Can President Obama's New Metrics Curb College Costs?

Aug 23, 2013Mike Konczal

(Photo Source: White House)

President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

(Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

Follow or contact the Rortybomb blog:

  

 

(Photo Source: White House)

President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

(Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

Follow or contact the Rortybomb blog:

  

 

College graduation banner image via Shutterstock.com

Share This

Whatever Happened to the Economic Policy Uncertainty Index?

Aug 6, 2013Mike Konczal

Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity is working out from the vantage point of this year. Now he looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013.

And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen?

I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around.

Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and "harmful rhetorical attacks on business and millionaires" were the cause of prolongued economic weakness.)

As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

Let’s take a look at the graph of EPU. When most people discuss this, they argue that the peaks tell them the index is onto something, as it peaks during periods of major confusion (9/11, Lehman bankruptcy, debt ceiling showdown).

But what is worth noting, and what drives the results in a practical way, is the increase in the level during this time period. And that happens immediately in January 2009:

How does economic policy uncertainty jump the first day in 2009? The index has three parts. The first is a newspaper search of people using the phrase “economic policy uncertainty.” I discussed that last fall, arguing that it was mostly capturing Republican talking points and the discipline of the GOP machine rather than actual analysis.

The second is relevant here, and that’s the number of tax provisions set to expire in the near future. (In the first version of the paper this was total number of tax provisions, while in the current version it’s total dollar amount of those provisions.) It’s heavily discounted, so tax cuts that are expiring in a year or two are weighted at a much higher level than those that are further in the future.

What does this look like over the past few years?

So what happened starting in early 2009? The stimulus, of course. And the stimulus was in large part tax provisions that were set to expire in two years. This mechanically increased economic policy uncertainty, even though it was a policy response designed to boost automatic stabilizers. Also, the Bush tax cuts were approaching their endgame, and the algorithm gave a disproportionate weight to them as they entered their last two years.

Then, in late 2010, the Bush tax cuts and some tax provisions from the stimulus were extended to provide additional stimulus to the economy while it was still weak.

Here’s how the creators of the index describe this move: “Congress often decides whether to extend them at the last minute, undermining stability of and certainty about the future path of the tax code... Similarly, the 2010 Payroll Tax Cut was a large tax decrease initially set to expire in 1 year but was twice extended just weeks before its expiration.”

But this decision was not orthogonal to the state of the economy. A major reason the administration waited and then extended the Bush Tax Cuts and the payroll tax cut was the fact that the economy was still weak, and they wanted to boost demand. The only policy uncertainty here was how aggressive and successful the administration would be in securing additional stimulus, which itself was a function of the weakness of the economy. To retroactively argue that the government’s actions in securing additional demand were creating the crisis they are trying to fight requires an additional level of argument not present.

The third part of their index has the same issue. They draw on a literature (e.g. here) that uses disagreements (dispersion of predictions) among professional forecasters as a proxy for uncertainty -- disagreements about the predicted growth in inflation, and predictions of both state and federal spending, one year in advance.

The problem comes from trying to push their definition of EPU onto these disagreements. Debates over how much the federal government will spend through stimulus, how rough the austerity will be at the state level, or how well Bernanke will be able to hit his inflation target, which drives this index, are really debates about the reaction to the crisis. The dispersion will increase if people can’t figure out how aggressively the state will respond to a major collapse in spending. But this is a function of a collapsing economy and how well the government responds to it, not the other way around.

This is why we should ultimately be careful with studies that take this index and plop it into, say, a Beveridge Curve analysis. As Tankersley notes, the government decided to fight a major downturn with stimulus, and the subsequent move away from stimulus before full employment hasn’t helped the economy. In other breaking news, if you carry an umbrella because it is raining, and then toss the umbrella, it doesn’t make it stop raining.

Follow or contact the Rortybomb blog:

  

 

Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity is working out from the vantage point of this year. Now he looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013.

And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen?

I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around.

Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and "harmful rhetorical attacks on business and millionaires" were the cause of prolongued economic weakness.)

As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

Let’s take a look at the graph of EPU. When most people discuss this, they argue that the peaks tell them the index is onto something, as it peaks during periods of major confusion (9/11, Lehman bankruptcy, debt ceiling showdown).

But what is worth noting, and what drives the results in a practical way, is the increase in the level during this time period. And that happens immediately in January 2009:

How does economic policy uncertainty jump the first day in 2009? The index has three parts. The first is a newspaper search of people using the phrase “economic policy uncertainty.” I discussed that last fall, arguing that it was mostly capturing Republican talking points and the discipline of the GOP machine rather than actual analysis.

