These graphs are generated and posted automatically and the captions are written in advance. I will post more specific analysis later.
- These graphs are generated and posted automatically along with the following commentary; I’ll post more specific analysis later (probably).
- The figures above show real output in the US over the post-war business cycles (WWII for those unfamiliar with the jargon). Each period was chosen to contain the expansions immediately before and after each recession, and the segments were aligned horizontally so that you can compare patterns. There are additional graphs that emphasize one or the other series below.
- You can enlarge the graphs by clicking on them.
- The black lines plot US real GDP and GDI (Gross Domestic Income) over time for the indicated horizon: i.e. the bottom lines show 1947 q1 through 1953 q2. Each period contains one recession, and they’re aligned horizontally so that period “0″ is the quarter the recession ended. The periods overlap, so the second from the bottom line shares observations on 1950 q 1 to 1953 q2 with the line below it.Basic economic accounting implies that the two series, GDP and GDI, should be nearly equal, as every dollar spent in the economy is a dollar that someone else earns in income. The two series can be different in reality because they are estimated using different surveys and data sets.
- The picture uses a log scale along the vertical axis. This means that periods of constant growth rate look like straight lines (i.e. a growth rate of 3% per year looks like a straight line with a slope of 0.03). Bear in mind that the scale was chosen so that most lines would be about 45 degrees, so it’s easy to see differences in slope but probably difficult to read off the slope of any segment itself.
- A few things jump out. There hasn’t been a “V-shaped” recession in the US in about 30 years. The dominant pattern lately has been for growth to resume at about the rate it was before the recession. Compare that to any of the earlier recessions, where there’s a period of faster growth once the recession ends.
- Also, and even more important over the long run (but less viscerally noticable at the moment), GDP growth has fallen over the last decade.You can see that, even ignoring the so-called “Great Recession,” the slope of GDP over in the top period is flatter than the previous one. This accumulates, so we’ll be much worse off in 10 years and 20 years than we would be otherwise unless that trend changes.
- The data are available through the St. Louis Fed (GDP, GDI) and the R code used for the plots is on GitHub.
The text from a very clear and interesting lecture by Christina Romer. Spoiler, here are the lessons (verbatim from the paper, obviously):
- Financial crises can be very painful.
- The zero lower bound on interest rates is a bigger constraint than we thought.
- Expectations management is essential, but difficult.
- Monetary policy can and should help ease the pain of deficit reduction.
Next, go to her webpage and read things at random. There’s a lot of interesting stuff at different levels of mathematical sophistication.
The government shutdown and debt limit brinksmanship have had a substantial negative impact on the economy. A new report released today by the Council of Economic Advisers (CEA) attempts to estimate the actual impact of the shutdown and default brinksmanship on economic activity as measured by eight different daily or weekly economic indicators. Overall it finds that a range of eight economic indicators in what we call a “Weekly Economic Index” are consistent with a 0.25 percentage point reduction in the annualized GDP growth rate in the fourth quarter and a reduction of about 120,000 private sector jobs in the first two weeks of October (estimates use indicators available through October 12th). These estimates very likely understate the full economic effects of the episode because of its effects that continued, and will continue, past October 12th.
- A full set of graphs of the unemployment rate are available in this post. That post was uploaded automatically after the jobs report was released this morning (pdf of the report here).
- The first two sentences of the report are, “Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in construction, wholesale trade, and transportation and warehousing.” That’s probably a decent summary overall.
- If you look at the graph above, which emphasizes 2001 through September, you’ll see that we’re on essentially the same trajectory as we’ve been in since the recession ended (nationally, at least; I haven’t looked at state-level data). Bear in mind, when the employment numbers are reported as “disappointing” or (in the past, at least) “surprisingly good,” that’s relative to forecasts, not an absolute statement (i.e., disappointing means “fewer jobs than expected” and not necessarily “very few jobs”).
- In absolute terms, these numbers are bad, but bad in more or less the same way that the recovery’s been bad all along.
- Looking around the FRED database at other measures of joblessness hasn’t really changed my view on that, they all look like slow recoveries (e.g. U6, median duration of unemployment, percent unemployed for 27 weeks or more, etc.).
Just realized that the plots are slightly mislabeled. These graphs contain today’s release, so they’re through “2013 m9.” The labels have been corrected (~11:30 central).
- These graphs and captions are generated automatically. I’ll post more specific analysis later (update: it’s later).
- These figures plot the US unemployment rate over time for the indicated horizon; each plot contains one recession, and they’re aligned horizontally so that period “0″ is the month the recession ended. The periods overlap.
The recessions themselves are highlighted in light red and their beginning and end are marked with a small circle. The light blue lines plot the other segments, for visual reference.
Click on the graphs to enlarge them.
- The time periods are chosen to contain the expansions before and after each recession. The pictures are organized in chronological order.
- A few things to notice: unemployment rose a lot during the last recession; it has been falling at about the same rate as in the previous two recessions, but is still very high because its peak was so much higher. Before the last few recessions, there was a substantial recovery period where unemployment fell rapidly before slowing down, but that hasn’t happened since the 1981 recession.
