about the reality we care about: our own weather.
This is true. Markets are inherently unstable beasts,as was proven by the crashes of 2000 and 2007/8. Personally, I am an advocate of free markets. The trouble is that no one can agree on what a free market is.
I recently watched a compelling lecture by development economist Ha Joon Chang, where he pointed out (rightly) that “free markets” are truly in the eye of the beholder, pointing out that even the most ardent of free market supporters in 2013 wouldn’t support the free marketers and libertarians who complained of the implementation of child labor laws in the early 20th century.
I should say, then, that I’m an advocate of the “freeest markets within reason” or “the freest markets as will support the moral ideals I hold to be important.” That is, the freeest markets as will support the protection of individual rights to freedom of expression and political thought, the preservation of equal opportunity through education and health, access to capital and social mobility.
Mr. Buchanan points put that where other sciences have accepted that there is no such thing as stability in the rest of the universe, desperate economists and their politically backward fans stick to the idea that, despite evidence of the irrationality of humans in every other space, markets are “self stabilizing.” That humans are rational (they are not) and customers can democratically select optimal prices vs. availability (untrue).
First, I am drawn to the incredible volatility of prices in areas that have the least power to influence them (developing countries).
If there were ever an example of the undemocratic nature of unbridled markets, food in developing countries would be it. Buyers and sellers are legion, yet bodies across the sea set prices with little regard to the demands of the many. In Sub Saharan Africa, stability is a fantastical dream.
Second, I am thinking of the work being done on complex systems in finance, specifically that coming out of Princeton at the moment.
SOME people aren’t waiting around with their heads in the sand, but rather are working to describe the phenomena of finance volatility, noting the increased complexity of financial markets in 2013. It would seem that deeper linkages between financial systems, though necessary, induce the very real problem of volatility. Ignoring it or pretending it doesn’t exist won’t make it go away.
Blaming government regulation and calling for a return to 19th century finance doesn’t work well either.
But that’s enough….
Though I’ve ripped this off the Big Picture blog (which my good friend Chris introduced me to), I’ll repeat it again here (since it was ripped off the Fed of New York anyway).
I never considered the problem of having to physically move money (read: metal coins) around to make foreign investments. Moving it would be an incredible risk, as it would likely be stolen along the way. Turns out, you could just pay the money to the central bank in Rome, and the Romans would just deduct the amount of money you wanted to transfer from their tax collection in whatever region it was going to.
This is worth the read. I promise I’ll write something of substance after I’m done dissertating.
Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome
Marco Del Negro and Mary Tao
Imagine yourself a Roman citizen in the 1st Century B.C. You’ve gone shopping with your partner, who’s trying to convince you to buy a particular item. The thing’s pretty expensive, and you demur because you’re short of cash. You may think that back then such an excuse would get you off scot-free. What else can you possibly do: Write a check? Well, yes, writes the poet Ovid in his “Ars Amatoria, Book I.” And since your partner knows it, you have no way out (the example below shows some gender bias on Ovid’s part. Fortunately, a few things have changed over the past 2,000 years):
But when she has her purchase in her eye,
She hugs thee close, and kisses thee to buy;
“Tis what I want, and ‘tis a pen’orth too;
In many years I will not trouble you.”
If you complain you have no ready coin,
No matter, ‘tis but writing of a line;
A little bill, not to be paid at sight:
(Now curse the time when thou wert taught to write.)
In a previous Historical Echoes post, we describe some of the characters in early Roman high and low finance. Here, we look at their modus operandi.
