Saturday, April 27, 2013

How can you even know if it's not a problem?

"Not One Word"

From Ash and Pollin's response to "Reinhart-Rogoff Data Problems":

For starters, let's just be clear that there is not one word in our paper that suggests that one should never, categorically, worry about high sovereign debt loads.

They are quite clear, I think. And they make a good point: It is important not to write things off, not to simply dismiss things that could be a problem, not to be categorical about things, ever.

Crossing 90

The blue line on the graph below shows Gross Federal Debt relative to GDP. That's the thing that may or may not become a problem when it crosses 90%, per Ash and Pollin.

The green line is 90%.

The red line is the problem.

BLUE: Gross Federal Debt as a Percent of GDP
RED: Debt Other Than Federal Debt, as a Percent of GDP
GREEN: Shows 90% of GDP

A Thing Unseen

At Econbrowser, James Hamilton reproduces Reinhart and Rogoff's summary of differences in the bottom-line claims between their "Growth in a Time of Debt" paper and the Herndon/Ash/Pollin takedown paper:


RR AER (2010)
HAP (2013)
Debt/GDP Mean Median Mean Median
0 to 30 4.1 4.2 4.2 NA
30 to 60 2.8 3.9 3.1 NA
60 to 90 2.8 2.9 3.2 NA
Above 90 -0.1 1.6 2.2 NA
RR AER (2010) (Table 1)
0 to 30 3.7 3.9 NA NA
30 to 60 3.0 3.1 NA NA
60 to 90 3.4 2.8 NA NA
Above 90 1.7 1.9 NA NA
RRR JEP (2012),
1800-2011 Mean

Below 90 3.5

Above 90 2.4

What's missing from all these numbers?

There is absolutely no reference to private debt. It's all a look at public debt. All of it. And let me point out, not only Reinhart and Rogoff but also Herndon, Ash and Pollin ignore private debt. As does James Hamilton.

How are you gonna solve a problem if you never look at it? How can you even know if it's not a problem?

Related post: Growth in a time of icebergs


paul said...

Art, here's a problem...

Gene Hayward said...

A very poor analogy I will use with my HS students that they will understand: The blue line is the economy. The Green Line is a squirrel in the middle of the road. We swerve to miss the squirrel(MUST avoid that 90% squirrel!!) and think we are free and clear (and proud of ourselves) until we hit the 1,000 pound bear standing on the Red Line. Guess a better choice would have been to run over the squirrel. But the bear still exists, waiting for us to drive around the block.

I will work on it before class... :)

The Arthurian said...

Gene, I have such trouble coming up with good analogies. In general, anymore, if I wake up in the middle of the night with a good phrase about the economy, I get up immediately and start to write. 2, 3 in the morning, no matter. By 4 AM it will be gone.

The Arthurian said...

I love it when the year values get a comma to separate thousands from hundreds... :)

Thanks, Paul -- Now I have some idea what NFA might be -- "sum of Federal deficits, less net exports"
In other words, the money the government put into the economy, less the money that left the country. Okay, good.

Oh, but when I tried to duplicate the graph it didn't come out the same as yours. Paul, help me understand what NFADOM is.

NFADOM = Net Financial Assets (domestic)

In the middle of the graph it says
Ratio of Private Debt to domestic NFA (∑ Deficits - NETEXP)
I assume the part in parentheses there is a definition of "domestic NFA"
The "Private Debt" is CMDEBT or the other FRED debt items.

So if (∑ Deficits - NETEXP) = domestic NFA,
then I think (the Federal debt - NETEXP) = domestic NFA
Should be close, at least. Am I missing something here?

For the Federal debt I used FGTCMDODNS at FRED, a value somewhat less than Gross Federal Debt.
NETEXP is a FRED series
CMDEBT is a FRED series
So for the Ratio of Private Debt to (∑ Deficits - NETEXP) I used

It shows me this.

It is a significant graph -- I've done several showing that same general shape -- but it looks nothing like the graph you showed me.

So now I'm at a loss. Can you help me duplicate your graph?

paul said...

Art, if you sum all the deficits it's greater than Debt Held by the Public...there's net cash in the system. The difference is about $2T.

Proof that money can be spent into the economy without issuing debt if the government wants to.

So NFA is not equal to Debt Held by the Public minus NETEXP.

Total NFA includes NETEXP...I just focused on the domestic economy for this graph.

There is little doubt that NFA creation supports the credit system in my view. Since government spending tends to go to saving (accumulation) this is an ongoing process not a pump-priming operation. No system is self-sustaining.

I think this idea also supports the points you have been making about private debt, which I look at as like pushing a ball up a hill or creating a vacuum...the pressure is always on for that system state to revert to a stable equilibrium...when it does the bubble deflates.

paul said...

Art, one more clarification...

most FRED series are running totals...accumulations.

Deficits and Net Exports are expressed as annual change, so I converted them to running totals...(the balance column in your checkbook).

Further, I didn't use the FRED series for deficits...I used Treasury historical's the Excel file...

The Arthurian said...

Ok Paul, the mowing is done and I am starting to look at your stuff. Thanks. Your comments above help.

(After I satisfy myself that I understand the graph by successfully duplicating it, then it will be easier for me to think about what the graph shows.)

I'll get back to ya.

The Arthurian said...

"...if you sum all the deficits it's greater than Debt Held by the Public"

Paul, I have in mind to use your observation as the basis for one or more posts. (Let me know if that's not okay.)

What I'm looking at so far is the Sum of Deficits from various sources and the Measures of Debt from various sources.

Both links bring up Google Drive spreadsheets.

A third sheet will compare the various measures of debt with the various sums of deficits. Didn't start that one yet.

paul said...

Art, be my are a much better story-teller than me.

Steve Roth said...

Keep at it! Good job.

For public debt, BTW, it's generally best to cite "Debt Held by The Public" as opposed to Gross Public Debt. (Wondering why people are confused...?) This excludes amounts the government owes to itself (SS and MC trust funds, mainly), and this measure is well below 90% of GDP.

Steve Roth said...

When that measure says "held by the public," btw, that includes "held by the Fed." So one might want to deduct that as well.

The Arthurian said...

Thanks, Steve.

Jever notice, the people least concerned about the Federal debt generally use the lower ("Held by the Public") number, while those most concerned generally use the higher ("Gross debt") number...

I think both sides' arguments are weakened by those choices.

But yea, "held by the Fed" is a different matter altogether. That should not count as debt, at all.

Found it!