- Data are available from the St. Louis Fed and code is on GitHub.
Just playing with more graphs of GDP. No new data have been released since the last graph, but I added income data for fun. Details below:
The figures above show real output in the US over the post-war business cycles (WWII for those unfamiliar with the jargon). Each period was chosen to contain the expansions immediately before and after each recession, and the segments were aligned horizontally so that you can compare patterns.
The black lines plot US real GDP and GDI (Gross Domestic Income) over time for the indicated horizon: i.e. the bottom lines show 1947 q1 through 1953 q2. Each period contains one recession, and they’re aligned horizontally so that period “0″ is the quarter the recession ended. The periods overlap, so the second from the bottom line shares observations on 1950 q 1 to 1953 q2 with the line below it.
Basic economic accounting implies that the two series, GDP and GDI, should be nearly equal, as every dollar spent in the economy is a dollar that someone else earns in income. The two series can be different in reality because they are estimated using different surveys and data sets.
The picture uses a log scale along the vertical axis. This means that periods of constant growth rate look like straight lines (i.e. a growth rate of 3% per year looks like a straight line with a slope of 0.03). Bear in mind that the scale was chosen so that most lines would be about 45 degrees, so it’s easy to see differences in slope but probably difficult to read off the slope of any segment itself.
A few things jump out. There hasn’t been a “V-shaped” recession in the US in about 30 years. The dominant pattern lately has been for growth to resume at about the rate it was before the recession. Compare that to any of the earlier recessions, where there’s a period of faster growth once the recession ends.
Also, and even more important over the long run (but less viscerally noticable at the moment), GDP growth has fallen over the last decade.You can see that, even ignoring the so-called “Great Recession,” the slope of GDP over in the top period is flatter than the previous one. This accumulates, so we’ll be much worse off in 10 years and 20 years than we would be otherwise unless that trend changes.
Some links related to yesterday’s nobel prize (in addition to yesterday’s post).
I’ve been unable to find a good description or review of Hansen’s GMM. Part of the problem is that it’s material that we typically teach graduate students but not undergrads, so the overviews are mathematically technical. The reviews that aren’t too technical have focused on the statistical aspects of GMM, not the economic aspects, and so they miss the point a bit. Just reading Hansen and Singleton’s (1982) application of GMM to rational expectation models should at least give you an idea of how it’s applied and why it’s interesting (JSTOR link, in case the first doesn’t work).
Neil Irwin has an interview with Shiller on Wonkblog. A quote:
NI: What do you see as the biggest implications of your conclusions on these market inefficiencies for policy and how policymakers should think?
RS: I have a very idiosyncratic recommendation. I talk about it in my book “Subprime Solution.“
People should be encouraged to get professional help with their investing. We should be subsidizing financial advisers. In this country we seem to have come around to the idea that there might be a role for the government in subsidizing medical advice, though that is controversial, too. There might also be a role for subsidizing financial advice.
It’s already tax deductible, but that only helps people with significant incomes. The system is not arranged so that low-income people have any subsidy for financial advice. That should change. I’d like to see more low-income people getting good financial advice.
Mark Thoma has lots of links, if you want to just read today.
You probably already know that winners of the Nobel prize in economics were announced this morning: Eugene Fama (who, I just learned 30 seconds ago, went to Tufts for undergrad), Lars Hansen (not a Tufts alum), and Robert Shiller (also not from Tufts). I haven’t met any of them personally, but Shiller gave a seminar at UCSD my first year or two in grad school (so, this would have been in 2004 or 2005 or so), in which he explained how and why there was a housing bubble and some of the audience expressed skepticism. Fama and Shiller are probably the household names, but Hansen completely deserves this for his work on GMM, and would have been a reasonable co-winner on Sims and Sargent’s earlier Nobel prize.
A summary of their research as a whole is available at the Nobel’s website (it’s a pdf) and is worth reading (but I’ve only started it so far). And, thanks to John Cochrane’s blog for letting me know about these summaries.
update: Apparently there’s a more accessible summary of their research as well (also pdf).
Released yesterday. Hella informative, but dense. Tables in the back give the participants’ forecasts for real GDP growth, etc.
These figures plot the US unemployment rate over time for the indicated horizon; each plot contains one recession, and they’re aligned horizontally so that period “0″ is the month the recession ended. The periods overlap.
The recessions themselves are highlighted in light red and their beginning and end are marked with a small circle. The light blue lines plot the other segments, for visual reference.
The time periods are chosen to contain the expansions before and after each recession. The pictures are organized in chronological order.
A few things to notice: unemployment rose a lot during the last recession; it has been falling at about the same rate as in the previous two recessions, but is still very high because its peak was so much higher. Before the last few recessions, there was a substantial recovery period where unemployment fell rapidly before slowing down, but that hasn’t happened since the 1981 recession.
