In a recent syndicated column, the economist Jean Pisani-Ferry had a generally reasonable discussion of the problems with the “troika” (made up of the European Central Bank, the European Commission and the International Monetary Fund) that has managed European rescue policies.
But I was struck by this: “Three years later, the results are mixed at best,” he wrote. “Unemployment has increased much more than anticipated and social hardship is unmistakable. There is one bright spot: Ireland, which is set to recover from an exceptionally severe financial crisis. But there is also a dark spot … “
What’s the Irish for “Et tu, Jean”? As best I can tell, Ireland has been universally (that is, by all the Serious People) proclaimed a successful role model at least once a year since the crisis began. Meanwhile, unemployment remains spectacularly high, although down a bit.
See the chart on this page. This is a “bright spot”?
True, in his column Mr. Pisani-Ferry doesn’t actually say that Ireland is recovering, only that it is “set to recover.” But we’ve heard that before, and before, and before. And much of the data that is used to tell the recovery story is suspect — not because it’s wrong, exactly, but because of Ireland’s odd economic structure, in which so much of the nation’s reported exports come from companies that add little value to its economy, which means that the usual numbers have to be treated with great caution.
So look: maybe Ireland really is going to recover soon, for real. Let’s hope so. But the repeated declarations that this is already a success story — which we’ve been hearing for at least three years — are just weird.
And yes, it seems obvious to me that Ireland keeps being proclaimed a success because it’s supposed to be a success: they did the austerity thing forcefully, with a minimum of complaints, so there must be a pot of gold at the end of that rainbow, right?
Debt and Growth: The State of the Reinhart-Rogoff Debate
There are three points that have been established in the debate about the paper written by the Harvard economists Carmen Reinhart and Ken Rogoff, which officials have used to justify austerity policies. I’m not sure that everyone understands that any one of those points is enough to refute most of the debt/deficit discussion of the past three years.
1. There is no threshold at 90 percent, even though the claim that economies were likely to stagnate when debt levels exceed 90 percent of gross domestic product has dominated a lot of the policy discussion for three years. The appearance of such a threshold in the original paper was an artifact of missing data (not deliberately, and perhaps unavoidably, but that’s not the issue here) plus an odd statistical technique.
2. There is a mild negative correlation between debt and growth. Even if this is interpreted as a causal relationship, however, the correlation is not strong enough to justify the debt panic of recent years. As the economist Brad DeLong wrote in his blog: “as best as I can tell we are talking that an increase in debt from 50% of a year’s G.D.P. to 150% is associated with a reduction in growth rates of 0.1% [per] year over the subsequent five years …”
3. There is pretty good evidence that the relationship is not, in fact, causal, and that low growth mainly causes high debt rather than the other way around.
We’ve spent three years letting unwarranted fears dominate policy decisions.