Reading the new issue of Discover

In the recent Discover magazine I turn the page and find this:

Improve Medical Research, Scrap Funding Model

For nearly seven decades, federal agencies and many private funders have financed medical research through competitive grants to individual scientists who submit proposals for particular projects. This system is intended to match available funds with the best researchers and ideas.

But today's competition for limited grant money encourages overly safe research, aimed more at producing positive results to bolster future proposals than at breaking new ground. The current system discourages high-risk, high-payoff science...

I don't need to read any more. I already have a response.

The first paragraph sets the stage by describing the how and why of funding for science. The second paragraph describes problems with that system. Between the two is a transition phrase: "But today's competition for limited grant money..."

That's the problem, right there. The money. Problems with money create other problems. And then people write articles proposing to fix those other problems by changing the way things have been done for seventy years or more.

It may be a way to cope, but it does not solve the real problem.

Opportunity cost

If I spend enough time mowing the lawn and doing yard work, then I don't have enough time to write a post every day for the blog. I hope to catch up this weekend.

Reverse debasement

Just some loose ends, not a complete idea. But I need a post this morning, so I'll call this a post.

I found a U.S. Silver Coin Melt Value Calculator. They provide a list of silver coins, with face value, weight, percent silver and other data. I typed in a quantity of one for each of the coins on the list.

Total face value: $7.85

Total value of silver: $239.27 (based on the current price of silver just a few days ago).

The value of the silver in those seventeen coins is more than 30 times the face value of the coins.

A Jefferson nickel, containing only 30% silver, contains $1.31 in silver. In a nickel.

But you know what really gets me? The Kennedy half dollar issued in 1964 contains $8.42 worth of silver at recent prices. But the Kennedy half issued in 1965 contains only $3.44 silver. Because after 1964 the silver content dropped from 90% to 40%.

The issue of dimes and quarters containing 90% silver, if I read the list right, also stopped at 1964. I vaguely remember. (I was in high school.) Wikipedia confirms.

Clearly, before 1965 the people in charge of issuing our coins knew they could not continue to issue coins containing 90% silver, or people would melt them down to make money on the silver in the coins. It's Gresham's law: Bad money drives good money out of circulation.

It's also a kind of reverse debasement: The government had to take silver out of the coins, because the coins were getting to be worth less than the silver was worth.

Usually, when I think of debasement, I think of the money becoming worth less because the government reduces the silver content. That's not what happened here.

A Krugman meme?

In Government Debt and Economic Growth (Economic Policy Institute, July 26, 2010) Josh Bivens and John Irons write:

The GITD threshold rests on a simple correlation of high debt levels with slower growth, but no evidence on causality is given. This is important given that contemporaneous causality is actually more likely to run in the opposite direction that what is claimed in the report. That is, causality is more likely to run from slow growth to high debt levels, and this alternative explanation is even supported in the GITD data.

In Not to Pile On, But…Correcting Reinhart and Rogoff (On the Economy, Apr 16, 2013) Jared Bernstein writes:

As I’ve written many times, riffing off of Bivens and Irons for one, if you mush everything together they way they do, you’re likely to get the causality backwards. You’ll convince yourself that higher debt leads to slower growth when it’s more often the opposite.

In Debt and Transfiguration (The Conscience of a Liberal, March 12, 2010) Paul Krugman wrote:

I’ve been going through this chartbook somewhat in tandem with rereading the recent Reinhart-Rogoff paper on debt and growth (subs. req.) — the one that’s being widely cited as evidence that bad things happen when debt goes above 90 percent of GDP...

What I think I’m seeing, although I haven’t tested this carefully, is that the causal relationship largely runs from growth to debt rather than the other way around. That is, it’s not so much that bad things happen to growth when debt is high, it’s that bad things happen to debt when growth is low.

This is definitely the case for the United States...

So, as I wrote before,

Paul Krugman argued against the view that a high level of debt causes problems in the economy. Inadequate growth, he said, makes debt appear excessive. He thinks the people who worry about the debt have cause and consequence reversed.

We see now that Josh Bivens and John Irons have the same idea, as does Jared Bernstein, and Arindrajit Dube, and probably many, many others.

I don't care. If you are evaluating the work of Reinhart and Rogoff, evaluating their analysis of Federal debt and its impact on growth, how are you going to deal with the fact that other debt has grown to be a far bigger number than Federal debt, and carries far greater cost?

Do you just assume it away with an implicit ceteris paribus?