This figure plots US CPI over time for the indicated horizon: i.e. the bottom line plots CPI from Jan. 1947 through June 1953. Each line contains one recession, and they’re aligned horizontally so that period “0″ is the month the recession ended. The periods overlap, so the second from the bottom line shares observations on Nov. 1949 to June 1953 with the line below it.
The recessions themselves are highlighted in light blue and their beginning and end are marked with small circles.
The picture uses a log scale along the vertical axis. This means that periods of constant inflation look like straight lines (i.e. an inflation rate of 3% per year looks like a straight line with a slope of 0.03). If the slope is steep, inflation was high for that period, and if the slope is curving upwards (as in the 1961–1979 segment), inflation is rising.
Bear in mind that the scale was chosen so that most lines would be about 45 degrees. This makes it easy to see differences in slope but is difficult to read the exact slope of any particular segment.
The time periods are chosen to contain the expansions before and after each recession. Since inflation has been largely positive over this period, the higher segments are later than those below them.
A few things to notice: the price level sometime rises and sometimes falls during a recession, there’s no dominant tendency. Theory suggests that recessions accompanied by a falling price level are driven by demand shocks (e.g. by changes in investment or consumer spending) and those accompanied by a rising price level are driven by supply shocks (e.g. changes to costs, factors of production, etc.; for example, look at how steep the 1973–1975 recession is; it was associated with an oil crisis).
You can see the intuition by drawing a simple supply and demand curve and looking at the behavior of the equilibrium—the point where the curves intersect—as either curve falls.
Also notice the big change in the slope beginning in the July 1981 recession. This was a recession that the Federal Reserve started as a matter of policy (to try to lower inflation). It’s probably fair to conclude that that event marks a significant shift in the Fed’s policies.
There’s also some evidence of a change in inflation’s behavior in the 50s: the earliest post-war segments are pretty volatile, but from the mid 50s through the early 80s, inflation grew steadily. Of course, this steady growth is why the Fed felt that it had to drive inflation down in the 80s.
The U.S. markets had been closed for several hours when Congress, at midnight, let the government shut down, but, even so, they already reflected how things were going in Washington. Stocks were down, continuing a slow-motion slide that’s seen the S. & P. 500 drop on eight of the past nine days. It’s hardly been a momentous decline so far—the S. & P. has fallen about two and a half per cent from its all-time high, and is still up for the month—but it seems clear that markets are getting a little queasy about the shutdown.
Even if the shutdown is resolved, though, investors have a bigger concern on their minds: namely, the possibility that Republicans might actually refuse to raise the nation’s debt ceiling in a couple of weeks. The ceiling is the legal limit on the amount of money that the government is allowed to borrow, and raising it is necessary not just to keep the government running in the future but to allow it to pay for obligations it’s already incurred. As Justin Wolfers and Betsey Stevenson convincingly showed last year, the 2011 imbroglio over the debt ceiling put a significant dent in both business and consumer confidence, held back hiring, and further weakened the recovery. It also sent the stock market tumbling—even though a debt-ceiling deal was eventually reached, the Dow fell almost fourteen per cent in less than a month during the crisis, in part because it made people realize that a U.S. default was no longer unthinkable. (It also led to the first downgrade of the U.S.’s credit rating in history.) So it’s hardly surprising that the standoff in Washington is spooking—if not yet terrifying—investors. Markets dislike uncertainty, and what the Republican hard-liners in the House of Representatives have done, most significantly, is to make the future look uncertain by suggesting that, if they do not get the concessions they want (above all, the repeal of Obamacare) they are willing to let the U.S. default…
This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession which was unlike most other post-war recessions in the US in being driven by deleveraging and financial market factors. We document how recessions with financial market origins are different from those driven by supply or monetary policy shocks. This helps explain why economic models and predictors that work well at some times do poorly at other times. We discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts.
- The black lines plot US Real GDP over time for the indicated horizon: i.e. the bottom line plots GDP from 1947 q1 through 1953 q2. Each line contains one recession, and they’re aligned horizontally so that period “0″ is the quarter the recession ended. The periods overlap, so the second from the bottom line shares observations on 1950 q 1 to 1953 q2 with the line below it.
- The light blue lines just repeat the black lines, but recentered vertically for visual reference—each black line is represented by one of the blue lines behind the 1947–1953 plot, for example, so we can see that the recovery after that recession was faster than the others.
- The time periods are chosen to contain the expansions before and after each recession plotted.
Scotusblog reflecting on the obamacare case: http://delong.typepad.com/sdj/2013/06/wildly-differing-assessments-talking-heads-in-studios-who-dont-know-what-they-are-talking-about-vs-live-blog-screen-craw.html (via(!) Brad DeLong)
Interesting article on property taxes in The Economist: http://www.economist.com/node/21580256
Apparently they should be higher
Cool article on monopoly (the game): http://www.businessinsider.com/math-monopoly-statistics-2013-6?op=1 Gets into deeper probability theory than you’d expect
Felix Salmon has an interesting post on foreign exchange manipulation: http://blogs.reuters.com/felix-salmon/2013/06/12/annals-of-market-manipulation-fx-edition/
- Glenn Greenwald’s article in the guardian on Verizon (for completeness)
- And his article on PRISM
- Heckling by Tufte
— Edward Tufte (@EdwardTufte) June 7, 2013
- The Washington Post
- Addition after posting: this article by the NYT giving more details
Ironically, going to all of those newspapers exposes you to social-media “sharing” buttons that send your IP address to google, facebook, twitter, yahoo, etc. (although Twitter lets you opt out of this tracking in your settings).