The second is relevant here, and that’s the number of tax provisions set to expire in the near future. (In the first version of the paper this was total number of tax provisions, while in the current version it’s total dollar amount of those provisions.) It’s heavily discounted, so tax cuts that are expiring in a year or two are weighted at a much higher level than those that are further in the future.

What does this look like over the past few years?

So what happened starting in early 2009? The stimulus, of course. And the stimulus was in large part tax provisions that were set to expire in two years. This mechanically increased economic policy uncertainty, even though it was a policy response designed to boost automatic stabilizers. Also, the Bush tax cuts were approaching their endgame, and the algorithm gave a disproportionate weight to them as they entered their last two years.

Then, in late 2010, the Bush tax cuts and some tax provisions from the stimulus were extended to provide additional stimulus to the economy while it was still weak.

Here’s how the creators of the index describe this move: “Congress often decides whether to extend them at the last minute, undermining stability of and certainty about the future path of the tax code... Similarly, the 2010 Payroll Tax Cut was a large tax decrease initially set to expire in 1 year but was twice extended just weeks before its expiration.”

But this decision was not orthogonal to the state of the economy. A major reason the administration waited and then extended the Bush Tax Cuts and the payroll tax cut was the fact that the economy was still weak, and they wanted to boost demand. The only policy uncertainty here was how aggressive and successful the administration would be in securing additional stimulus, which itself was a function of the weakness of the economy. To retroactively argue that the government’s actions in securing additional demand were creating the crisis they are trying to fight requires an additional level of argument not present.

The third part of their index has the same issue. They draw on a literature (e.g. here) that uses disagreements (dispersion of predictions) among professional forecasters as a proxy for uncertainty -- disagreements about the predicted growth in inflation, and predictions of both state and federal spending, one year in advance.

The problem comes from trying to push their definition of EPU onto these disagreements. Debates over how much the federal government will spend through stimulus, how rough the austerity will be at the state level, or how well Bernanke will be able to hit his inflation target, which drives this index, are really debates about the reaction to the crisis. The dispersion will increase if people can’t figure out how aggressively the state will respond to a major collapse in spending. But this is a function of a collapsing economy and how well the government responds to it, not the other way around.

This is why we should ultimately be careful with studies that take this index and plop it into, say, a Beveridge Curve analysis. As Tankersley notes, the government decided to fight a major downturn with stimulus, and the subsequent move away from stimulus before full employment hasn’t helped the economy. In other breaking news, if you carry an umbrella because it is raining, and then toss the umbrella, it doesn’t make it stop raining.

Follow or contact the Rortybomb blog:

  

 

Share This

Daily Digest - July 26: The Trouble with Summers's Silence

Jul 26, 2013Tim Price

Click here to receive the Daily Digest via e-mail.

Should Obama pick Larry Summers to head the Fed? (Politico)

Click here to receive the Daily Digest via e-mail.

Should Obama pick Larry Summers to head the Fed? (Politico)

Roosevelt Institute Fellow Mike Konczal writes that while Ben Bernanke led the Fed through a crisis, his successor will need to build consensus and establish the central bank's new normal. That's a problem given that Summers hasn't said a word about the biggest debates he'll have to settle.

Even as economy rebounds, income inequality festers (MoneyWatch)

Charles Wilbanks notes that most American remain deeply dissatisfied with an economy in which workers at the bottom see their wages fall while those at the top are making money hand over fist. And to add insult to injury, taxpayers are forced to subsidize their bosses' raises.

The day the right lost the economic argument (Salon)

Michael Lind argues that President Obama's Knox College speech offered a strong and broadly appealing summary of progressive economic theory focused on manufacturing, innovation, infrastructure, and education, while the House Republicans' alternative plan offered nothing in particular.

Some Democrats Look to Push Party Away from Center (NYT)

Jonathan Martin writes that as Democrats contemplate their future post-Obama, many are advocating for a populist approach to economic policy, financial reform, and rising inequality rather than the murky middle ground that the party's leaders have settled for since the '90s.

White House hardens stance on budget cuts ahead of showdown with Republicans (WaPo)

Zachary Goldfarb and Paul Kane report that the Obama administration may force a government shutdown come September if Republicans in Congress refuse to undo sequestration and continue to demand deeper cuts to a budget they've already carved to the bone.

