Daily Archives: April 16, 2013

How Much Unemployment Did Reinhart and Rogoff’s Arithmetic Mistake Cause?

Thanks to WayneP for bringing this issue to my attention.  I have chosen an article by Dean Baker to highlight the story. The article on Truthout is How Much Unemployment Did Reinhart and Rogoff’s Arithmetic Mistake Cause?

Beside the “error” that Reinhart and Rogoff made, the quote below from Baker shows one of the reasons why Reinhart and Rogoff should have been suspicious about their numerical results.  It should have been a tip-off to double, triple check their results until they could explain why their numbers ran counter to so much economic theory.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.

For all the people that use the comparison of the Federal Budget to their personal budgets, it is time to stop and ask themselves, if economic history runs counter to what they predict from their analogy, they really need to study the reasons why the facts do not match their intuition.  All good engineers check their calculations against whatever intuition they have built up overs years of experience.  If the calculation and their intuition disagree, they do not rest until they understand why.

If the numbers for building a bridge tell a engineer that the bridge will fall down, but their intuition says it will stand, they don’t build that bridge until they understand whether the numbers are wrong or their intuition is wrong.

I don’t think that lawyers and politicians without this engineering or scientific foundation realize the need to check the results they get from a single analysis of a complex situation.  Certainly many recent Supreme Court decisions show the dangers of using a single faulty analogy without a cross check against other ways of looking at the problem.

A Tax System Stacked Against the 99 Percent

The New York Times blog has the Joseph Stiglitz piece A Tax System Stacked Against the 99 Percent

Research in recent years has linked the tax rates, sluggish growth and rising inequality. Remember, the low tax rates at the top were supposed to spur savings and hard work, and thus economic growth. They didn’t. Indeed, the household savings rate fell to a record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Contrary to the warnings of those who want to preserve their privileges, countries that have increased their top tax bracket have not grown more slowly. Another piece of evidence is here at home: if the efforts at the top were resulting in our entire economic engine’s doing better, we would expect everyone to benefit. If they were engaged in rent-seeking, as their incomes increased, we’d expect that of others to decrease. And that’s exactly what’s been happening. Incomes in the middle, and even the bottom, have been stagnating or falling.

Why do so many voters keep insisting on electing the people who are stacking the deck against them? Is it their sense of adventure in wanting to create a system where the odds are against them? Do they get extra pleasure when the system bloodies them a little less than their neighbors while heaping huge rewards on people they never get to see?