A few quick thoughts,
- Unless you are a wealthy government (so, probably none of this site’s readers) I think you have to assume that if the NSA or another equivalent agency wants to know what you in particular are doing online, it already knows, and can do so lawfully, under pretty much any sensible legal regime. Once you’re deemed “of interest” it strikes me as absurd that a court would make itself a significant hurdle.
- That’s much different than routine data collection on essentially everyone who uses the internet. My biggest concern isn’t that the information would be useful for catching terrorists, of course it would be useful for that. My biggest concern now is that data mining algorithms are pretty badly behaved. Even assuming for argument’s sake that the NSA has exceptional data analysts (they probably do), I suspect that there are plenty of people who also get to access parts of PRISM’s output that have absolutely no idea how to interpret it. I also suspect that this has and will lead to false positives.
- Even “reasonable” people have completely legitimate reasons to be concerned about privacy; it seems like one prosecution strategy is to collect private information that would be ineligible in court, and leak it (the easiest example I could think of is from Dominique Strauss-Kahn’s case; he’s so unsympathetic a figure in the US that I hesitated to use him as an example, but that’s kind of the point: we know a lot of details about his life that have no bearing on his case). If you’re concerned about privacy, you should probably take further steps to be private on the internet, but that feeds into the problems in the previous bullet. You probably won’t pull off being completely private; instead you’ll just look secretive.
- That said, you can view using Tor, Ghostery, OTR., as political statements; also removing social-media sharing buttons from websites. I would count avoiding Chrome, Safari, and Internet Explorer in that category (leaving… Firefox, and possibly Opera); avoiding Android and the iPhone (leaving… what exactly, I’m not sure, but Firefox OS is looking better than it did earlier this week) too. It’s probably unrealistic to think that it’s more than a political statement though.
- One downside of the Patriot Act/NCTC/other post-911 intelligence agency consolidation is that the PRISM information almost certainly will spill over to other agencies, local police and the FBI. Whatever organization handling all of this information (presumably the NSA is the natural one to do it) really needs to be quarantined from the rest; e.g. this article from the NYer (with links to others).
- These are just preliminary thoughts; I expect to have better ones later.
A surprisingly stupid interactive graphic from the Economist,
on when China’s production will overtake the US’s
Everything we know about economic growth implies that China’s growth in productivity (per capita output) will slow down as it gets closer to the US (this is the [conditional] “convergence” hypothesis).
It might be an interesting exercise to plot population growth and productivity growth separately and combine them into the sort of plot they display here under different scenarios… but that’s not what they did.
Here’s the interactive chart:
and here’s the article:
It would be nice if they had the “non-bubble” estimated price paths too.
I’m surprised Gruber left off Google Docs, which seems like it was conceived/acquired only to choke off MS Office
Update on 6/5
Okay, so that didn’t last very long. I’ve discovered that I still want some form of a link-blog, and twitter isn’t really long enough and my homepage is too professional. So I’m reopening this blog.
But, with a catch: I’ve tried (and let me know if I’ve failed) to set it up so that anyone with a wordpress account can post here. So let’s try to make it a shared link blog and discussion site for people interested in Econometrics.
I’m moving this blog to my main website: http://gray.clhn.co/blog
Maintaining two different domains was annoying. I’ve moved some of the posts over and deleted the copy here (if I need to update or correct a post, I’ll almost certainly forget to do it in both places), but I’ll keep notes for my classes, etc., up here for a little while.
More links to the news. It’s just like classes were in session! As always, I’m intentionally avoiding overtly political news: the IRS scandal, etc.
- James Surowiecki has a column on working conditions in Bangladesh.
- The Economist has an editorial on Pakistan’s elections.
- Another article from The Economist, on economic conditions in the Euro-zone.
- The WSJ has a blog post outlining different candidates to be the next Fed Chair.
- The Economist’s Free Exchange blog has a discussion of the CBO’s updated deficit forecast. The main quote (from the CBO’s original report) is,
If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, the Congressional Budget Office (CBO) estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.
- Brad DeLong has a great parable about hedge funds’ views of Bernanke.
- Paul Krugman, our favorite textbook author, has an article on austerity policies in the NY Review of Books.
The semester is just about over; I still need to grade exams, etc., but last week was the last week of lectures. And so I don’t feel the same sense of urgency to look for interesting news articles for my students. But I’ll try to keep it going because it’s been fun and kept me in touch with what actually has happened in the world.
- Felix Salmon has a depressing but informative post on Pell Grants for college students.