Congress to Fed: End Too-Big-to-Fail Already! (MoJo)

Erika Eichelberger notes that Dodd-Frank requires the Fed to implement rules to scale back its emergency lending powers, but three years since the law was passed, the central bank still just says it's working on it. Things like this don't happen overnight. Or even over 1,095 nights.

Why 17 liberal senators voted against the student loan "deal" (MSNBC)

Suzy Khimm writes that while the Senate finally passed legislation to address the doubling of federal student loan interest rates, progressives weren't willing to swallow a compromise that lowered students' rates now while guaranteeing they'll have to pay even more in the future.

Share This

Daily Digest - July 24: Don't Copy the U.S. Telecoms Model

Jul 23, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Cable Companies Try to Take Over Europe, Too (Bloomberg)

Roosevelt Institute Fellow Susan Crawford thinks that the leaked European Commission proposal for data communications copies all the worst features of the U.S. model. Encouraging monopoly behavior doesn't increase high-speed access.

Click here to receive the Daily Digest via email.

Cable Companies Try to Take Over Europe, Too (Bloomberg)

Roosevelt Institute Fellow Susan Crawford thinks that the leaked European Commission proposal for data communications copies all the worst features of the U.S. model. Encouraging monopoly behavior doesn't increase high-speed access.

Why CEO Pay Exploded Over The Last 20 Years (HuffPo)

Caroline Fairchild looks at the Roosevelt Institute's latest white paper to discuss how the performance pay loophole has contributed to the explosive growth of CEO pay. Changes in the tax code under President Clinton encouraged a rise in options-based compensation.

  • Roosevelt Take: Read the white paper, "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Roosevelt Institute Director of Research Susan Holmberg and Roosevelt Institute | Campus Network Senior Fellow for Economic Development Lydia Austin here.

Part-Time Work On The Rise, But Is That A Good Thing? (NPR)

Michel Martin questions whether the rise in part-time work could be a positive change. His discussion with Amere Graham, a minimum-wage part-time McDonald's employee, makes it clear that these are in no way good jobs or careers.

The American Dream: Survival is Not an Aspiration (Al Jazeera)

Sarah Kendzior argues that the American dream of upward mobility is dying. In the low-wage service economy, there isn't money to spare for education, while higher-wage industries require unpaid or low-pay short-term positions, blocking out those without money.

Is the US Economy Good, Bad, or In-Between Right Now? (On The Economy)

Jared Bernstein compares the economy to a standard transmission car - we're currently in second gear, but we need policies that will help us to accelerate the economy by reconnecting growth and middle-class prosperity.

The Budget Crisis in Congress's Head (Bloomberg)

Evan Soltas asks why Congressional Republicans are still seeking spending cuts when according to Congressional Budget Office estimates, the crisis is past us. The cuts aren't needed anymore, but the GOP continues to hold fiscal measures hostage to these demands.

Economy: Without Congress, All Obama Can do is Talk (MSNBC)

Suzy Khimm suggests that President Obama is kicking off a series of speeches on the economy because he can't do anything else. Congress isn't taking action, so the President can only point to the issues and assure voters that someone is paying attention.

Share This

Policy Note: Are Less-Visible Taxes Really the Answer?

Jul 1, 2013

Download the policy note (PDF) by Elizabeth Pearson

In a new policy note, Roosevelt Institute | Pipeline Fellow Elizabeth Pearson examines the factors that shape American attitudes toward taxation. She makes the case that public opinion about taxation is malleable and that progressives should focus on raising awareness of the purpose of taxation and the benefits taxes will produce rather than how they are designed.

Download the policy note (PDF) by Elizabeth Pearson

In a new policy note, Roosevelt Institute | Pipeline Fellow Elizabeth Pearson examines the factors that shape American attitudes toward taxation. She makes the case that public opinion about taxation is malleable and that progressives should focus on raising awareness of the purpose of taxation and the benefits taxes will produce rather than how they are designed.

Read the policy note: "Are-Less Visible Taxes Really the Answer?" by Roosevelt Institute | Pipeline Fellow Elizabeth Pearson.

Share This

Governor Cuomo's "Tax-Free New York" Would Come at a High Cost

Jun 13, 2013Richard Kirsch

Eliminating taxes in college communities won't improve the economy, but it will undermine our public institutions.

Eliminating taxes in college communities won't improve the economy, but it will undermine our public institutions.