The only way to deal with "other" debt is to consider it, in your studies of debt. If other debt is not constant -- and you know it is not -- then by ignoring it you invalidate your own study of central government debt.

In my simple view, the Reinhart and Rogoff study is completely invalid because it ignores debt other than central government debt. In everybody else's view, it seems the R&R study is great, except they got the causality wrong.

So, who has the better argument?

Just checking

Responding to their critics, R&R link to their data from This Time Is Different. I visited their data.

I browsed by country, clicked on the United States, and clicked on Debt to GDP Ratios. Nothing seemed to happen, so I clicked it again. Then I checked my downloads folder and found two copies of their Excel file.

Then I bothered to read the twice-clicked Debt to GDP Ratios line: Debt to GDP Ratios country T-Z.xls, it says. See those last three letters there? XLS? I might have known it was downloading an excel file, if I read all the way to the end.

Well, that's all the funny stuff for today.

So I looked at the file. It defaults to a Contents sheet identifying the authors (a useful detail) and lists the countries for which the numbers are presented on other sheets; that's a nice touch.

I went right away to the US data. The data sources are identified, and three columns of Debt/GDP numbers are provided, along with a "Year" column, of course.

The three different measures are

1. Total (domestic plus external) gross central government debt/GDP (1790-2010)
2. Total (domestic plus external) gross general government debt/GDP (1980-2010)
3. Total (public plus private) gross external debt/GDP (1970-2010)

I want to see how these measures compare to FRED's "Total Credit Market Debt Owed" (TCMDO), to the Federal government's portion of TCMDO, and to the Gross Federal debt. To make the comparison I'll show the FRED measures as debt/GDP, the same as Reinhart and Rogoff do.

The FRED numbers are all annual data, same as R&R. The start dates on the FRED numbers vary. Three of the series start at 1950, one at 1939. So I deleted R&R values from before 1939, leaving a minimum of two series to look at:

FRED's "Total Credit Market Debt Owed" (Green) Towers Above All the Rest

The R&R debt numbers most certainly do exclude most of the debt in the US.

One other interesting thing on this graph: a significant increase in US "external" debt, as shown by the "R&R External" item.

Do we really want to wait till things are that bad?

Via George Washington's blog at ZeroHedge, Reinhart and Rogoff: Responding to Our Critics by Carmen M. Reinhart and Kenneth S. Rogoff:

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

This view generally reflects the state of the art in economic research...

Let me shorten that up and say it again:

“Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative...”

So the focus of state-of-the-art economics is to find the point where adding one more dollar of debt stops making GDP go up and starts making GDP go down.

What possible object could there be to that effort? It can only be so that we might manage to come as close as possible to the threshold without crossing it. That may be state of the art, but it sure ain't the state of Arthurian.

Look: Debt productivity has been declining for a long time. The increase in GDP we get per dollar of new debt has been declining for a long time. And that's not just Federal debt. It's all of our debt. Increasing debt makes economic performance decline.

If it is true that increasing debt makes economic performance decline, then why would we want to push it close to the limit where "the correlation between debt and growth becomes negative"? This is like saying "Adding more debt is not okay if it takes away even a tiny bit of GDP, but it is okay as long as it adds to GDP, no matter how little it adds."

But it's not okay with me. As I see it, our economy can grow at maybe 4% per year. If it's only growing 3% I look first to accumulating debt to account for the 1% loss of growth. If it's only growing 1.5% I look first to accumulating debt to account for the 2.5% loss of growth. If the economy crosses the threshold and growth "becomes negative" at -0.1% say, then I look first to accumulating debt to account for the 4.1% loss of growth.

The point is, it's not okay to get one or two percent growth. It's not okay to keep getting less and less growth while more and more debt accumulates, and then only stop just short of zero growth. It's not okay. We need to stop debt accumulation when it starts to hinder growth; this is how we define the maximum acceptable level of finance for our economy. A level of finance something like we had in the 1960s, the early 1960s, is my target.

So the state of the art in economics seems to disagree with me: They are wrong.

And just to be clear on this: When I say "I look first to accumulating debt" to account for the loss of growth, I don't just mean the Federal debt. I mean all of our debt.

Other Things Equal

Partial derivative

From Wikipedia, the free encyclopedia

In mathematics, a partial derivative of a function of several variables is its derivative with respect to one of those variables, with the others held constant...

I first ran into the phrase ceteris paribus many years ago in Maynard's General Theory. It means "other things equal" or "everything else unchanged". It lets you consider the effect of a change in one factor, uncomplicated by the fact that everything in the economy is related to everything else.

