“The backlash from hell” – Bass Resources (here)
The discovery of an error in an influential research paper by Harvard University economists Carmen Reinhart and Kenneth Rogoff has sparked an academic firestorm. It’s time to sort through the wreckage. – Betsey Stevenson and Justin Wolfers 
In the last post in this series, we took a hard first look at the Reinhart/Rogoff thesis, originally floated in early 2010, that public debt/GDP ratios over 90% cause growth to decline. This was an influential idea that quickly gained control of the political agenda around the world, becoming the alleged rationale for “austerity” in government, and the sole economic rationale for the Republican Party’s austerity-driven federal budget proposals in the United States. In my review of the authors’ own initial presentations, however, I did not find a reasoned basis for this unusual idea. Relying entirely on the alleged virtue of a “decidedly empirical” approach, they left important questions unanswered. I was forced to wonder if they felt their rationale was already so well-known within the profession that it didn’t need to be publicly articulated.
Despite their lack of theoretical support, and a reasoned critique  posted by the Economic Policy Institute (EPI), this popular theory apparently attracted little academic attention at the time. Two years later, however, with the unexpected allegation from a U. Mass. graduate student and his faculty advisors that factual errors in their study actually nullified their statistical findings, both academia and the media suddenly became intensely interested.
After the initial frenzy of coverage, this second round of controversy is subsiding now somewhat, as Reinhart and Rogoff have backed away from their over-ambitious support of the “90% tipping point” thesis. But that is only the first step: The newly-awakened interest has provoked an abundance of competing opinions and allegations which might lead to a more thorough review of the empirical and theoretical aspects of debt and growth. As Dean Baker recently remarked: “The silly spreadsheet error was important in the debt debate controversy because it allowed for a real debate.” 
The time has come, as Stevenson and Wolfort put it, to “sort through the wreckage.” That’s going to be a big job, however, more extensive than the task described by Stevenson and Wolfert themselves, for the wreckage includes more than just a damaged interpretation of statistical results. It extends deeply into the “science” of economics itself. Our objective is a reasoned appreciation of the relationship between debt and growth, and its status in macroeconomic theory. The task reminds me of my numerous experiences with untangling backlash on a fishing reel; it’s a step-by-step process, and concentration and patience are required. We need to understand what makes sense. This post offers a new framework for that understanding.
The Reinhart/Rogoff Perspective
Initially, it seemed as if Reinhart and Rogoff, as economic historians, were “fishing” as well, casting back over centuries of data to see what they might discover about how financial crises affect growth. In their August 11, 2010 article, published shortly after EPI released its critique of their study, they made it clear that their interest went well beyond mere curiosity, for they had explored “the contemporaneous link between debt, growth, and inflation at a time in which the world['s] wealthiest economies are confronting a peacetime surge in public debt not seen since the Great Depression of the 1930s and indeed virtually never in peacetime.”  And, they continued:
One need look no further than the stubbornly high unemployment rates in the U.S. and other advanced economies to be convinced how important it is to develop a better understanding of the growth prospects for the decade ahead.
In other words, from the perspective of economic history as the history of financial crises, they argue that high levels of public debt (public debt/GDP ratios) could be a determinative factor, if not the determinative factor, controlling growth and prosperity. They imply, moreover, that their study will help us understand U.S. growth prospects in the coming decade. This seemed to be their response to Irons and Bivens’s conclusion, in their EPI paper, that “the GITD ’90% threshold’ for gross government debt should not be used as a guide for U.S. fiscal policy, as both the theory and the data in the paper rest on exceptionally shaky foundations.”
They also discussed the corollary question of causality between high public debt and low growth, which they did not test empirically:
We examine average and median growth and inflation rates contemporaneously with debt. Temporal causality tests are not part of the analysis. The application of many of the standard methods for establishing temporal precedence is complicated by the nonlinear relationship between growth and debt (more of this to follow) that we have alluded to. But where do we place the evidence on causality? For low-to-moderate levels of debt there may or may not be one; the issue is an empirical one, which merits study. For high levels of debt the evidence points to bi-directional causality.
As the recent controversy retreats from public view there appears to be universal or near-universal agreement that low levels of public debt and growth are not problematically related; but at high levels of public debt, there remains this nagging question of causality. Most economists, I assume, have no difficulty with the idea that at high levels of public debt, further decline of private sector growth creates the need, all else equal, for additional federal borrowing. But the existence of a bi-directional causality is not obvious.