- This post by Noah Smith on getting an Econ PhD has gotten a lot of attention, so I feel like I should address it a little. I guess that I agree with the title: if you want to get a PhD and have interests that overlap with Economics, the Econ PhD is a pretty good one (there are way more jobs than in other social sciences; the pay is better than most other fields). But the post is way too dismissive of the costs of getting any PhD. It is brutal. Very few people should actually try to get PhDs, and you really should work a few years first to make sure that it’s worth the cost.
- The government has started releasing hospital-level Medicare charges; the NYT has an article and an interactive graphic about the data.
A post from visualscoreboard.com:
This is an “old” (by news terms at least, April 25… what does it say about the world that I feel like I need to apologize for writing about a two-week old article?) interactive graphic from the NYT about the NFL draft; historically, in which have the best players been drafted? They also have a write-up of the thought process behind the chart on Kevin Quealy’s chartsnthings blog; read it!
Anyway, just a few thoughts on the chart, which I like a lot. I know they need to make things visually interesting, but I’m not a fan of color coding each round (in the print version) or shading the first round (in the online version). That information’s already in the ordering, but having it color coded subtly encourages viewers to emphasize comparisons within groups and deemphasize comparisons across groups. I’d prefer just to add some whitespace between the groups. Also, the lines are higher than they need to be in the online version (the line height is uniform and adds no information). Minor issue, but my laptop screen can’t display the whole chart this way, and I assume smartphones wouldn’t be able to either.
We’ll start by talking about fixed exchange rates vs floating exchange rates. Canada and the US have had floating exchange rates since 1971, while China pegs its currency to the US.
If there’s time, we’re going to talk about Purchasing Power Parity; the easiest way to start to understand it is to play with The Economist’s interactive “Big Mac Index” (it’s exactly what it sounds like).
- Ryan Avent goes over the latest unemployment and inflation numbers from Europe (the post is titled “Europe bleeds out” so… not good).
- Joe Weisenthal has a bunch of related short posts at business insider (BI’s titles are always… aggressive).
- The Economist has a column on apps and software for farming.
- The Counterparties email has a summary of some recent discussion about monetary policy when combined with fiscal austerity.
- We’re going to start covering Chapter 19, open-economy Macroeconomics
- This covers trade and foreign investment
- Next week, we’ll see how the exchange rate comes into play and how exchange rate policy affects monetary policy
- Chapters 9 and 19 are the only new chapters we’ll cover since the last midterm; we won’t get to Chapter 17, so it’s not going to be on the final exam.
Recent articles (mostly from yesterday’s Economist)
- The BEA released GDP estimates this morning that showed 2.5% annualized growth over the 1st quarter (it was forecast to be ~3%); remember that the initial estimates will be revised as more data becomes available. Ryan Avent gives a quick analysis of the release.
- Reinhart and Rogoff have an op-ed in the NYT defending their research (there are a bunch of posts on this blog linking to the debate and I’ve written up some thoughts on their data too).
- The Economist’s Free Exchange column discusses some research on behavioral economics, e.g. trying to actually study and model the way people really behave and not some mathematically perfect “rational” individual. The column emphasizes this working paper by Dan McFadden, an Econometrician at UC Berkeley who won the 2000 Nobel Prize with James Heckman (there’s a lot of accessible information about their research, speeches for the Nobel Prize, etc. at this link). If the stuff in the Free Exchange column sounds cool, check out the paper — parts of it are mathematically challenging but you should be able to get a handle on other parts. For what it’s worth, I think the columns too negative on how most economists think about this stuff: there’s broad recognition that it would be great to have more realistic models of people’s behavior, but it’s hard to do it well enough that you can use those models to make better policy recommendations, forecasts, etc., than you get from the unrealistic models. Once you can use those behavioral models to do basic economic tasks well you’ll see economists use them a lot more.
- News on Zimbabwe, mostly about current use of the dollar. But this relates to what we discussed in class yesterday about conditional convergence: Zimbabweans really can’t make the investments (in physical & human capital) that you’d need for productivity growth.
- The Economist has an editorial (sorry, leader) and article on Cyprus. Brutal opening: “Cyprus, it is said, never misses an opportunity to miss an opportunity. After its euro bail-out, that needs to change, not least for the sake of its battered economy. Cypriots face the grim reality that, thanks mainly to the collapse of much of their financial-services industry, GDP will shrink by 15% this year, another 15% in 2014, and perhaps 5% more in 2015…. That is a comparable drop to 1974-75, after a Greek-backed coup followed by a Turkish invasion led to the island’s partition into a Greek-Cypriot-controlled south and a Turkish-Cypriot-controlled north.”
- Some fun news about bumblebees and theft (I promise you, whatever you expect the article to be about, you’re wrong).
We’re going to finish chapter 9 in class today and talk about policies that can encourage growth.
Some news articles
- The Economist’s Free Exchange blog discusses inflation and monetary policy. It’s not my area of research, but I thought that nominal GDP targeting was being proposed as a solution to the problems mentioned in that post.