Large sums of money changed hands in Roman times. People bought real estate, financed trade, and invested in the provinces occupied by the Roman legions. How did that happen? Cicero writes, in Epistulae ad Familiares 5.6 and Epistulae ad Atticum 13.31, respectively: “I have bought that very house for 3.5 million sesterces” and “Gaius Albanius is the nearest neighbor: he bought 1,000 iugera [625 acres] of M. Pilius, as far as I can remember, for 11.5 million sesterces.” How? asks historian H. W. Harris (in “The Nature of Roman Money”)–“mechanically speaking, did Cicero pay three and half million sesterces he laid out for his famous house in the Palatine . . . . That would have meant packing and carrying some three and half tons of coins through the streets of Rome. When C. Albanius bought an estate from C. Pilius for eleven and half million sesterces, did he physically send the sum in silver coins?” Harris’ answer is: “Without much doubt, these were at least for the most part documentary [i.e., paper] transactions. The commonest procedure for large property purchases in this period was the one casually alluded to by Cicero [De Officiis 3.59] . . . ‘nomina facit, negotium conficit’ . . . provides the credit [or ‘bonds’–nomina], completes the purchase.”
What exactly are these nomina?–from which, by the way, comes the term “nominal,” so commonly used in economics. In his Ph.D. dissertation “Bankers, Moneylenders, and Interest Rates in the Roman Republic,” C. T. Barlow writes (pp. 156-7): “An entry in an account book was called a nomen. Originally the word meant just that–a name with some numbers attached. By Cicero’s day . . . [n]omen could also mean “debt,” referring to the entries in the creditor’s and the debtor’s account books.” And this “debt was in fact the lifeblood of the Roman economy, at all levels . . . nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for a great number of others” (Harris, p. 184). Pliny the Younger writes, for example, (in Epistulae 3.19): “Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble.”
For concreteness, say that some fellow, Sempronius, owes you one million sesterces. You–or in case you’re a wealthy senator, or eques, your financial advisor (procurator–Titus Pomponius Atticus was Cicero’s)–would record the debt in the ledger. What if you suddenly needed the money to buy some property? Do you have to wait for Sempronius to bring you a bag with 1 million sesterces? No! As long as Sempronius is a worthy creditor (a bonum nomen [see Barlow, p. 156]; in the modern parlance of credit rating agencies, a triple-A creditor), you’d do what Cicero says: transfer the nomina, strike the deal. For example, Cicero writes to his financial advisor Atticus (Ad Atticum 12.31): “If I were to sell my claim on Faberius, I don’t doubt my being able to settle for the grounds of Silius even by a ready money payment.” As Harris (p. 192) observes: “Nomina were transferable, and by the second century B.C., if not earlier, were routinely used as a means of payment for other assets . . . . The Latin term for the procedure by which the payer transferred a nomen that was owed to him to the seller was delegatio.”
So, we’ve seen that Romans could settle payments by transferring nomina. But was there a market for nomina, just like there’s one today in, say, mortgage-backed securities? According to both Barlow and Harris, the answer is yes. They claim that the Romans took the transferability one step further and essentially turned “mere entries in account books” into “negotiable notes” (see Barlow, p. 159, and Harris, p. 192). Not everyone agrees. The economic historian P. Temin (“Financial Intermediation in the Early Roman Empire”) also reports evidence of assignability of loans, opening the possibility of “wider negotiability, but,” he adds, “we do not have any evidence that it happened” (p. 721). Yet some indirect evidence is there. For instance, the idea of negotiable notes appears to be well understood by Roman jurists, such as Ulpian (The Digest of Justinian XXX.I.44): “A party who bequeaths a note bequeaths the claim and not merely the material on which the writing appears. This is proved by a sale, for when a note is sold, the debt by which it is evidenced is also considered to be sold.”
What if you had to transfer money to somebody in a different part of the globe? As the Roman dominions expanded into Greece, Spain, North Africa, and Asia, Roman finance actually faced this logistical problem. If you’re in Rome and want to, say, finance Caius’ mines in Thapsus, North Africa, how do you get him the money? He needs the silver to buy material, slaves, and other things, but you’re naturally very reluctant to see your money sail away for Africa, as the chances of it getting there aren’t that high (see pirates, shipwrecks, etc.). “Permutatio, the transfer of funds from place to place through paper transactions, was Rome’s great contribution to ancient banking” (Barlow, p. 168). It worked as follows: The publicani were private companies in charge of tax collection in the provinces (as well as many other tasks; see “Publicani,” by U. Malmendier). They had a branch in Rome and one in Thapsus. So, you’d give them the silver in Rome (or transfer them some nomina) and they’d divert some of their tax collection in North Africa to Caius. This is also how the Republic would finance its public spending overseas. Since taxes were collected throughout the provinces, by trading claims on taxes Romans could transfer funds across the globe–or at least to the part of the globe they had conquered.