Here is where the issue gets really interesting; in their introduction, Irons and Bivens listed this as their first major finding:
The GITD report examines yearly growth and debt levels, with no allowance for an impact over time, or a more complicated dynamic relation between growth and debt. There is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth. (Emphasis added.)
The regression of contemporaneous data over two hundred years may well present a substantive problem for Reinhart and Rogoff, for without time series analysis of the data, causation is not directly implicated. However, it seems possible that elements of causation may be preserved even in a regression of contemporaneous data. I would want to submit that question to a top-notch statistician; if that is true, it would seem especially significant that Reinhart and Rogoff found no material correlation below the alleged 90% “tipping point.” But the question remains: What dynamic factors might cause declining growth at extremely high levels of public debt? Neither Reinhart and Rogoff, nor Irons and Bivens, reached that underlying question in their presentations. But that is the fundamental theoretical question, and we must reach it now.
Growth, “Trickle-down,” and “Austerity”
John Maynard Keynes established, beyond any credible doubt, that the level of economic activity (and growth) depends on the level of effective demand. His reasoning was set forth in the third chapter of The General Theory of Employment, Interest, and Money; because of their length, I’ve posted the most important paragraphs from Chapter 3 separately and linked them (here).
Because of it’s infallibility, I’ll call Keynes’s rationale “The Law of Effective Demand.” It’s as irrefutable as “Say’s Law,” but explains so much more. In its most irreducible form, Say’s Law says: “Every sale is a purchase.” Reduced to its essence, The Law of Effective Demand says: “You can’t buy anything if you don’t have any money.” No, I’m not being facetious. Here’s the bottom line: If you want more growth, you need to create more demand and more employment.
In the linked passages from his third chapter, Keynes also demonstrated a complete grasp of the mechanism for inequality growth. He appeared to appreciate the drag that growing income and wealth concentration has on growth and he was only one lap around the track, I suspect, from finding a way to incorporate income distribution into his “full employment” model. He didn’t get there, however, so “mainstream” economics regressed back into a neoclassical synthesis. Because the Law of Effective Demand is tautological, its influence has dominated every piece of macroeconomic data ever generated. Still, because he claimed to have solved the poverty problem, at their expense, the wealthy elite have disliked Keynes from the beginning and created ideas designed to undermine his General Theory; and at one level — the neoclassical level — the General Theory was vulnerable to such attacks. We face the two most influential of those ideas here:
Also known as “supply-side” economics, this is the idea that the less corporate earnings and top incomes are taxed, the more the economy will grow. Conversely, it holds that higher taxes at the top will discourage investment and employment. This is a flat-out rejection of Keynes’s General Theory, which reasons that there will be no current investment in the means of producing goods and services that are not expected to sell; investments require the expectation of future profitability, and expectations of future growth are constrained by experience, which is constrained by the Law of Aggregate Demand. The current situation is a good example: Four years since the Crash of 2008, interest rates remain extremely low in an effort to encourage investment, but as nearly everyone from Ben Bernanke to Reinhart and Rogoff understands, the U.S. economy on its current course is many neoclassical years  away from full employment.
Trickle-down is not only based on faulty psychology, it is physically impossible: money is created and destroyed in specific ways. Trickle-down imagines that when the existing money supply is being used for contraction (i.e., redistributed into wealth and income at the top), the people below the top who are losing their share of the money supply will somehow magically increase their consumption, as if they still had that money, and the economy will somehow magically grow.  This “pixie dust” idea flatly violates The Law of Effective Demand.
Recent experience has provided ample and dramatic proof of that, as I pointed out in a recent blog post (here):
In their April 27, 2001 report “The Economic Impact of President Bush’s Tax Relief Plan” (The Heritage Foundation, Center for Data Analysis Report #0101, April 27, 2001, here), D. Mark Wilson and William Beach predicted that the Bush plan would significantly increase economic growth and family income while “substantially reducing federal debt.” In fact, they predicted, the Bush plan would greatly increase government revenue, so much so that “the national debt would effectively be paid off by FY 2010.” In other words, they argued that the Bush tax cuts would more than pay for themselves, by an incredible amount.
What actually happened, however, is that the federal debt, which was at about $6 trillion in 2001, increased to about $13.6 trillion by the end of 2010 (Treasury Direct, here). The Heritage Foundation’s estimate of supply-side “stimulation” was off by almost $14 trillion, nearly one year’s GDP. In those years the economy suffered stagnation, not growth, climaxing with the Crash of 2008 and the Great Recession. 
