Pollin Responds to Reinhart and Rogoff; Cuts Deepen and Stock Market Soars
Bob Pollin: NYT Op-ed defending study repeats errors; theoretical basis for austerity has been exposed yet massive cuts in public spending continue
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore. And welcome to this week’s edition of the PERI report with Bob Pollin, who now joins us from Amherst, Massachusetts.
Bob is the founder and codirector of the PERI institute in Amherst. He’s widely published. His most recent book is Back to Full Employment.
Thanks for joining us again, Bob.
ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you very much for having me, Paul.
JAY: So there’s a lot of flak flying about your recent study. Tell us what it’s all about.
POLLIN: This working paper that we put out actually just three weeks ago today criticizing this very influential paper by Carmen Reinhart and Kenneth Rogoff continues to generate a lot of discussion, because Reinhart and Rogoff’s paper had been a cornerstone of austerity policies, because they said that if governments allow their debt level in this recession, if they allow the debt level to exceed 90 percent of GDP, it’s going to bring a precipitous fall in the country’s economic growth.
Now, Reinhart and Rogoff have responded to us at great length in The New York Times a week ago Friday. Actually, I’ve never seen The Times give over so much space to anybody, because they let them have a big article, and then they had an appendix to the article. The Times then allowed myself and Michael Ash to respond to them. That went up a week ago today.
Here’s the upshot. Reinhart and Rogoff have acknowledged that they made a Excel coding error. The other thing is that they–.
JAY: Here, hold on. Let’s just make sure everyone understands what that means. So that means in a spreadsheet you put little formulas and you decide in the formula to add up from this, from 40 to 49, and if you’ve got–if your formula’s wrong, you might not get all the data. And that’s more or less what happened, right?
POLLIN: That is exactly what happened, not more or less what happened. They excluded five countries from their data set because of their Excel coding error. And they acknowledge that. But they say, well, actually it doesn’t really mean much of anything, because without getting into all the details, when you look at our corrected numbers versus their preferred numbers, not the ones that politicians have latched on to, in fact the falloff in GDP growth at high debt levels, they say, our numbers actually match up to their preferred numbers, which is you get a one percentage point falloff in GDP growth, which means from about a 3 percent average growth rate to about a 2 percent average growth rate.
JAY: Okay. Now, just to be clear, when–ours and theirs, this is them, Reinhart and Rogoff, saying PERI’s study’s conclusion of what the numbers are aren’t all that different than Reinhart and Rogoff.
POLLIN: That’s what they said.
But they also said–they referred to the other data in their paper that we hadn’t actually examined in our initial critique. But when they put in their article in The New York Times, we then went back and looked at their other data. The problem with their other data is that they’ve made the exact same mistakes. They’ve compounded the initial mistakes. They themselves didn’t even acknowledge this in their lengthy New York Times article. So we said, how can you be defending yourself on the basis of some preferred numbers in their original paper when those preferred numbers have the exact same mistakes in them? And when you actually correctly calculate their preferred growth rate numbers, the relationship between high debt levels and economic growth basically evaporates. There is no relationship in Reinhart and Rogoff’s own study. And that’s more or less what we say in our response to them in The New York Times last Monday.
JAY: Now, it wasn’t just the math error, right? Wasn’t there also an issue that the countries that they selected was somewhat apples and oranges? Like, what was it? One year of New Zealand being compared to ten or 15 years of England or something, that the way–.
POLLIN: Right, yeah, they defended that in The New York Times. Well, they didn’t actually explicitly defend it. They’d said, well, other people said our method is okay, it’s good. But they didn’t actually say, we think it’s totally reasonable to compare one year in New Zealand, where they had a depression when the growth was high, 1951, with 19 years in Great Britain. Great Britain had high debt for 19 years, and the economy grew at about 2.5 percent per year. We say this is a ridiculous way of averaging up your entire data set. They say it’s justified. They don’t explain why it’s justified, and they don’t out and out say, sure, 1951, one year in New Zealand, that’s fine to weight that equally with 19 years in a big country like Great Britain. So that’s the other set of issues. And that problem is also compounded in their preferred data. It’s the same problem.
JAY: Now, you’ve gotten other reaction now to people who are pro-austerity and who are focused on this argument that public debt is the number-one problem, and they’ve sort of–they’re cutting–they’re throwing Reinhart and Rogoff under the bus, to some extent. They’re saying, well, you shouldn’t respond–focus just on one study, or, yes, PERI guys prove 90 percent isn’t the cliff, but that doesn’t change the fact that public debt restricts growth.
POLLIN: Right. Well, yeah. I mean, there isn’t much to say about the Reinhart and Rogoff. Reinhart and Rogoff are trying to deflect the issue away from their paper. Maybe it’s time we just stop talking about their paper altogether, stop talking about this notion that there’s this cliff at 90 percent, when government debt exceeds 90 percent of the economy’s GDP. Let’s get back to talking about austerity.