Interestingly, some historians measure the sophistication of Roman finance “by the extent banks were present” (Temin, p. 719). While it is true that we have no evidence of a 1st Century B.C. Wells Fargo, this may not necessarily imply lack of sophistication. Prior to the Great Recession in the United States, a large chunk of financial intermediation didn’t involve banks–it went through the “shadow banking system.” Roman high finance “functioned primarily on the basis of brokerage” (K. Verboven, “Faeneratores, Negotiatores and Financial Intermediation in the Roman World,” p. 12), and hence was a bit like a proto-shadow banking system, as we suggest in our prior post. Like the shadow-banking system in the United States, it was fragile. Going back to our earlier example, we note that if whomever you want to buy property from starts wondering about the creditworthiness of Sempronius, she will not accept his nomina in payment and will want cash. That’ll force you to call in the loan to Sempronius, who in order to pay you will call in his loan to Titus, and so on. But financial crises in ancient Rome are the subject of a future post.
We are grateful to Cameron Hawkins of the University of Chicago for help navigating the literature.
I’ll take an aside from Kenya to write on an excellent article I found on Bloomberg on the subject of economic “uncertainty.” During the run up to the 2012 election and the subsequent debates on the now almost forgotten “fiscal cliff,” Republicans and their faithful believers spread wacky ideas that American business was crippled by not knowing what their tax rate would be in 2013.
Caroline Baum on Bloomberg claims, rightly, that this was a manufactured panic, though I would argue that our academically challenged politicians seriously believed what they were peddling.
Republicans in Congress claimed that businesses were sitting on cash, unwilling to invest until they knew what their tax rate would be next year (as if tax rates are ever set in stone). What’s more, raising taxes on “job creators” would bring the U.S. economy to its knees.
The premise behind this is fantastical. If businesses are sure that they’ll make a profit, they’ll invest the money today. I think it’s ridiculous to assume that single digit tax increases will somehow get in the way of moving ahead with business.
She points out, though, that the whole thing was fantasy:
– The private sector added 675,000 jobs, making it the second-best quarter since the recession ended in June 2009.
– Business spending on equipment and software rose 12.4 percent annualized, the biggest increase since the third
quarter of 2011.
– Business sales rose an annualized 4.2 percent (assuming no change for December), the strongest quarter of 2012.
The most perplexing part of the whole “kowtow to the American economic elite or else you’ll be unemployed” idea is the notion that somehow CEO’s hand out jobs like candy. “Job creators” don’t create jobs unless there is demand for products, either domestically or abroad (don’t forget that the US is an export giant). Republicans, so opposed to handouts, imply that somehow it is the responsibility of business to provide jobs without the expectation of return.
This is, of course, the government’s responsibility! It is exactly why we continue to invest in infrastructure improvement, have unemployment insurance, provide food stamps and bolster national defense. These expenditures are made knowing that returns are unlikely, but the infusing of cash into the economy keeps important sectors afloat and reduces overall volatility.
It’s ironic, given the anti-Keynesian bent of the Republican Party that prevents them from admitting it, that the US’s economic contraction in the last quarter of 2012 was due to defense cuts and had nothing to do with any type of fantastical “uncertainty.”
OK, back to bednets and Kenya.
Lake Victoria is a rich source of Nile Perch and Tilapia. Both fish are recent introductions to the lake. The Nile Perch, as a top predator, is associated with extensive ecological damage to the Lake’s ecosystem. Extensive fishing of the Nile Perch has led to a decrease in size, and the comeback of several types of local fish fauna.