Back in the 1960s, trickle-down mythology was generally understood to be insensible; but one-half century later, just as we are learning how deadly it really is, it has triumphed politically. Grover Norquist has famously obtained pledges from the vast majority of Republicans in Congress never to increase taxes (here); and Chris Mooney cites Mitch McConnell as endorsing trickle-down as the official economics of the Republican Party. As Mooney observes, trickle-down claims have moved well beyond the basic argument, that cutting taxes at the top will encourage investment and growth, all the way to the preposterous claim that a tax cut will actually more than “pay for itself” through growth and increased government revenues. Mooney concludes:
It isn’t just misinformation about taxes, deficits, and how our economy came to ail so badly – though there’s plenty of that. But we’re also talking about putting the entire U.S. economy and way of life in jeopardy on the basis of questionable economics. . . 
Although budget deficits and the national debt can be reduced either by cutting government spending or by raising taxes, it is noteworthy that neither side in the Reinhart/Rogoff debate discusses taxation; the only reference to taxation I can recall seeing is the temporary Reinholt and Rogoff reference to Robert Barro’s study on optimizing the choice between taxation and public borrowing. This debate has been almost entirely focused on the option of reducing debt by cutting government spending.
Austerity is the idea that cutting government spending can actually stimulate economic growth. Like trickle-down, this theory must contend with The Law of Aggregate Demand, and even more directly so. Each spending reduction is itself a constrictive reduction in demand; so how might austerity stimulate growth, that is, “pay for itself”? Wikipedia (a recent addition, last modified on June 1, 2013) provides a reasonably objective description of the austerity idea , which can be summarized as follows:
1. High debt-to-GDP ratios can signify inadequate government “liquidity” to creditors;
2. In adverse conditions, governments can demonstrate liquidity by spending less and increasing tax revenues;
3. The macroeconomic effect of reducing government spending is to reduce growth and GDP, hence reducing the debt-to-GDP ratio;
4. Thus, austerity does not improve growth, unless growth improves pursuant to a controversial theory called “expansionary fiscal contraction”:
In macroeconomics, reducing government spending generally increases unemployment. * * * Under the controversial theory of expansionary fiscal contraction (EFC), a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion.
The EFC theory, attributed to Francesco Giavazzi and Marco Pagano (1990), holds that in some circumstances “a major reduction in government spending that changes future expectations about taxes and government spending will expand private consumption, resulting in overall economic expansion.”  The abstract of the Giavassi/Pagano paper  elaborates:
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy; if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upward the estimate of their permanent income, and will raise current and planned consumption.
I doubt this theory has “often” been argued, because like trickle-down, it is extremely anti-Keynesian — it violates The Law of Effective Demand. A permanent reduction in government spending means less economic activity and declining growth, so a perception of declining government spending would likely cause households (especially those dependent on small business income) to revise their expectations of future income downward. Moreover, while growth expectations determine current and planned investment, current consumption is constrained by current income, especially for low- and middle-income households who have precious little ability in a depression to raise current and planned consumption in response to anything.
In a recent Oped Paul Krugman, America’s most vocal anti-austerian, condemned a more recent (2009) Alesina/Ardagna version of expansionary fiscal contraction, “Large Changes in Fiscal Policy: Taxes Versus Spending” (2009) , along with the Reinhart/Rogoff study, for lacking a real-world factual foundation:
The dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity — Alberto Alesina and Silvia Ardagna on “expansionary austerity” and Carmen Reinhart and Kenneth Rogoff on the dangerous debt “threshold” at 90 percent of G.D.P. — faced withering criticism almost as soon as they came out. And the studies did not hold up under scrutiny. By late 2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed their findings. 
The Institute for America’s Future, a progressive think tank, has released an anti-austerity statement signed by over 460 American economists, arguing:
There is no theory of economics that explains how we can deflate our way to recovery. Businesses are not basing investment decisions on how much Congress cuts the debt in 2023. As Great Britain, Ireland, Spain and Greece have shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasing misery.
In a deep recession, deficit reduction is a moving target. If you cut spending and consumer purchasing power in an already depressed economy, unemployment rises and revenues fall — and the goal of a smaller deficit keeps receding like a mirage in a desert. When private purchasing power is depressed by the aftermath of a financial collapse, only public investment can make up the gap.