The decade-long conservative campaign for lower taxes and limited government has hit a wall of public outrage over the unfairness of the American tax system. But while lower taxes for the wealthy and corporations may not be popular, there is still huge public skepticism about how tax dollars can be put to work creating jobs or improving people’s daily lives. Fueling that skepticism are campaigns like that being run now by New York Governor Andrew Cuomo, who is aggressively promoting the idea that we can promote prosperity by lowering taxes.

Governor Cuomo has been racing around New York, with six appearances around the state in less than two weeks, to promote a plan he calls “Tax-Free NY.” Just the name alone should be enough to alarm anyone who understands what society, citizenship. and civilization is all about or what is needed to create broadly shared prosperity. One of a governor’s fundamental jobs is to spend tax dollars wisely, to put the public’s resources to work educating our children, protecting the health of our air and water, building the roads and mass transit systems that allow us to get to work, enjoy community life. and get their goods to market. Taxes pay for public safety and courts that safeguard the rule of law. A “tax-free NY” would be a New York of anarchy, dire poverty, and hopelessness.

Of course, the governor is not really proposing to get rid of all taxes in New York. Instead he would eliminate all taxes – property, personal income, sales, and business – in new tax-free zones established in and around public and private colleges and universities in the state. Every one of these institutions of higher education are supported heavily by taxes in a host of ways: for their very existence and operations in the case of public colleges, and through research grants and government-provided or -guaranteed student grants and loans to private colleges. 

If there is an idea behind the governor’s program, it is that the researchers and thinkers who work in higher education have long made university communities incubators of new businesses. Creating tax-free zones around New York universities is somehow supposed to make them more attractive to business innovation. But Governor Cuomo has this totally backwards. Universities are business innovators because of the creative people who work there. Eliminating taxes around a community college or university does not make the people who teach and do research more creative or innovative. Businesses don’t start in university communities because of low taxes. Businesses are started in university communities because of the quality of the researchers and intellectual richness of the faculty. Attracting and supporting them takes money – from taxes!

As part of Governor Cuomo’s push, I have received two emails from his campaign touting “Tax-Free NY.” The emails are full of quotes from the super-rich promoting the governor’s proposal, including Goldman Sachs CEO Lloyd Blankfein and Jamie Dimon, CEO of JPMorgan Chase. My favorite is from Kenneth Langone, one of the billionaires who tried to defeat President Obama last year: “States need to begin helping businesses by lifting the tax burden and also creating an environment in which employees want to raise their families.” The Blankfeins and Dimons and Langones of this world may live in gated communities, use private education, pay for private health care (at the Langone NYU Medical Center), and enjoy lavish retirements without Social Security, but most other New Yorkers rely on taxes and public programs to help them raise their families.

Of course, Langone – who made his fortune from Home Depot – and the rest of Cuomo’s tycoons would never have become rich without all the public structures that support their businesses and employees. In his advocacy for “Tax-Free NY,” the Governor is encouraging people and businesses to shirk their responsibilities and deny their obligations. The businesses and employees who benefit from the richness of a university community, often marked by excellent schools and libraries and good public services, have a basic responsibility to help pay for the benefits that give them that opportunity.

Building an America that works for all us, with broadly based prosperity, will take leaders who can tell a different story about America – the true story about the great American middle class built by decisions the country made, through our government, to invest in public education, a legal system that protects private initiative, labor laws that protect workers from exploitation, and investment in public infrastructure. That, Governor Cuomo, is also what built New York as the Empire State. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform

Share This

Europe's Austerity Backlash: History Repeats Itself

Jun 11, 2013Mariam Tabatadze

Austerity's failure in Europe was easy to predict, even if politicians and economists didn't see it coming.

Austerity's failure in Europe was easy to predict, even if politicians and economists didn't see it coming.

A few weeks ago we saw an interesting debate unfold in Europe: European Commission President José Manuel Barroso said that austerity in Europe had reached its limit, and a few days later, the German Finance Minister Wolfgang Schaeuble responded, “somebody should tell Barroso” that strict budget rules are not the main issue in the eurozone. Though some politicians are stubbornly refusing to admit that the default policy in Europe for the past three years has been a devastating force, most policymakers and influential leaders are already changing their tunes. The most salient example of this is the IMF, whose Managing Director, Christine Lagarde, has been toning down her austerity recommendations and calling for more gradual reforms. Most recently, she supported the Spanish government’s decision to ease austerity policies and focus on decreasing the alarmingly high unemployment rate (especially among young people, for whom it reaches over 50 percent).