Local fisherman on hand made boats use crudely fabricated nets to pull a few fish out of the water, they then sell either whole fish or smoked chunks to dealers. Dealers in turn sell the fish to processors, who then sell the fish to European, American and Japanese distributors. The distributors sell the fish to large supermarkets, who, of course, sell the fish to you and me.
Where the fish may bring as much as $20 a kilo in giants such as Whole Foods, a local fisherman can expect approximately $1.00, but the price is set by the world market and also subject to the whims of dealers. Without a union, fishermen have little means to negotiate prices.
As the lure of quick and plentiful cash is hard to resist, local fisherman have abandoned traditional fishing practices to enter the cash economy. This, of course, in itself is not a bad thing, but the money often gets spent on alcohol and prostitutes, rather than school and health fees for children. The nutritional profile of Lake communities suffers, and children are malnourished in an area that brings nearly $500 million dollars in revenue to Kenya.
Worse yet, ready cash creates a new market for sex work and positions are easily filled by poor women from the rural areas with no other options. The result is that the fish trade, and its destabilizing effect on families, is fueling HIV transmission here. Up 40% of people in any community along Lake Victoria may be HIV positive.
The trade has brought people from the inland areas to Lake Victoria, which has led to displacement of indigenous populations. Displacement has serious implications for security and livelihoods but in this area of intense malaria transmission, displacement and encroachment both impacts human health. The movement of populations has changed the genetic profile of local communities. Millennia of interactions between locals and parasite had led to at least some minimal level of genetic balance, which may have been disrupted by the introduction of new humans not acclimated to local strains of the parasite which causes malaria. This present added risks of serious disease.
Now, anyone who reads this blog knows that I am pro-economic development, pro-market and see no merit in suggesting that developing countries uselessly stick to old, antiquated and oppressive ways. No matter how nostalgic we may be for an idyllic past that may or may not have ever existed, the reality is that economic development in many cultural contexts has extended human life expectancy, reduced infant mortality, freed women to not be treated as cattle and reduced the subjugation of social minorities. But being pro-development means that one must support, err, development, which is only occurring slowly here.
The fishing communities suffer for a number of macro level factors.
- The nature of global economic disparities means that the government cannot step in and help negotiate fair prices for fish. The producers live entirely at the mercy of the market. The government would probably not be successful in artificially raising prices, but could help reduce price volatility by negotiating a yearly floor.
- There is no reliable means of taxing earnings to make sure that money is invested in schools and infrastructure (instead of alcohol). Say what one will about taxation, but the truth is that without it, power lines and roads don’t get built.
- The economy here is insufficiently diversified. The entire economy relies on fish, that developed countries may or may not buy. There is sadly little agriculture here, almost no tourism and, like just about all African countries, no manufacturing. A concentrated economy like that along Lake Victoria, could easily bust overnight.
All of these things, however, are challenges that all developing countries are facing. The economy along Lake Victoria is hardly an exception, but the mechanism are at least somewhat more obvious.
I’m in a development mood right now, having had a conversation with someone over whether the American democratic model is portable to other cultures. Let me ramble on about democracy and development for a while.
I say yes, with caveats, of course. There are certainly things about American style democracy that are peculiarly American. Our intense emphasis on property rights being the main candidate. Outside of that, I can see no reason why the American model isn’t transferrable elsewhere, and would even argue that an American (or western style) democracy is not peculiarly Western, but rather a natural outcome of economic growth.
Benjamin Friedman, a Harvard economist, writes in “The Moral Consequences of Economic Growth“:
Economic growth—meaning a rising standard of living for the clear majority of citizens—more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms.
I tend to agree with this. Persons who participate in an economy also participate within a system that requires them to step outside their small circles of family and friends. They are forced to rely not merely on one another, but rather must negotiate and interact with persons they may not know, and may not even like. Old hierarchies become meaningless, as the nature of jobs and value become fluid. A King may be necessary today, but useless tomorrow. Most salient, violence and force, which are both wholly un-democratic, become less attractive when one has something to lose.