Ceteris paribus

From Wikipedia, the free encyclopedia

A ceteris paribus assumption is often fundamental to the predictive purpose of scientific inquiry. In order to formulate scientific laws, it is usually necessary to rule out factors which interfere with examining a specific causal relationship...

One of the disciplines in which ceteris paribus clauses are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant.

(Hesitantly) Okay...

According to the Wikipedia article, the concept is used "to consider the effect of some causes in isolation, by assuming that other influences are absent."

But you have to remember it's an assumption. The purpose of "other things equal" is to help to focus on the one topic under consideration, and for that it is most effective. But it's only an assumption, not the reality. If you happen to be arguing (PDF) that "average growth falls considerably" when government debt reaches "a threshold of 90 percent of GDP", it helps to assume that nothing else is changing. So then, the results that you see can only have been caused by the cause you describe.

If we are looking at increasing debt as the cause of slowing growth, and you want to focus on the Federal debt as the cause, then you have to assume that debt other than Federal debt didn't change at all. Because if "other" debt increased a little, it may share a little of the blame for slowing growth. And if other debt increased as much as Federal debt, it may share equally in the blame. But if other debt increased more than Federal debt, perhaps it is "other" debt that should get most of the blame for slow growth.

In the graph below, the blue line shows the gross Federal debt as a percent of GDP. The red line shows "other" debt as a percent of GDP. The green line is a benchmark showing 90% of GDP.

Graph #1: Debt as the Cause of Slow Growth

Assume there was no increase in debt other than Federal, and we can say the Federal debt must be responsible for slow growth. But I just can't bring myself to say it.

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:

1945-2009
	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)
1800-2009
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

A second look

Marcus takes a second look at government spending relative to GDP, and its relation to economic growth.

It may be easier to see the circularity in Marcus's analysis if I say he is looking at government spending relative to GDP, and its relation to changes in GDP. For if we're looking at changes in GDP, those changes will have to have an impact on the ratio called "government spending relative to GDP".

Marcus has an interesting approach. He considers a long period (1960-2007) and looks at government expenditure as a percent of GDP at the start and end of the period. He then looks at RGDP growth near the start and near the end of the period.

He looks at data for a dozen countries. I will look at just one of them. The US was at the top of his list of twelve, as this clip shows:

Part Screen Capture of Marcus's Table

I took Marcus's Gov. Expenditures (GX) numbers along with start- and end-year RGDP values from FRED, put them into a Zoho spreadsheet, and calculated US government expenditures in inflation-adjusted dollars.

// UPDATE: After a recent Zoho update, their spreadsheet now "takes the focus" when the page loads, and the screen jumps to make the Zoho sheet visible on-screen. Took me a few days to figure out a fix for this. I put the Zoho sheet into a "spoiler" that remains hidden until you click this text to make the Zoho sheet visible... (I'm disabling the spoiler.)

//UPDATE: But now it never loads... I'm about to give up on Zoho.

//UPDATE 7 May 2013: IT WORKS!!!!! Thank you, Zoho Support.



Then I took Marcus's Real GDP Growth numbers and put them on row 8. And I said to myself: I wonder how things would have looked if RGDP growth stayed at the high rate of the early years, 4.3% annual, rather than dropping off so much...

So I took the start-year RGDP value and Marcus's annual growth rate and put them into a compound-interest formula from Chron to see what the end-year value of RGDP would be in 2007, after 47 years. (Cell E10.)

You can check my math. I think it's good.

Anyway, after 47 years of 4.3% growth RGDP would have been 20 460 point 6. With the less impressive growth that we actually had, RGDP was 13 206 point 4. So, 20 versus 13, a pretty big difference.

So now we can take the government expenditure number for 2007 from cell C5 and look at it as a percent of the impressive RGDP number, and compare that to Marcus's GX/GDP number in cell C3.

Okay. Back in 1960 GX was 28.4% of GDP. Then, given the suck-ass GDP growth that we had for the last 40 years, in 2007 GX was way up high, at 36.7% of GDP. But if growth had continued at the early-years rate, US government expenditures would have fallen from 28.4% to 23.7% of GDP.

And I'm not fiddling with the government spending numbers. Just looking at what-if growth. So what I'm saying is that US government expenditure growth slowed since 1960, just not as much as GDP growth slowed.

How we get from that, to the idea that increasing government expenditure is the cause of slow GDP growth, the logic escapes me.