The fact that European leaders are seeing the light of day and turning their backs on austerity is a welcomed development. Perhaps the eurozone has a chance to grow now that governments have stopped purposely crippling themselves. But why was austerity the default policy, and why weren’t its devastating effects foreseen? Since 2010, various European nations have been following the policy prescriptions of right-wing economic thought, and the reality illustrates a strikingly different result than what was expected. Greece’s debt-to-GDP ratio rose from 144.6 percent in 2010 to 170.7 percent in 2012. Austerity, which set out to restore confidence, help economies flourish, and most importantly, reduce debt, has failed to accomplish all of the above so far. In fact, the eurozone as a whole contracted for the first time ever in 2012, two years after austerity policies were implemented.

Ideologically, austerity policies come from a familiar place – most individuals are intuitively aware that one should spend less than one earns. Furthermore, one does not cure sickness with more sickness, and it is simple to make the argument that debt cannot be cured by more debt. While it is true that fiscal responsibility is important, there are other aspects of austerity worth considering.

First, spending cuts often affect the layers of society that are most vulnerable, because they were already more dependent on government support. Impoverishing the poor and lower middle class is not synonymous with promoting entrepreneurship and dynamism of the private sector. The lower layers of society end up suffering and bearing the burden of an economic crisis caused by members of the upper levels of society, whether they are bankers or politicians.

Second, it makes no sense to cut spending across the board on an entire interconnected continent. Austerity is supposed to restore competitiveness and promote exports through efforts like reducing domestic wages, but who will spend the necessary funds to consume those exports if every country is cutting budgets and focusing on saving? It seems common sense that not all nations within the eurozone can run surpluses; it is equally obvious that not all countries can be export-led, the way Germany is.

Third, and most important, is the glaring problem in the set of assumptions behind austerity. The first is human rationality. According to this line of thought, economic stimulus will provide a net effect of zero because consumers are smart enough to factor rising government debt into their calculations and therefore will save today in order to prepare for rising taxes in the future. On the other hand, spending cuts signal to these (largely imagined) rational, calculating economic actors that their income will be higher in the future due to lowered taxes and lowered debt. Thus, they will be more comfortable spending in the present, and voila, demand has been boosted. Except, there is one problem: Homo economicus has very little in common with Homo sapiens, in that actual living humans are not rational and not nearly as farsighted as most economists would like you to believe. If, in the midst of an economic crisis and austerity policies, your neighbor gets fired and your newly graduated son is having a hard time finding a job, you are not likely to spend more money now because you anticipate your taxes being lower one day.

Despite overwhelming evidence, politicians and economists alike are still convinced that austerity works. Historical examples like the austerity policies put in place before Roosevelt’s famous New Deal leave little doubt that “expansionary contraction” is not beneficial during economic downturns. Even so-called austerity success stories with supposed applicability to the eurozone have been called into question: Australia and Denmark, regarded as model austerity countries, fell into crises after two years of implementing austerity policies. The only real success stories of reductions in debt have not been during downturns, but during periods of economic growth. The United States, for example, succeeded in reducing the deficit significantly under Bill Clinton, and Sweden reduced its fiscal deficit from 1994-1998 during a period of rapid GDP growth.

The bottom line is simple: none of what is going on in Europe after adopting austerity policies should be a surprise. It is just inexplicable that we have to keep reinventing the wheel and rediscovering the adverse effects of austerity in a struggle to recover from a crisis. Why can’t we tell austerity (in the words of Kelis), “might trick me once, I won’t let you trick me twice”?

Mariam Tabatadze is a a member of the Roosevelt Institute | Campus Network and a recent graduate of Connecticut College with a double major in Economics and International Relations. She is interning at the Institute for New Economic Thinking this summer. Click here to read her full paper on the eurozone crisis.

Share This

When a Surplus is Really a Deficit

Jun 3, 2013Elizabeth Pearson

States are showing budget surpluses, but that doesn't mean that everything has been fixed post-recession.

States are showing budget surpluses, but that doesn't mean that everything has been fixed post-recession.

News of surging income-tax revenues and surprise budget surpluses has brightened statehouses over the past few weeks, but it’s worth asking whether we should be thinking of these revised fiscal projections as surpluses at all. After all, current state surpluses are the product of deep cuts to higher education, delayed repair to basic infrastructure, and unfunded pension liabilities — in fact, these surpluses are better viewed as evidence of serious, structural budget deficits.

