L. Randall Wray is a professor of economics at the University of Missouri-Kansas City.
Around two years ago, you pointed to an economic error in R & R paper. You said (*) that correlation doesn’t imply causality. What do you think today in the face of the new debate on coding error triggered by a book review?
Yes, I co-authored a critique with Yeva Nersisyan that pointed to three major errors. (See here) First, the notion that one can simply aggregate across 800 years of data (from a variety of sources) and countries with very different monetary and fiscal policy arrangements to obtain a debt ratio threshold beyond which growth slows is highly questionable. Why should we believe the experience of a weak feudal government operating with a gold standard sheds light on a modern sovereign government that issues its own floating currency? The short answer is that we should not.
Second, the authors did not provide clear details that would allow one to separate governments that issued debt in foreign currency versus those that only issued debt in their own currency. They did not indicate which were on gold standards or had pegged exchange rates. In our view, that matters critically. A sovereign government that issues its own currency cannot be forced into involuntary default on debt denominated in that currency; it can always make payments in its own currency—a point recognized even by Alan Greenspan. On the other hand, countries that peg to gold or foreign currencies are often forced to abandon the peg, which is a technical default. And governments that issue debt in foreign currency are often forced into default. R&R simply lumped all this together because they apparently do not understand that these arrangements matter.
Third, we suspected that their results were driven by a few outliers. Further, you would need a lot more information to determine the cause and effect relation: does slow growth lead to rising debt ratios, or does high debt lead to slow growth? For example, it is quite clear that Japan’s high debt ratio today has resulted from decades of slow growth (its debt ratio was not high before it went into recession). For that reason, we wrote to them to get their data—to try to see which national experiences drove their results, and to check for “reverse causation”. They did not respond to our request.
And now we know there was a fourth problem with their results: the data they used actually did not support their results. They excluded data that conflicted with the results they reported. In other words, the results are erroneous: they have no evidence that high debt ratios lead to lower growth; the magic number—90% debt ratio—was wrong all along.
Why did so many economists and politicians believe in the first place in expansionary austerity which is causing human suffering without an end in Europe today?
They wanted to believe it. It fit with their neoliberal ideology. Of course, this happens all the time. They should now be embarrassed. There is no such thing as expansion through fiscal austerity. It has never worked; there is no evidence to support the theory. I do believe that in some cases countries can still grow IN SPITE OF fiscal austerity. But they do not grow BECAUSE OF fiscal austerity. And, finally, R&R have not shown that high debt ratios by sovereign governments that issue debt in their own currency lead to fiscal crises. There isn’t evidence in support of this neoliberal belief, and everyone should be skeptical of the claims of deficit hysterians.
What is the single most effective tool to support aggregate demand and tackle the mass unemployment in a depressed economy?
As Yeva and I argued in another piece, in a depressed economy, you need fiscal expansion. By that I do not necessarily mean “priming the pump”—generalized spending. I think it is much better to aim the spending where it is most needed, and that usually means more jobs. Hence, I favor spending directly on job creation.
Here’s the problem. You do need fiscal policy space to engage in stimulus. Countries with their own floating currency have that space, so they can always choose to spend more to stimulate demand. Countries that peg to gold or other currencies may not have the space. And unfortunately, European countries that dropped their own currencies in order to adopt the foreign Euro currency do not individually have the policy space. So for the EMU, the fiscal expansion can only come from the center. And that is the big problem that has not been resolved. To make matters worse, the Troika still believes in expansionary austerity—a non sequitur. And so they will continue to impose austerity and suffering on the population.
Thank you very much.
Senior Scholar L. Randall Wray is a professor of economics at the University of Missouri-Kansas City. His current research focuses on providing a critique of orthodox monetary theory and policy and the development of an alternative approach. He is using Minsky’s approach to analyze the current global financial crisis.
(*) in FTD.