The budget hawks have the sequence backwards. Public outlay for jobs and recovery come first, growth is restored, and revenues follow. Budget cuts in a deep slump lead only to a deeper slump. 
This is pure Keynesian short-run logic, proven out time and again. And so the debate continues, with the austerian case against taxing the rich resting on a slender reed, supposrted only by erroneous data as the corrected data continue to verify reality. It is important, as Krugman notes, that Reinhart/Rogoff’s theory is an austerity theory: The notion that at high debt/GDP ratios growth is curtailed is just the flip side of the austerity doctrine’s assertion that growth can be stimulated by reducing high public debt/GDP ratios.
The Reckless Republican Plan
Here is the familiar chart from Paul Ryan’s 2012 House budget proposal:
The first premise of this chart, represented by the down-sloping green line, is that austerity is the path to prosperity. The claim, released on the same day (March 20, 2012) by both Paul Ryan in the House Budget Committee’s Fiscal Year 2012 Budget Resolution (here) and James Pethokoukis of the American Enterprise Institute (here), is that that the budget plan will eliminate the national debt by 2050. This is an audacious replay of the Heritage Foundation’s predictions for the effect of the Bush tax cuts, and it suffers from exactly the same denial of economic reality.
Beyond the false claim that austerity will increase growth, the trickle-down ideology also maintains that not doing austerity reduces growth, and this is where Reinhart/Rogoff and the other austerians come in. The big red triangle and the upward-sweeping projection called “current path” represents that “debt as a share of the economy” will rise exponentially if the austerity path is not followed. By 2050, the assertion is, public debt will rise to 350% of GDP.
Importantly, as shown in post #8 in this series (here), Irons and Bevins (EPI) prepared a chart of all of the Reinhart/Rogoff observations of the U.S. public debt/GDP ratio plotted against contemporaneous growth. That chart shows that since 1800 the public debt/GDP ratio has rarely exceeded 80%, and never exceeded 130%, the point it approached in 1946 immediately following WW II. After the record decline in 1946, the U.S. economy began to grow as the U.S. government pursued an expansionist policy with a top marginal income tax rate around 90% and heavy investment in a middle class economy; and the national debt as a percent of GDP rapidly declined thereafter. Thus, the high debt did not cause declining growth; progressive taxation permitted improved growth and declining debt in following years.
It’s entirely unlikely that any government could reach the point of holding debt at 350% (never mind 800% as projected by Ryan for 2080) of GDP, for the U.S. over $50 trillion (based on the current level of GDP), without an extremely regressive tax system; nor would it last very long if it did, as real growth would be greatly inhibited by the extremely high cost of servicing that much debt. Certainly, to avoid default, very highly progressive taxation would be required, if there were any rich people in the economy left to tax. But how could the U.S. have borrowed $50 trillion in the first place? And where, is it imagined, has the $50 trillion of borrowed money gone in this scenario?
This Republican plan even ignores the austerians’ own caveat that austerity could only work if spending cuts are accompanied by tax increases to help reduce the debt/GDP ratio; instead, the Ryan budget proposes huge tax cuts at the top. A double whammy of failed austerity and failed trickle-down, both guaranteed by The Law of Effective Demand, would virtually guarantee the demise of the already depressed U.S. economy, in fairly short order.
This isn’t just non-economics, it’s very sloppy non-economics. Because the austerity and trickle-down ideologies are false, it is not surprising that the quirky statistical anomaly presented by Reinhart and Rogoff is the only study cited by Paul Ryan in support of the his budget proposal. Why is this important? As Chris Mooney reminds us, this is about “putting the entire U.S. economy and way of life in jeopardy.”
Ask yourself this question: If the trickle-down and austerity doctrines are so unsound, why do they still dominate public debate and control policy?
Reinhart, Rogoff, and Inequality
To the bannermen of the top 0.1% who argue the supremacy of “stylized facts,” ideology trumps unpopular facts every time, and they can make it stick because they own major universities like Harvard, and most of the media, and inundate with a continuous stream of working papers and journal articles. On these points, Krugman asserted himself as forcefully as he could in “The 1 Persent Solution”:
You can’t understand the influence of austerity doctrine without talking about class and inequality. * * * [T]he wealthy, by a large majority, regard deficits as the most important problem we face. * * * The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise. You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. * * * The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.
And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies? I hope not; I’d like to believe that ideas and evidence matter, at least a bit. Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified. 