Interestingly, one researcher has found the same result, that GDP leads to democracy, but that these effects were weaker than that of primary education:
Over the last two centuries, many countries experienced regime transitions toward democracy. We document this democratic transition over a long time horizon. We use historical time series of income, education and democracy levels from 1870 to 2000 to explore the economic factors associated with rising levels of democracy. We nd that primary schooling, and to a weaker extent per capita income levels, are strong determinants of the quality of political institutions. We find little evidence of causality running the other way, from democracy to income or education.
The interesting piece here is that, in most contexts, primary education is a state-provided service. Thus, using public funds (socialism!) to allow near universal education can actually enable the creation of democratic states. I would argue here, that the authors are taking a narrow view. I believe, though cannot test it, that it is not education, but rather women’s education that creates democratic states.
The development – democracy theory, however, can be countered when one considers mostly undeveloped India. India has a GDP lower than that of Ghana and Papua New Guinea, but is a functioning republic, with disparate, linguistically diverse and culturally heterogeneous states that don’t kill one another after elections. Amartya Sen, an Indian economist, is a devoted believer in democracy as a universal and essential system:
India, of course, was one of the major battlegrounds of this debate. In denying Indians independence, the British expressed anxiety over the Indians’ ability to govern themselves. India was indeed in some disarray in 1947, the year it became independent. It had an untried government, an undigested partition, and unclear political alignments, combined with widespread communal violence and social disorder. It was hard to have faith in the future of a united and democratic India. [End Page 5] And yet, half a century later, we find a democracy that has, taking the rough with the smooth, worked remarkably well. Political differences have been largely tackled within the constitutional guidelines, and governments have risen and fallen according to electoral and parliamentary rules. An ungainly, unlikely, inelegant combination of differences, India nonetheless survives and functions remarkably well as a political unit with a democratic system. Indeed, it is held together by its working democracy.
- Timeline of the Saharan Crisis (NYT)
- To little fanfare, the United States recognizes the Goverment of Somalia for the first time since 1991. (NYT)
- The free market at work: Cerberus is having trouble dumping gun maker Freedom Group. No one wants to tarnish their image by owning the company. Looks like a fire sale is about to happen. I still maintain that Bloomberg should buy it and shut it down. (Bloomberg)
- Another noble call to treat firearm injuries as a public health problem, comparing firearms to tobacco. As they note, firearms are not tobacco, which is unsafe at any level of consumption. To help reduce injury and death, we need a broad based approach. Of course, they wrote this article with no health from the NIH. (JAMA)
- The Fed failed to predict the Great Recession. Someone at the Fed had to see it coming, though. This uncovers a major structural flaw in the Fed. Designed to mitigate crises, it in’t incentivized to act when times are good. (Bloomberg)
- The lessons of past slavery need to inform present day business owners, policy maker and slavers to improve working conditions. (History News Network)
- Bio-fuels and world hunger(food prices). This guy has the right idea, but misses a couple of important points. First, though the share of corn going to ethanol has been increasing, corn production as a whole has been increasing. Second, he misses that food price increases and volatility have been following the general trends of stock market since 2000, discounting the role of bio-fuels as a cause. Trading food like oil explains the oil like patterns in food. A good article though. (Conservable Economist)
- Developing countries are trading with each other more than they are exporting goods to wealthy countries. Mutual trade and accountability could do much for creating regional stability and stable governments. (Economist)
- Japan and China need to end this petty bickering before it becomes the end of us all. How far will they take this silly game? (Economist)
And to round this up, a graphic of US troop deployments which presents a picture vastly different from what some of my liberal comrades would like to believe. The Obama admin would do well to advertise this reduction more forcefully.:
A friend sent me this graphic today from the Wall Street Journal which depicts the suffering that Americans experience under the new tax plan.
I saw the “single parent” and thought to myself, “wow, she makes the same amount of money I do” then I noticed the extra zero.
My heart goes out to these people, and to the Wall Street Journal, which is clearly based in a world that I’m wholly unfamiliar with.
It’s tragic, really. You can tell by their faces that they are suffering terribly.