- Thomas Herndon, the UMass-Amherst grad student who first found the errors in Reinhart and Rogoff’s debt & growth paper, has already achieved every economist’s secret lifetime goal of appearing on the Colbert Report (and you must watch this clip from the same episode).
I’ve linked to some of the debate over Reinhart and Rogoff’s suddenly suspect results on debt and economic growth but haven’t said much other than that and was happy to leave it that way. But… I’m teaching a PhD time series class this semester and we just spent about a week on identification in SVARs (structural vector autoregressions) and then a student asked me about this follow-up “time series” analysis by Deepankar Basu that tries to get at causality (i.e. whether high debt causes low growth or low growth causes high debt) and there’s also this statistical analysis by Arindrajit Dube and… damn it, I probably need to actually have a professional opinion on this whole mess now (check out Felix Salmon’s summary of Dube’s results and Justin Wolfers’s of Basu’s too).
Here’s a really short summary of Basu’s results (since that’s what my student asked about). He looks at the annual growth rate of real GDP and the annual debt/GDP ratio and tries to forecast them with past values of both variables. He finds that the growth rate of GDP seems to have predictive power for the debt/GDP ratio and that the debt/GDP ratio doesn’t have statistically significant predictability for GDP growth. Taken at face value, this would be moderately convincing. It’s a bland truism that “correlation isn’t causation,” but sequential timing can help and unless you believe that the growth rate of GDP moves down in anticipation of high future values of the debt/GDP ratio then this suggests that the low GDP growth is causing the rise in the debt/GDP ratio. It’s not hard to tell stories where that sort of anticipation happens, though, since Macro and financial variables are often forward looking: if households save in anticipation of a high debt/GDP ratio, that would cause aggregate demand to fall, causing lower GDP growth. Note that that’s more or less the story that pro-Austerity politicians and pundits have been telling (essentially Paul Krugman’s confidence fairy), and it’s completely consistent with Basu’s model and statistical results.
That’s probably worth repeating: since investors and other economic actors act try to anticipate the future state of the economy, events are as good as caused by future events all the time.
So, for that reason alone, you shouldn’t take Basu’s result at face value. There are other reasons too: the debt/GDP ratio is highly persistent and has extreme starting points (I’ll have pictures later in the post) either of these can cause problems for these test statistics (this issue is discussed in Elliott and Stock’s 1994 paper and Cavanagh, Elliott, and Stock’s 1996 paper). The same persistence issue raises statistical problems with the rest of the analysis too. There are other more conceptual problems, so you can basically ignore the Impulse Response Functions (IRFs); the idea behind presenting IRFs is to show the effect of an economic shock, but as conducted here, it doesn’t tell you any more than the tests of predictability. (It’s hard to give an accessible explanation for that. but here’s where “correlation is not causation” is somewhat helpful. The data can only tell us about correlation, and you need to have extra knowledge about the system, maybe that the data come from a controlled experiment, to infer causation from that correlation. Basu estimates correlations from the data, then tries to get the data to identify the causal structure too without making any other explicit assumptions. This task is literally impossible).
The same issues are present to a lesser extent in Dube’s analysis, but I think his main analysis (his Figure 2) is less affected by the persistence issues; the timing issues are still there, though. If you wanted to, you could probably reconcile his Figure 2 with a confidence fairy argument, meaning that it doesn’t establish causality either.
So, what would I do? Well, remember:
The combination of some data and an aching desire for an answer does not ensure that a reasonable answer can be extracted from a given body of data. (John Tukey)
We have annual data on economic growth and debt for 20 countries; without a lot of more nuanced data and information, we’re never going to have a bulletproof analysis, so don’t hold that up as the goal. Accept that with this data set, you’re not going to disprove the confidence fairy (ironically, if you want to understand the debt/growth relationship and how it should affect policy, you’d probably want to do a deep qualitative analysis of different periods of debt, as exemplified by… Reinhart and Rogoff’s This time is different).
A first step, and I’m going to argue that for my purposes (writing a blog post) this is a sufficient step, is to look at the data. I downloaded the dataset and Herndon, Ash, and Polin’s code here, plus see their readme.txt, and generated some very basic plots. The first gallery plots the GDP growth rate over time for each country, but using line color to show the years in which debt was higher than 90% of GDP (those years are red).
And, look. For countries where the 90% threshold is exceeded, it happens at the very beginning of the sample (i.e. WWII deescalation and rebuilding) or the towards the end. For some countries (Italy and Japan for example) there’s a clear downward trend over the last 50 years; so of course if the high debt is at the end of the sample, it’s going to be correlated with lower growth. Literally nothing in these pictures makes me especially concerned about debt over 90% of GDP (obviously I’ve played around with other thresholds too and found similar results). The R code used to generate these plots is straightforward and is available here.
Remember, each plot shows annual GDP growth for the listed country, with red indicating years where the debt/GDP ratio is greater than 90%.