So here in the U.S., we had our employment report on Friday, where the unemployment rate went down, the official unemployment rate went down from 7.6 to 7.5 percent, so an almost indiscernible drop in the unemployment rate, 0.1 percent. And that set the stock market off on another boom. The stock market, as of Friday, almost–Dow Jones almost reached all-time peak of 15,000. It did briefly get over 15,000 and then fell down a little bit below. And they say, well, look at the outstanding employment report.
Well, actually, even that tiny drop in the official unemployment rate was matched when we look at the–as we’ve talked about before, Paul, when we look at the broader measure of unemployment, the Labor Department’s own broader measure, which counts people who are discouraged and which counts people who wanted full-time jobs but only got part-time jobs, that actually went up as of Friday. It went up from 13.8 to 13.9 percent. So, basically, there is no improvement whatsoever in the labor market. That’s 21 and a half million people who are either unemployed officially or underemployed by the Labor Department’s own measure. But that is enough to set off the stock market saying, great, victory. And let’s keep in mind this is all four years, officially, four years after the recession, by the official statisticians that measure these things, four years after the recession is over. We’ve been in a recovery for four years, and there’s 21 and a half million people who are unemployed or underemployed.
JAY: Well, the stock market doesn’t seem to have anything to do with what’s going on in the rest of the economy. It just seems to be everyone guessing what a psychological factor for other investors is going to be the movement in the unemployment rate. I mean, that–it’s not like they actually think the economy’s coming back, do they?
POLLIN: Well, I think that’s a big part of it, Paul, and that is certainly, you know, a lot of what drives the stock market.
But there is this other factor, which you and I have talked about a lot and you yourself have emphasized, that the nature of this, quote, economic recovery has been so skewed to benefit the rich that the gains in income over this four years since we’ve had a, quote, recovery have been going entirely to the top 1 percent, so that any indication that this is going to continue and at least not get worse, that alone seems to be an affirmation for big players on Wall Street that actually the economy is doing pretty good from their point of view. From their point of view, if they’re getting 100 percent of the economy’s income gains, well, they may care as people about the unemployed, but that’s really not their concern.
JAY: Yeah, it may be the other way around. If unemployment had actually gone down more significantly, it may be the market would have gone down.
POLLIN: That’s possible, and that’s always the tension that’s there. If the unemployment rate really went down sharply, then Wall Street would certainly be concerned that workers’ wages would go up because workers would have more bargaining power. But instead we see the imposition of austerity.
Again, The New York Times had an article on the impact of sequestration as it’s being spread throughout the country. So what do we see? We see Head Start programs, you know, preschool education programs for kids that have been demonstrated by conservative University of Chicago economists to have a, you know, major positive effect on kids’ well-being, these things are being cut. The Times talked about the closing, layoffs, at a cancer treatment center in Birmingham, Alabama. It talks about cutting free transportation for kidney patients to a dialysis center in Ohio.
So these are the things that are going on now. This is austerity American style–not as severe, as yet, as austerity European style, but plenty severe enough. And the arguments for austerity have evaporated, the analytic arguments, starting with Reinhart and Rogoff. Nevertheless, we proceed.
JAY: And maybe it’s a political win-win for the Democrats and Republicans, leadership at least, because both of them really do want some kind of cuts, but they’ve been able to do it with sequestration that they both get blamed, so nobody gets blamed.
POLLIN: Well, yeah. It’s kind of letting the conventional wisdom and the political center in Washington just proceed ahead as if conditions for these 21 million people who are out of work or underemployed don’t really matter that much, as if cutting, you know, the free transportation to kidney dialysis center–what does it–that doesn’t really matter much. Cutting Head Start, okay, not really a big deal. But the stock market is doing fine. That’s where we are.
And this is all–the foundation for this is austerity economics, which, as we’ve now discussed a couple of times, doesn’t have any intellectual foundation.
JAY: But part of this is also their assumption that the system always comes back. You know, wait long enough, there will always be a recovery. But I’m not sure why does there need to always be a recovery. Like, they’re talking about this slow recovery because of the cutbacks in public spending, but, I mean, slow–slow could be decades.
POLLIN: Slow could be decades. What we’re looking at, the pace at which the unemployment rate is coming down, if nothing else were to happen but if we just kept continuing reducing unemployment at the rate that it’s going, well, you know, we’re going to be into 2018 before we even see 5 percent unemployment.
And, actually, again, there was no improvement when we take the broader measure. This was not part of the headline. I mean, the headline was unemployment goes down, stock market boomed on Friday. But even by the official measure, it went down by a miniscule amount. By the broader measure, it actually went up a little bit. The stock market still boomed.
And then we still have sequestration going on. Now, yeah, in Congress they’re talking, how do we get around these sequestration cuts for the military. But they’re not talking about how do we get around, how do we stop sequestration cuts for preschool education. That’s not even on the agenda.
JAY: Alright. Thanks for joining us, Bob.
POLLIN: Thank you very much, Paul. Thank you for having me.
JAY: And thank you for joining us on The Real News Network.
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