But Austerity Perseveres

R&R did not create austerity – discrediting them will not kill it.

If you’ve been reading about the Rogoff and Reinhart incident this week, most everyone outside of the right wing press is claiming that the austerity argument has now been proven false. If only it were that simple. When Paul Krugman (probably the fiercest critic of austerity on this side of the Atlantic) wrote about R&R last week, he closed his column by saying the following:

“So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.”

Essentially, if it wasn’t R&R, proponents of austerity would have found some other paper by some other economist to back their claims. And most folks on the right are admitting that Excel error or not, debt kills economic growth (just a lot less than we thought it would).

Bob Samuelson committed probably one of the most egregious false equivalences in recent years in his column by referring to the fall-out over the paper a “dispute”, in which one side says X and the other says Y – as though X had not already been proven to be factually inaccurate and misleading.

So what now? For once, we seem to have a good set of economic data that millions of people around the world are familiar with. When debt approaches GDP, growth slows down to about 2%. That’s not great, but borrowing money is always painful. Taking a mortgage prevents you from accessing liquid capital in the short-run, but it is often a sound long-term investment.

Peggy Noonan made the mistake in the Wall Street Journal this week of basically making Obama’ argument for him, by claiming that the jobs crisis is much worse than the debt crisis. The Republican Party will likely pivot soon and start blaming the President for not doing enough for jobs, months and years after they blocked any and all legislative efforts to do something about jobs.

This is the Republican game – don’t let facts get in the way of your agenda. Excel errors do not matter. There are scores of other economists who are willing to stand in for R&R and defend the merits of austerity. While it’s true that Herndon’s work at UMass has exposed bad research and briefly given progressives, and Keynesians, and basically everyone other than right wing fiscal conservatives something to cheer about, I’d be surprised if politicians remember this a month from now. I’m a bit surprised that the coverage over an Excel error in an academic paper has lasted a week already.


Austerity Stumbles

It’s not often that an academic paper makes the headlines. Researchers and professors typically write on obscure topics that are read, if they’re lucky, years later, by a handful of graduate students who are working on their own obscure and imminent-to-be-ignored academic works. Ken Rogoff and Carmen Reinhart were superstars in this respect.

The Rogoff-Reinhart paper, entitled “Growth in a Time of Debt”, was the stuff of legend. Policymakers around the world referenced it when making the case for budget cuts and austerity measures, arguing that running budget deficits would cripple economic growth. In particular, they claimed that when debt crosses the threshold of 90% of GDP, national economies would begin to shrink.

The United States has already crossed that threshold (we’re beyond 100% actually), but our economy continues to grow. It’s growing at a flimsy rate and in a way that does not benefit the country as a whole, but grow it does.

Enter UMass Amhert economics grad student, Thomas Herndon, who did what nobody else did (yeah – the paper was not peer reviewed) and looked over the numbers used by Rogoff and Reinhart (check out the interview between Herndon and Stephen Colbert). It seems R&R forgot to include 5 countries (Australia, Austria, Belgium, Canada, and Denmark) in their final analysis. If you include these countries, economic growth crawls along at about 2%, which is to say that they somehow omitted the countries that maintained high growth in spite of high debt. It turns out the R&R committed a simple Excel spreadsheet error (visual approximation below). Unfortunately, this error led to the false conclusions that were used as ammunition to sell austerity measures all over the world! RandR Excel error

This is all very embarrassing for R&R and those who cited their paper, but if you think this means much in term of policy, think again. John Maynard Keynes once wrote:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Although I respect Keynes, I think we’d disagree on the extent to which economists and their ideas are pawns of politicians. I’ll tell you why tomorrow.

Is College Worth it? Part 3: Learning

We are filling colleges with too many unprepared students who don’t want to be there in pursuit of a misguided idea of prestige.

For most middle class American families, the four year undergraduate college experience has (de)generated into merely an expected step in the process – motions rather than actions. As discussed in part 1, college grads have more jobs than non college grads. So far, the remedy for this gap has been, let’s put everyone in college. Well, perhaps not everyone is meant for college (read till the end before sending hate mail).

I do not mean that certain students are not “good enough” for college. Rather, we must change our understanding of the term “good enough”. Rick Santorum recently referred to President Obama as a snob for supposedly saying that all Americans should go to college. Santorum defended those who were “gifted with their hands” implying that Obama wishes to herd everyone to the base of his ivory tower. Santorum is either a fool or a liar because he and the President actually agree on this issue. 

Germany and much of northern Europe have maintained a competitive advantage in manufacturing by supporting a system of vocational education built around developing skills necessary for a robust and productive industrial sector. Our politicians all pay lip service to the blue collar work ethic, but increasingly, parents and employers look down on those who don’t work at a desk. We enjoy watching Deadliest Catch on TV, but God forbid if one of our kids wants to catch fish for a living. How many times have we heard someone say something along the lines of “study hard, or else you’ll end up a janitor”. No wonder kids feel pressure to sign up for degrees they don’t want and can’t afford.

I learned a lot in college. I’m sure many of you have as well. But of course you did – it would be near impossible to progress through your first few years of adulthood without learning anything. The point is, how much did college instruction have to do with it, and was it worth the cost to you, your family and society?