At least a bit? Why such timid understatement? Verifiable ideas and evidence are all that really matters. The “intellectual collapse of the austerian position” must not be allowed to obscure the overwhelming victory of the Reinhart/Rogoff side in this debate: Remember, the purpose of trickle-down and austerity ideology is and always has been to protect the wealthy from taxation, and this entire Reinhart/Rogoff debate so far as I can determine, has taken place with no mention of taxation. Mainstream economics still ignores income and wealth distribution; and Paul Krugman limits himself to noting that this debate is on the front lines of class warfare.
Here is my assessment of how the Reinhart/Rogoff debate might be resolved if income and wealth redistribution were taken into account:
1. Those who argue that growth declines somewhat through the Reinhart/Rogoff categories as the debt/GDP ratio gradually increase (including Reinhart/Rogoff themselves) are apparently correct. This has been shown to be not about financial crises, however, but it likely accurately reflects the inexorable growth of debt interest as the public debt rises, and the growth of inequality as the wealthy increasingly “earn” this debt interest from the not-so-wealthy;
2. For the last 30 years or so, as income inequality has sharply risen, the federal government has borrowed the money to pay the interest, which now totals over $220 billion annually.  This is not about crowding out other possible private sector uses of debt for economic expansion, not with about $2 trillion or so sitting idle in investment accounts. It’s about crowding out public sector uses of funds for economic expansion, operating functionally as automatic “austerity” machine;
3. The cost of interest on the debt, however, is minor relative to the size of the debt itself. Rising income inequality both reduces growth and, in today’s circumstances, directly increases the level of debt. So, yes, higher debt/GDP ratios are closely related to lower growth;
4. All of the outstanding $16.7 trillion of U.S. debt has effectively financed wealth transfers to the top 1%, through avoided taxation of top 1% income, which makes the inequality problem today far worse than I had previously dared to imagine. This consistently reduces GDP and raises the level debt, so that the debt/GDP ratio will continue to rise. The implications:
a. The idea that austerity might help at all, never more than a dream and a prayer, is beyond all reason;
b. More federal borrowing will aggravate the rise of the debt/GDP ratio and contribute directly to further decline in growth and increase in inequality;
c. In the interest of debt management, fiscal responsibility, and economic growth, it is essential to immediately institute a sufficiently progressive program of federal taxation.
In other words, the one thing essential to the survival of our capitalist market economy, adequately progressive taxation, is something that no one in the Reinhart/Rogoff debate even mentioned.
The Neoclassical Prison
Imprisoned by their own neoclassical thinking, mainstream economists today have been playing the 1%’s game, in the 1%’s ballpark. Thus, while Krugman celebrates the ”intellectual collapse of the austerian position” he attributes the lack of an outright Keynesian victory in the policy war to the notion that “ideas and evidence” must not matter any more.
I single out Krugman, of course, because he is our Keynesian leader. But the problem is not Krugman’s alone: The real problem is that the Neoclassical synthesis, the attempted merger of incompatible “macroeconomic” and “microeconomic” systems, long ago nullified Keynes’s core wisdom (here). Only a year ago Krugman, in End This Depression Now!, made this pronouncement:
My guess — and it can’t be more than that, given how little we understand some of these channels of influence — is that the biggest contribution of rising inequality to the depression we’re in was and is political. 
That’s the wrong guess, and this issue is too important for mere guesswork. For the last few years the rumblings from mainstream economists have been mostly the sounds of distant thunder, and here’s why:
1. Keynes made it clear that market economies are unstable, but he was unable to break away from his own bad habits of thought. He used the word “equilibrium” 85 times in The General Theory. “Equilibrium” is a “microeconomics” concept, requiring the ceteris paribus (all else equal) assumption, and only a small handful of established economists, such as James Galbraith, have emphasized that there is no reason to assume that economy-wide decline can turn around on its own;
2. Most mainstream economists today appear to believe, however, that an economy will eventually correct itself. This, however, is the “famous optimism” of classical economics that Keynes rejected, and adhering to that belief is a rejection of Keynesian economics;
3. The ultimate proof awaited the collection of adequate income distribution data, as Simon Kuznets warned back in the 1950s. And that proof, now in hand, demonstrates that a modern capitalist economy can be far more unstable than Keynes, or Hayek for that matter, in all likelihood ever imagined it could be.
