Posted: 4/17/2015
Trigger
I said it before on my blog post, it amazes me how many top economists have written absurd pieces for this Project Syndicate.
I have written a number of blog posts here on contemporary dismal economists. I guess, it could be called a series of posts.
Who Is Shiller?
“Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Finance and the Good Society.”
Shiller’s Delusions Or Banalities
The whole article is about what seems an obsession by this top economist to show that a particular economic indicator is “artificial” “and often irrelevant”. His singular focus and by exclusion of a lot of stuff related to government indebtedness and its consequences this economist has done a dismal job.
Following are salient quotes from the above article and my comments (emphasis added):
- “Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?”
[What a stupid remark is that by an ivy league professor! Yes, indeed it could happen, e.g. when interest rates are back to normal and if the economy is sputtering.] - “There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.”
[First, this is a non sequitur argument. What is this banality all about? A year or a quarter or a month is a practical, useful period of time to define an indicator like debt to GDP ratio. This has been common and best practices for a decades if not longer. Indebtedness is usually a process that happens over time.] - “We should remember this from high school science: always pay attention to units of measurement. Get the units wrong and you are totally befuddled.”
[Thank you so much for another banality.] - “Speaking from personal experience, I have to say that they can, because even I, a professional economist, have occasionally had to stop myself from making exactly the same error.”
[The only passage of his article where he expresses something significant. He errs.] - “Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.” [Like so many economists do not admit that they are driven by pure stupidity and would not so often misinform the public. Most economists know that rational expectations is an abstraction or simplification, but that over time a majority of individuals act more or less rationally in their economic transactions.]
- “What is really happening in Greece is the operation of a social-feedback mechanism. Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default. Lower demand for Greek debt caused its price to fall, meaning that its yield in terms of market interest rates rose. The higher rates made it more costly for Greece to refinance its debt, creating a fiscal crisis that has forced the government to impose severe austerity measures, leading to public unrest and an economic collapse that has fueled even greater investor skepticism about Greece’s ability to service its debt.”
[Had this Nobel Laureate done his homework, he would have known that Greece heavily overspends on military and public sector. Further, too much of the economy is run by the government etc. Thus, so called “austerity measures” [a red herring anyway] were not necessary, but some serious economic reforms to liberate the economy was asked for, which the Greek politicians refuse.] - “A paper written last year by Carmen Reinhart and Kenneth Rogoff, called “Growth in a Time of Debt,” has been widely quoted for its analysis of 44 countries over 200 years, which found that when government debt exceeds 90% of GDP, countries suffer slower growth, losing about one percentage point on the annual rate. One might be misled into thinking that, because 90% sounds awfully close to 100%, awful things start happening to countries that get into such a mess. But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.”
[I cannot believe, Prof. Shiller wrote this nonsense! Well, yes, perhaps the classification chosen by Reinhart/Rogoff is somewhat arbitrary, but I would guess, with different brackets the results would have come out similar. Perhaps, something else is flawed with this study and needs correction.] - “There is also the issue of reverse causality. Debt-to-GDP ratios tend to increase for countries that are in economic trouble. If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance.”
[Many economists would know that government failure is often the cause of economic trouble. The public debt to GDP ratio is only one indicator to quickly gauge this situation. Keynesianism has been debunked so many times that one must get the impression that economists like Shiller are incorrigible dogmatic, never learning from their mistakes.] - “The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.
The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.”
[How about that certain governments are underreacting to increasing public debt to GDP ratios. Investors do not demand austerity, but meaningful reforms to liberate the economy. Austerity is most of the times only demanded by economists or international, governmental institutions like the IMF]