College is no longer primarily a place for learning. A recent book, Higher Education?, argues that teaching has taken a back seat to research. Even small colleges put so much pressure on their faculty to publish that they often have no time to actually teach. College and university rankings rely heavily on the extent to which an institution’s publications are cited by other publications. But is writing an arcane article on Chaucer’s diet more important than helping students grasp the basics of English literature? We are losing our way and academic scholarship is the currency with which we are selling our souls for prestige.

Another book, Academically Adrift, argues that our colleges are caught up in a public relations arms race in which they are watering down curricula and standards so as to graduate more students and make short-term gains against their peer institutions. Professors are scared of giving bad grades. The end result is that students leave college without having acquired important skills like critical thinking, complex reasoning, and writing.

Even critics feel that the US university system is still the envy of the world. But much of that is based on inherited prestige from our graduate programs, which rely heavily on being able to attract the best and the brightest from around the world. If we continue to send more kids to college than we should, it’s only a matter of time before we have yet another debt crisis and a collapse in confidence in an already overvalued product that often fails to deliver on its promises.

Is college worth it? Yes, but we should really be encouraging high school graduates to genuinely consider all their options and support them if they choose something other than a 4-year degree. By channeling students to build off of their actual interests and capabilities, we will certainly produce both better mechanics and better writers.

Is College Worth it? Part 2: Cost

College degrees may no longer get you a job, but tuition costs continue to rise and student debt continues to accumulate.

I spent 4 years at a private liberal arts American college where the cost of tuition and board was about $35,000 per  year (for the current academic year, the amount is $55,450). I then spent two years in India, pursuing a masters degree, where the total cost was $1,200 per year.

Both schools provided me with an excellent education, but one was 30 times more expensive. Sure, the facilities at my undergraduate college were much better, but was it worth more than half of my parents’ combined salary? In reality, I actually only paid about a quarter of the full tuition because of various grants made possible by the college and the Federal Government. And then there were loans. By American standards, I was fortunate to walk away from college with only about $15,000 in student debt.

Every year, the Federal Government provides more than $150 billion in post-secondary financial aid – mostly through low interest, easy to get loans. Sound familiar? Government backing makes it very easy for students, many of whom are not ready to take on such a burden, to access large amounts of credit. As of last year, Americans had more student loan debt ($867 billion) than credit card debt ($704 billion). Even more modest calculations show a huge (511%)  increase in tuition in just over a decade.

In the previous post, I described how a college degree is still the best way to get a good job, but no longer a guarantee for one. Some folks believe that the cost of tuition has finally reached a tipping point and that it is no longer worth it, even for a job. Peter Thiel, co-founded of PayPal, started the Thiel Fellowship, which pays 20 students (all under 20 years of age) $100,000 to not attend or drop out of college and pursue their entrepreneurial ambitions. Peter Thiel and I may not see eye to eye on most things political and economic (here’s why), but I think we both agree that $200,000 is too much to pay for college.

Attending a four year private college is tantamount to undertaking a mini-mortgage for most students. There are some unnerving similarities between the housing mortgage crisis and our current education system:

  • cheap government-backed credit encourages unreasonable and unsustainable increases in price.
  • if the public/market decides that a product is overvalued, then the correction for overvaluation will be painful – yet another round of defaults, bailouts and hindsight finger-pointing.
  • folks were given far too many incentives to make purchases and undertake loans that they were not able to afford. 
On this matter, even Peter Thiel and Bill Maher seem to agree.

In Part 3, we will look at whether or not our undergraduate colleges actually teach students anything.

Blame Germany Too!

Everyone is blaming Greece and the rest of the PIGS but let’s take a look at who benefited the most from the formation of a currency club that was supposedly too large to begin with.

The Euro has depreciated against the US Dollar by about 15% since it’s 2011 peak of almost 1.5 Dollars for every Euro. Many have argued that the Euro was overvalued for years and that currency markets are merely correcting for past discrepancies. Even during the Euro’s heyday, the imbalances between Europe’s rich north and “poor” south benefited the likes of Germany who were effectively working with an undervalued currency, whereas Greece had to deal with an overvalued currency. This was a boon for German exports in that they artificially deflated the price of German goods on the international market.

Now, as the Euro has lost some of its value, and the rest of the Eurozone considers kicking Greece out of the club, Germany stands to gain the most once again. As long as Germany is entwined to its poorer neighbors, its currency will be valued lower than it otherwise would have been – the more poor the country, the more likely that the Euro would be undervalued. Any depreciation in the exchange rate benefits the Deutsche economy. Germany is already the second largest exporter in the world and has recently held the top spot if only for a few months.

Furthermore, the capital rich countries of Europe’s economic core were more than eager to lend money to the peripheral countries at high interest rates – fuel to the fire! For years, Germany has been riding the wave of an undervalued currency and cheap markets for their surplus capital; and when the problems began to emerge, all fingers started to point towards the south. It seems like another case of a drug dealer blaming the user.

Germany, more than any other country, has benefited from the Eurozone’s premature expansion and subsequent fall. They should be the last to complain.