Adhering to the notion of eventual, automatic recovery to full employment, then, is a full-bore retreat into the classical world, the world occupied by Paul Ryan and the Harvard economists who preach the supremacy of “stylized facts.” And they are happy to play in that world — it may not be a game they can win, but it’s one they cannot lose.
The Legacy of Reinhart/Rogoff
Because of the confused state of economic “science,” the wreckage of this debate is a confused tangle of reactions and ideas. Most of the media reports dealt solely with the statistical issues. An early post by Ann Landrey, and the later Stevenson/Wolfers article, argued that the computer glitch had not damaged the Reinhart/Rogoff thesis.  These were followed by a flurry of articles by more progressive reporters announcing that a computer glitch had brought on the demise of the austerity doctrine.  Veteran Washington Post correspondent Robert J. Samuelson walked us through the statistical issues and concluded: “What’s sobering about this brawl is that it settles nothing.” 
Dean Baker at CEPR threw up his hands and declared: “As a general rule economists are not very good at economics”:
The debt-to-GDP ratio can be thought of as something like the color of a house. Suppose Reinhart and Rogoff told us that people who lived in blue houses had 40 percent less income than people who lived in houses painted other colors. Presumably people would be skeptical of the results, but if their finding was really true, then we would probably want to encourage people in blue colored houses to paint them a different color. 
There is almost nothing in these articles to alert readers to possible questions about the soundness of the classical economics that gave birth to the austerity doctrine, or the neoclassical fusion called “mainstream economics” that sometimes challenges it. For his part, Paul Krugman weighed in not by attacking the Reinhart/Rogoff results, which he said he “never believed,” but by criticizing them for “evading the critique.”  Krugman, however, hadn’t objected to their results when he cited them a year ago in his book, and indeed he appeared to have endorsed their “financial crisis” theory of high public debt and and its association with high unemployment.  Hence, his recent reaction only led to a celebrity-feud between Krugman and Reinhart/Rogoff, which the press is loving.  Both sides have played their hands and neither side wants to risk looking even worse. That’s a stalemate; which as chess Grandmaster Kenneth Rogoff would be pleased to explain, is a draw.
Meanwhile, Paul Krugman continues to demonstrate that he accords no macroeconomic significance to income and wealth redistribution.  And as deficit problems mount, he continues to shrug off continuing very large deficits as a minor problem, insubstantial because, although very large, the deficit is not expected to increase as a percentage of GDP.  But the bottom 99%’s share of GDP has been declining since the Crash of 2008 and the start of this depression. Just a few days ago,  Krugman once again expressed his long-time conviction that “if Washington would reverse its destructive budget cuts, if the Fed would show the ‘Rooseveltian resolve’ that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment.”
But he should have been warning us that we’ll never return to the growth and prosperity we once had until we reduce the concentration of wealth and income at the top, which has grown far too great to allow the United States economy to ever return to the levels of employment and prosperity we once knew. As 460 economists have argued, we cannot “deflate our way to recovery” and, I submit, we cannot borrow our way to recovery either.
Mainstream Keynesians are skating on very thin ice. Let me put it this way: Unless the neoclassical position is correct that income and wealth redistribution has no material macroeconomic significance, Paul Krugman’s debt and deficit arguments will prove to be as wrong as the CBO deficit projections upon which they are based, and as Ryan, Reinhart and Rogoff are about the efficacy of austerity. We’ll know for sure in less than two years. Meanwhile, time is running out on the quest for a new macroeconomics.
I’ll return in the next post to developing a fuller understanding of some important aspects of wealth transfers, and a better understanding of how much damage has already been done.
JMH – 6/12/2013 (ed. 6/13/2013)
 “Refereeing Reinhart-Rogoff Debate,” by Betsey Stevenson and Justin Wolfers, Bloomberg, April 28, 2013 (here).
 ”Government Debt and Economic Growth: Overreaching Claims of Debt ‘Threshold’ Suffer from Theoretical and Empirical Flaws,” by John Irons and Josh Bivens, Economic Policy Institute, Briefing Paper #271, July 26, 2010, pp. 1-2 (here).
 “Excel Spreadsheet Error, Ha Ha! Lessons From the Reinhart-Rogoff Controversy,” by Dean Baker, The Blog, Huffington Post, May 27, 2013 (here).
 “Debt and Growth Revisited,” by Carmen M. Reinhart and Kenneth Rogoff, VOX,August 11, 2010 (here).
 I.e., assuming there is no more inequality growth.