Honestly, as a guy that’s never broken $30K in his lifetime, I can’t adequately express how much rage this is producing.
Ben Bernanke, Chairman of the Federal Reserve, came and spoke at the University of Michigan today. Of course, I make sure never to miss an opportunity to check out high ranking government offices ask when they come and speak.
Bernanke addressed what one would expect, fiscal cliff issues, the debt ceiling and the role of the Federal Reserve itself.
The fiscal cliff: He started by reiterating the position that Obama took at his noon press conference. Namely, that Congress has no choice but to approve a raise of the debt ceiling as it has nothing to do with future spending, but rather covers spending that has already been approved by Congress. To not approve an increase in the debt ceiling would lead the US to default of its financial obligations and create chaos in the world economy.
This is, of course, completely true. People are basically suggesting that the government should save money by not paying the light bill. Shutting down the government may sound like a revolutionary affair, but the results would be disastrous, and as the interest on these bills would continue to accrue, we’d just end up losing money in the end.
The role of government in mitigating financial disasters: Bernanke discussed parallels of monetary policy between the Great Depression and the Great Recession, pointing out that efforts to reign in the depression were too cautious and conservative. Government may not do very well in times where the markets do well (since it doesn’t really have to do anything), but has much to do during a financial crisis.
Though a personal observation, the response to the Great Recession was far too conservative. We needed more stimulus, not less and the notoriously slow reaction of The United States Congress held us back in the end. Petty bickering and political brinksmanship shot us in the foot. We’ve certainly seen economic growth since, but unemployment gains have been anemic.
Global economic issues: Though Americans seem to be under the mistaken impression that the united States lives in a bubble, the truth is that we live in an interconnected world. Though the US has seen comparatively impressive gains compared with the rest of the world since the crash, continued problems in Europe and slowed growth in the emerging economies has held us back.
I’m not sure how one gets around China’s slowing pace of growth. Some of that is the result of intentional policy changes to cool down exports in order to create a stronger domestic market there. The Europeans, at the very least, are working to create a unified central bank, which should help mitigate problems in the future. How all the individual political players work this out, will remain to be seen.
Move to require auditing of the Fed: He mentioned the recent movement by House Republicans to require full auditing of the Federal Reserve. Bernanke argued that the Fed is already subject to an independent private sector reviewer. The GAO is also able to examine the Fed’s books and evaluate the inner workings of the at agency. What the GAO cannot do is evaluate specific monetary policy of the Fed. The reason for this, is that the Fed is an independent agency and a unique private-public mixture. If the GAO, or any other government body were able to say, audit and evaluate the implications of raising or lowering interest rates, the Fed would then become less than independent and be subject to the short term political interests of Congress.
Given the batshit nature of this particular Congress, we can be assured that this would result in chaos for the world economy. For proof, one would consider the policy roots of the financial crisis itself. Governments are not incentivized to reign things in when people are profiting. A politically compromised Fed would be even less likely to attempt to control an asset bubble. I’m not sure where I stand on this issue, but an independent central bank is not unique. The Bank of Japan also operates outside the political sphere of the Diet.
I’m pretty sure House Republicans knew all too well that the Senate wouldn’t approve the Bill. They had nothing to lose by signing it.
As Bernanke kept repeating, the “dual mandate” of the Fed is to manage price stability and maximize employment. It can be offered that the Fed, in fact, serves only the interest of the very wealthy. This may certainly be true. It has been my experience, however, that the intentions of policy makers are manifold and often what appears to be self-serving, is actually intended to serve the greater good. Knowing this, I tend to give policy makers the benefit of the doubt and at least listen to what they have to say (rather than have Ron Paul do all the talking for them).
I feel that Bernanke is no exception. I am definitely not stating that I trust him implicitly, or that I think that the policies of the Fed, or any other economic policy, are flawless. On the contrary, the brunt of the financial crisis can be attributed to poor policy making. However, it is irresponsible to disregard agencies such as the Federal Reserve. But it’s worthwhile to hear a man out.