Now we can flip the roles of growth and debt. The next gallery plots the debt/GDP ratio for each country and uses red to indicate years where GDP growth was below 1%. The figures are below; the red line indicates the low growth periods. Unlike before, the low growth periods are scattered through the series. We also see results that are at least suggestive: for many countries (Denmark, Canada, Belgium, the US, Sweden, and others), low growth in the early 80s was followed by an increase in the debt/GDP ratio. Same thing with Sweden, Finland, and Japan in the 90s. But, again, this doesn’t disprove the confidence fairy. The R code for these plots is here as well.
But we actually can learn something new from these plots. Notice that GDP growth moves in broadly the same direction across different countries. You can see that there’s some systematic comovement in the GDP plots, and you can also see that the red lines are pretty clustered in the debt ratio graph. And, this is the key, you see clustering at the same point in time, but not at the same level of debt. If the lower level of GDP growth anticipated a higher level of debt, we’d see more red lines before the higher debt levels. Instead, we see that the red lines happen before an increase in the debt level, but it doesn’t matter whether it’s an increase to a high level of debt or to a low level of debt.
So, those are the two key things that jump out of the graphs, particularly the “All countries” panel.
- Low growth periods happen at roughly the same time in different countries, suggesting that there’s a common element that’s at least partially responsible. The debt/GDP ratio has common patterns across countries, but at very long horizons, so it seems unlikely to be that common element.
- The low growth periods happen before an increase in the debt/GDP ratio, but it doesn’t appear to matter whether it’s an increase to a low or high level of debt/GDP. Confidence fairy stories seem like they’d imply that low growth should happen before a change to a high level of debt/GDP and not be as likely before a change to a low level of debt/GDP, which we don’t see at all in the data.
It might be possible to formalize either of those observations into an academically rigorous identification strategy; the second bullet especially lines up with statistical tools for empirical macro, although you’d need to actually write down a model that pins down the change vs. level distinction. Right now, this is just somewhat informed speculation. Of course, since there’s been a lot of structural change in the last 70 years, if we really want to understand our policy options, it’s probably best to look in detail at the last 20 years or so and draw conclusions from that. The aggregate statistical evidence is probably best as supporting, not primary, evidence.
Please let me know when you find errors; other comments and suggestions would be great too.
Update: Further comments on identification in general here.
We’re going to continue to talk about Economic growth (obviously); i.e. very general causes of growth and “growth accounting.”
- The Journal of Economic Perspectives has an article by Bosworth and Collins on economic growth in China and India that might interest some of you.
Other interesting stuff
So, the big news in Economics blogging is that a fairly influential study by Carmen Reinhart and Ken Rogoff was alleged in a new paper by Herndon, Ash and Pollin to have a lot of errors, stuff like using the wrong part of key Excel files (I originally wrote “found” instead of “alleged,” but honestly I haven’t worked through the errors myself, and I don’t care enough about this issue to take the time to do it properly. Plus it’s been less than a day, so the new paper could have errors too).
- The new critical working paper that discusses the errors is here: Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff
- Reinhart and Rogoff’s response is available through Business Insider (I’m not sure why, but I can’t find a “more original” copy of their response). I feel obliged to point out that it’s very unusual for R&R to claim that their upcoming Journal of Economic Perspectives paper will vindicate their American Economic Review paper (which is the one alleged to have errors); the AER is almost certainly the most prestigious journal in economics, and the JEP is meant mainly to disseminate research to a wide audience and not so much for original findings. So the AER paper should be the best and most correct version of the project. (This was so unusual, in fact, that I verified that the “AER” publication was really a Papers and Proceedings article… and no one still reading cares about that distinction so I’ll stop there.) (the JEP paper is available here)
- Some comments by Tyler Cowen and Paul Krugman (and another one after their response).
- I’ve read a lot of posts on this and there’s a clear political angle in the people attacking the paper: R&R’s paper had been interpreted as giving evidence that high debt was historically very bad and was used as justification for austerity policies; so people who opposed the austerity policies are happy to see this paper go down. I’ve tried to find some conservative econ bloggers to balance out these links, but haven’t been able to find anyone discussing the paper. Regardless, it’s seemed all along to me that this paper and R&R’s research program wasn’t going to tell us very much about the effects of high debt now, even without any errors; they’re looking at historical aggregates, but this seems like an issue where specifics matter a lot (and I know that it’s easy for me to make that claim now, don’t worry).
- The Economist on the relationship between inflation and unemployment over the last downturn. (and an informal and chattier version here)
- NYT on “Promontory” an influential financial and regulatory consulting firm.
- Also read Felix Salmon’s summary. And, as you can probably tell from how often I link to his stuff, you should probably read Felix Salmon on just about everything… he’s much better at blogging than I am.
- Krugman on monetary policy in Japan: Monetary policy in a liquidity trap
- Blogs review: Understanding the mechanics and economics of Bitcoins. (via Free Exchange) And no, I don’t know why there’s been an explosion of interest in Bitcoins lately, but one consequence is that it’s pretty easy to pick up some background knowledge right now now if you’ve been idly interested in them but too lazy to do much research (my situation).