For one thing, welcome news from the states comes with the disclaimer that much of the revenue surge prompting headlines is due to one-time revenues caused by taxpayers with capital gains and other types of non-withheld income accelerating income into the 2012 tax year as they anticipated higher federal income-tax rates in 2013.

But the larger cause of current budget surpluses is the deep cuts state governments imposed during the recent recession. For instance, states are now spending 28 percent less per student on higher education compared to when the recession began in 2008. The recession also produced more dramatic losses in state government jobs than in any other downturn over the past fifty years. State-government spending cuts and job losses have dragged down the economy, slowing recovery and prolonging the jobs crisis.

States (with the exception of Vermont) have legal requirements to balance their budgets each fiscal year, and therefore do not have recourse to deficit spending. One reason recent cuts were so deep is that states relied disproportionately on spending cuts rather than revenue increases to balance their budgets during the recession — and because federal recovery aid to states expired in mid-2011 even as states struggled to cope with increased obligations due to the economic collapse.

As states cut to the bone to survive the recession, prolonged under-investment eventually produces misleading surpluses. Meanwhile, it is perversely harder to actually see the budget gaps that states grapple with each year. At the federal level, recessions produce annual deficits and increase the size of the federal debt, prompting political wrangling over sustainable solutions. As ideologically charged as these debates can be, they at least engage a visible target: no matter whether the federal books balance in any given year, we still confront the costs of past wars and economic downturns in arguments over the size of the public debt.

But, because states don’t have the option of deficit spending, budget gaps at the state level are effectively internalized through cutting services, laying off employees, and delaying improvements. Each year’s painful shortfalls are solved through cuts that swiftly and quietly become a “new normal.” With no mounting debt to remind us of these structural imbalances, past years’ debts seem to disappear — but in fact they are leaving lasting impacts on states’ abilities to underwrite economic growth in the long term.

Hollow as they are, today’s surpluses are being cited in states like Wisconsin to call for permanent tax cuts that will start the austerity cycle anew by generating future shortfalls that can then be “solved” by new cuts. Such efforts come on the heels of attempts in several states to abolish income taxes during the past legislative session — and fly in the face of the simple fact that, while state tax revenues now have three years of growth under their belt, they still have not surpassed their pre-recession levels. Advocating tax cuts when state revenue remains below pre-recession levels would be laughable if it were not so dangerous. This recession has impacted state tax collections far worse than in past recessions, and even if current revenue growth rates continue it could take years for revenues to catch up to pre-recession levels, adjusted for population growth and inflation.

More responsible discussion of revenue increases and “surpluses” has revolved around whether funds should be set aside in state rainy-day funds or used now to restore services. These are important conversations to pursue. But we must also consider a broader conversation about state budgets as a reflection of our public priorities. As states rebuild in the wake of the recession, which public investments will support economic growth and meet fundamental needs for safe infrastructure, quality education, and services for vulnerable citizens? Viewed in this light, today’s improving bottom line is a step in the right direction but still falls far short of both pre-recession goals and our broader common priorities. In other words, we are still faced with severe deficits.

Seizing on recent changes in state tax collection is the wrong place to focus these broader discussions. Instead, we need to be talking about revenue increases and much-need tax-system modernization like extending the sales tax to services and digital goods. Revenue increases have always been part of the state government toolkit when it comes to balancing budgets — Republican and Democratic policymakers alike recognized this fact as recently as the 1960s and 1970s when they repeatedly adopted major new taxes to invest in their states. Remembering this bipartisan legacy can be an important part of making the case for responsible tax reform at the state level.

When surpluses are the result of dramatic cuts to services and unprecedented job losses, they shouldn’t be considered surpluses at all. We can cheer the good news of growing state tax collections while pursuing broader measures of fiscal health, most notably a budget that balances with our priorities.

Elizabeth Pearson is a Roosevelt Institute | Pipeline Fellow and a PhD candidate at UC Berkeley.

 

Money in vise image via Shutterstock.com

Share This

Guest Post: Dube on Growth, Debt and Past versus Future Windows

Jun 1, 2013Arindrajit Dube

Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

Follow or contact the Rortybomb blog:

  

 

Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

Follow or contact the Rortybomb blog:

  

 

Share This

Dube, Kimball, and Wang, All on Reinhart/Rogoff

May 31, 2013Mike Konczal

Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

Follow or contact the Rortybomb blog:

  

 

Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

Follow or contact the Rortybomb blog:

  

 

Share This

Pages