This Time is Different: Fiscal Discipline Not Required

This time is different. Each time a literature or study proposes to show that government discipline is required to avert a crisis, some rejoinder will be issued to justify the opposite.

From Bloomberg,

A paper by Harvard University economists Carmen Reinhart and Kenneth Rogoff that has been cited by Republican lawmakers to justify eliminating the budget deficit contains “serious errors,” according to a study by a group of University of Massachusetts academics.

The Reinhart-Rogoff paper, “Growth in a Time of Debt,” argued that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth.

The new study -- by economists Thomas Herndon, Michael Ash and Robert Pollin -- says that the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.

This led to “serious errors that inaccurately represent the relationship between public debt and growth,” Herndon, Ash and Pollin said in the paper published yesterday.

In an e-mail, Reinhart and Rogoff defended the conclusions of their 2010 paper and said that “on a cursory look” the new study also finds growth slowing in nations with excessive debt. “We literally just received this draft comment, and will review it in due course,” they said.

Ash said in a telephone interview that his paper does show “a modest diminishment of growth” in countries with big debts yet nothing like “the stagnation or decline” seen in the study by Reinhart and Rogoff.

Note: The kernel of the paper’s objection to Rogoff-Reinhart’s study: “modest diminishment” versus “stagnation”.

More of Reinhart-Rogoff response at the Wall Street Journal Blog, they rebut,

cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.

Based on the Bloomberg article, the critique is an example of the silly quibbling over statistics while ignoring of the real human effects of a debt laden economy (mostly hobbled by higher taxes, financial repression, byzantine regulations and politicization of markets--all of which diminishes growth and whose economic losses will never be captured by data). 

While I am no big fan of Professors Reinhart and Rogoff, for what I see as their skewed views of capital flows and their advocacy of inflationism as means to reduce debt, at least they recognize of the hazards or of the perils of a leveraged economy from their chronicles of 8 centuries of crises.

As Carmen Reinhart and Kenneth Rogoff writes in their book This time is different Part I Financial Crisis: An Operational Primer (bold mine)

The essence of this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provokes a crisis of confidence that pushes it off.

For the mainstream: This time is different. Yes, this is mania at its finest.