 No, increasing household debt is not magic, but it just makes matters worse.
 “Amygdalas Economicus: Perspectives on Taxation,” by J. M. Harrison, January 24, 2013 (here).
 Chris Mooney, The Republican Brain: The Science of Why They Deny Science – and Reality, John Wiley & Sons, NY, 2012, Ch. 10, “The Republican War on Economics,” p. 190.
 “Austerity,” Wikipedia, last modified June 1, 2013 (here).
 “Expansionary Fiscal Contraction,” Wikipedia, last modified March 13, 2013 (here). (The quoted language is from the Wiki-summary, not the authors.)
 “Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries,” by Francesco Giavazzi and Marco Pagano, NBER Macroeconomics Annual, Vol. 5, 1990, JSTOR, Chicago Journals, Abstract (here); For Giavazzi’s broader discussion of public debt issues, see also, “Fiscal Policy after the Financial Crisis,” Introduction by Alberto Alesina and Francesco Giavazzi, NBER conference held December 12-13, 2011 (here).
 ”Large Changes in Fiscal Policy: Taxes Versus Spending,” by Alberto F. Alesina and Silvia Ardagna, NBER, Working Paper 15438, October 2009 (here).
 ”The 1 Percent’s Solution,” by Paul Krugman, The New York Times, April 25, 2013 (here).
 “Jobs and Growth: Not Austerity,” Institute for America’s Future (here), February 1, 2013 (here).
 ”The 1 Percent’s Solution,” supra.
 See, e.g., “National Debt Interest Payments Dwarf Other Government Spending [CHART]” by Danielle Kurtzleben, U.S. News, November 19, 2012 (here).
 Paul Krugman, End This Depression Now!, W.W. Norton & Company, NY (2012), pp. 84-85. My review of his Chapter 5 suggests that the section “Inequality and Crises” (pp. 88-82) best reveals how his logic falters on inequality.
 “A Study That Set the Tone for Austerity Is Challenged,” by Ann Lowry, The New York Times, April 16 (here); ”Refereeing Reinhart-Rogoff Debate,” by Betsey Stevenson and Justin Wolfers, Bloomberg, April 28, 2013 (here).
 “Austerity Fanatics Refuse To Admit They’ve Just Been Completely Discredited,” by Mark Gongloff, The Huffington Post, April 22, 2013 (here); “Reinhart And Rogoff Make More Mistakes While Admitting To Research Flaws, by Mark Gongloff (report), The Huffington Post, April 22, 2013 (here); ”Who Is Defending Austerity Now? The Excel error heard ’round the world has deficit-cutters backpedaling,” by Matthew O’Brien, The Atlantic, April 22, 2013 (here); ”Austerity doctrine is exposed as flimflam,” by Katrina vanden Heuvel, The Washington Post, April 23, 2011 (here).
 “The Reinhart/Rogoff brawl,” by Robert J. Samuelson, The Washington Post, April 24, 2001 (here).
 “Reinhart-Rogoff One More Time: Why the 90 Percent Never Should Have Been Taken Seriously,” by Dean Baker, Center for Economic and Policy Research (CEPR), May 11, 2013 (here).
 “Reinhart-Rogoff, Continued,” by Paul Krugman, The New York Times, April 16, 2013 (here).
 Paul Krugman, End This Depression Now!, W.W. Norton & Company, NY (2012), pp. 128-128.
 Coverage abounds: See the Reinhart letter to Krugman (5/25/2013, here), Krugman’s follow-up Oped (5/26/2013, here), and Fareed Zakaria’s “today is my lucky day” interview (6/1/2013, here).
 E.g., (a) “The Twinkie Manifesto” (11/18/2012, here) where he stated that that a high top income tax rate is “not incompatible” with growth, when he could and should have argued that progressive taxation is essential to growth; (b) more recently in “From the Mouths of Babes” (5/30/2013, here), where claimed, while defending food relief to the unemployed on both moral grounds and because it stimulates the economy, that the economy is depressed because “many players in the economy slashed spending at the same time, while relatively few players were willing to spend more,” when he could and should have said that we’re in a depression because so much income and wealth has concentrated at the top that many players who would not otherwise be destitute are now involuntarily in need of help buying food.
 “Dwindling Deficit Disorder,” by Paul Krugman, The New York Times, March 10, 2013 (here).
 “The Big Shrug,” by Paul Krugman, The New York Times, June 9, 2013 (here).