Last January the Las Vegas Sun published an article reporting that economic development was costing Nevada about $30,000 per job created. As noted in the publication, we need to be cautious tossing numbers about concerning “per-anything,” because the denominators in any arithmetical calculation are subject to interpretation. However, Nevada has demurred on tax collections (revenue) and this does mean there are costs for economic development. We may be incentivizing as fast as we can but the economic growth in the state is lagging as a result of “lackluster growth in construction and hospitality.” [Pew] When the Governor proclaims we need to emphasize economic growth there are several ways to interpret this statement. Let’s return to the Governor’s comment: “We cannot cut our way out, we cannot tax our way out, we can only grow our way out,” because it relates directly to some of the larger economic issues under debate.
As noted in a previous post, the statement is problematic because it disconnects three essential parts of the same question: How do we provide an acceptable level of public services with the current tax revenues? Part A of the answer is that there are some expenditures which might be reduced. Part B is that there are serious flaws in our significantly regressive system of taxation in this state with its emphasis on sales taxes while other sources of revenue remain low to barely consequential. Part C assumes that economic growth is predicated on a given set of ideological standards. For some economic growth is a function of reduced regulation and “pro-business” policies, among which are debt reduction, low or no taxation, and tax breaks for businesses such as those which have benefited from our economic development efforts.
In light of the controversy over the Reinhart-Rogoff Study we need to take some time considering the austerity focus which was supposed to create a national business climate conducive to economic recovery.
One of the most oft-cited pieces of evidence used by those lawmakers and public figures enamored with austerity is that too much debt will eventually squash a country’s growth. The academic basis for that claim is a study done by economists Kenneth Rogoff and Carmen Reinhart that claims economic growth starts to slow when a country’s public debt-to-GDP ratio hits 90 percent. [USNWR]
The inferences drawn by various and sundry politicians at the national level from the Reinhart and Rogoff study tended toward the austerity camp (We Can Cut Our Way To Prosperity) and the latest incarnation of the House GOP budget proposal exemplified this thinking. We should be paying attention to this for the following reasons:
#1. Austerity economics assumes that economic growth, as measured by the GDP, will be enhanced if the government cuts spending at the federal level. The problem with this assumption is that government spending IS part of the formula by which we measure economic growth. [Formula]
#2. Cuts at the federal level have implications for state economies, even if the states are required to have balanced budgets except for capital expenditures. If we determine we cannot afford assistance for infrastructure investment, new technologies, or other innovations to diversify a state economy, then public investment in economic activities related to these efforts is reduced and consequently so is the state’s capacity for augmented economic growth.
#3. The point should be emphasized that there is considerable evidence that a weakened economy means more public indebtedness, reversing the austerian argument. [TP] In a related vein, there’s also evidence indicating that our national debt isn’t seriously impeding our economic growth: [Forbes] [LAT] “…while there’s no way to know whether the economy would be expanding faster if the debt burden were lower, the traditional way that government debt hurts growth is by raising the cost of money as public sector borrowing “crowds out” private borrowers. That isn’t happening.” [Bloomberg]
The Reinhart-Rogoff study, so piously intoned by conservative Republicans, was supposed to substantiate the austerity focus by providing statistically reliable and valid evidence that debt restrains economic growth. Nevada Representative Mark Amodei (R-NV2) announced during his last campaign he’d never vote to raise Obama’s debt ceiling. [RJ] Nevada Senator Dean Heller (R-NV) sententiously announces, “Congress must immediately start to solve Washington’s out-of-control spending that has led to unprecedented debt and deficits. ” The facts that our spending is not out of control, nor is our debt level unprecedented seem to be lost on Nevada’s junior Senator. In short, the GOP emphasis on debts and spending is only viable IF we assume the Reinhart-Rogoff study describes economic reality — but it doesn’t.
First, the R&R study was in trouble long before anyone tried to replicate it. The study attempted to compare some very disparate economies using a few leverage ratios. [BusinessInsider] Goldman Sachs economist Jim O’Neill pointed out:
“… it would seem reasonably obvious that grouping countries together in terms of their debt levels and concluding that the economic consequences are the same is quite a tricky path to tread. Even to apply such arguments about balance of payments current accounts, which to some degree are more of an accounting identifying and therefore less subjective, is tricky, but countries with high debt levels usually share very little else with each other.”
Secondly, there’s that sticky part of science in which the results and conclusions drawn from objective data should be capable of replication. The Reinhart-Rogoff study didn’t meet this criteria.
“The underlying problem is not that their method is necessarily wrong, but that it is particularly sensitive to outliers. This contributed to the “perfect storm” of errors whose combined effect caused the large decline in average GDP. If the only problem was the weighting, this would not have been sufficient to cause a drastic decline in average GDP growth. However, it was the combination of the weighting system with the exclusion – for whatever reason – that combined to cause the most significant fall in average GDP growth. There is nothing inherently wrong with their weighting system. However it is unusual and it is their obligation to be open and clear in explaining why they used this unusual methodology.
O’Neill was proven correct — the central assumption, that a study which lumped all manner of countries together and then concluded that their economies would all behave in the same ways despite significant differences was tenuous to the breaking point. The problems weren’t just spread sheet anomalies and errors — the assumptions underpinning the study could not withstand scrutiny.
When the “scientific” validity of a phenomena is questionable at best, then the great debt debate devolves into emotional arguments. Thus we are treated to such misinformation as “The federal budget should balance the way a family budget balances.” No, most family budgets are not balanced in terms of revenues and debt. The currently reported 4Q2012 Debt Service Ratio for American families stands at 10.38. [FedRes] For American homeowners it was 13.60 as of the 4th quarter of 2012. [FedRes] The only Americans whose budgets balance by the GOP definition are those with no mortgages, car loans, student loans, or credit cards. Not exactly our average American family.
Another “monster” pulled out from under the bed is the Foreign Owned Debt — or The Chinese are Coming. Not to put too fine a point to it but the United States doesn’t have creditors — it has investors. Foreign finance buys U.S. Treasuries expecting to receive interest payments on solid investments, just as we expect the government to pay interest on the EE series Savings Bonds we give to kids on their birthdays or other special occasions.
With no “scientific” study to support the austerity campaigners, and no common sense rationale to substantiate their arguments, it’s little wonder the whole austerity binge is standing on rapidly liquifying silt:
In a speech Monday, European Commission President José Manuel Barroso said the policy of austerity pursued by the EU in recent years no longer has the political and social support needed to work.
The International Monetary Fund last week said the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing its belt-tightening is holding back the global economic recovery and is self-defeating. [WallStJ]
When you’ve lost the head of the European Commission, and the IMF, there aren’t too many advocates left besides the radical conservatives like Blackstone billionaire Pete Peterson [C&L] and his Republican allies.
Meanwhile, Nevada spends about $30,000 for each job created in an effort to offset the grinding slowness of an economic recovery freighted with a self defeating economic theory which places the interests of the bankers over their customers, clients, and countrymen.