- Felix Salmon on “The promise of Ripple” (another online money exchange)
We are proud to introduce an important new feature to the IDEAS website. MyIDEAS is a personal space for the IDEAS user where she can save the papers and articles found on the site and organize them into folders. Think of it like navigating an online store and selecting items for purchase. The difference is that your "cart" is a list of references that you can sort at will into categories you can name.
We’re going to talk about hyperinflation and finish talking about deflation in Monday’s class. Wednesday will be a review session and Friday will be the second midterm exam.
I mentioned that This American Life had a story about inflation in Brazil earlier in the semester. I’ll mention it again, because it will give you an idea of what really high inflation looks like in the country, but you should be aware that there have been countries with much, much higher inflation than this story describes: The Lie That Saved Brazil.
Also look at the article “my hyperinflation vacation” (linked below as well), but again, what the author describes in Iran is nowhere close to hyperinflation. In 2008, prices in Zimbabwe doubled about every 17 days on average for the year. (I’m having trouble finding graphs to show, because the all basically look like a line straight up).
We’ll talk a little bit about Japan’s growth and deflation problems.
Relevant recent articles:
- “Disappointing and below expectations were the most used phrases to describe the economic releases last week. Even though growth in Q1 was better than in Q4 2012, it appears the first quarter ended sluggishly.” (“Summary for Week ending April 5th” by Bill McBride on Calculated Risk)
- “For years, I have been advising my cash-poor friends: the secret to an ultracheap international holiday is a Google News search for the words runaway inflation. The place listed in the dateline of any recent articles including that phrase should be your destination. En route to your home airport, visit the bank and withdraw U.S. dollars in crisp hundreds and fifties. At your beleaguered landing place, the local currency’s value will be melting away like a snowman in July. Your greenbacks will remain pleasantly solid. Everyone at your destination—hoteliers, restaurant staff, tour guides—will covet them and cut you deals. For you, luxuries will suddenly become affordable. Until your return flight (assuming you make it back safely, and are not robbed by an increasingly desperate local mob), you will experience the dismal science at its most cheery.” (“My Hyperinflation Vacation” by Graeme Wood, in The Atlantic)
- “Portugal’s prime minister says the government will have to cut spending on health, education and social security to keep the country’s €78bn bailout programme on track.” (From the Financial Times)
Ms Buchwald’s most important ruling was to dismiss claims that banks conspired to manipulate rates, violating competition law. That may seem surprising. Traders acknowledge submitting false prices; they had financial incentives to do so. But nothing is entirely obvious when it comes to LIBOR because of the odd way it is set.
In class, we’re going to talk about the Phillips Curve again; hopefully I’ll be able to do better than the quasi 3D graphs I drew on Wednesday. If you’re interested in additional (optional and long) reading
- A speech Ben Bernanke gave on inflation (and inflation forecasting) in 2007
- An article in the JEP that talks about the development of the Phillips curve
We’ll also talk about deflation and (possibly) hyperinflation.
Links to interesting news articles:
- The print edition of the Economist has a nice explanation of where all of the money goes when investments tank
- Two articles by Ryan Avent on central banks: one on the Fed and BoJ and one on the ECB
- An article by Ken Rogoff discussing the low global interest rates, and a response by Ryan Avent (who writes a lot)
- Probably the best thing I’ve read about Bitcoins (and the TL;DR version), which also talks briefly about deflation, both by Felix Salmon
A cute video, but I don’t see how much the animation adds to just a pair of time series plots, especially if they were annotated.
A line I never expected to see, anywhere, ever: “Fair or not, the rise in debt over his term will make it difficult for Mr Obama to claim the mantle of fiscal responsibility he might otherwise enjoy as a Democrat.” (From Daily chart: Vote Truman | The Economist)
To call in the statistician after the experiment is done may be no more than asking him to perform a postmortem examination: he may be able to say what the experiment died of.
The combination of some data and an aching desire for an answer does not ensure that a reasonable answer can be extracted from a given body of data.
A website put together by Di Cook, who’s in IA State’s statistics department, summarizing data on the presidential election. She’s giving a talk in the stats department on Friday, Sept 28th — I won’t be able to make it, unfortunately (seminar information is here: http://www.stat.iastate.edu/seminars/seminar.html?id=761).
When a euro-zone country falls short on reform, will the central bank stop buying its bonds? If it does, the ECB would precipitate the market panic it intends to prevent; if it doesn’t, it will amass potentially unpayable debt. That dilemma plays into the tension between the ECB and the Bundesbank. Germany’s chancellor, Angela Merkel, publicly supported the ECB’s action. But Jens Weidmann, the Bundesbank’s president, was the only person to vote against the bond-purchase plan. His public condemnation echoes widespread worries in Germany about the ECB’s direction. Germans (and other north Europeans) will surely become even more worried if it starts buying boatloads of bonds. The ECB, fearing a political backlash or growing internal divisions on its own board, may shrink from the necessary boldness. Yet if it holds back from loosening monetary policy, the region’s economic prospects will darken further.