Readers won’t be surprised to learn that I support Rudd. I have two reasons for this.

First, whatever his problems with interpersonal relationships and administration, Rudd is a serious leader with ideas for Australia’s future. Gillard has shown herself to have no ideas worth the name. Her policy agenda has consisted, almost entirely, of implementing policies introduced by Rudd.

Second, Gillard has totally lost the trust of the Australian people and if she leads the government to the next election, there is no chance whatsoever of a Labor victory. The result will be the election of Tony Abbott, someone who matches Gillard in terms of a lack of any consistent principles or concrete achievements, but adds to it a reactionary ideology and determination to undo the policies brought forward by (Rudd) Labor. Labor’s only chance of retaining office is to go back to Rudd.

Anyway, feel free to have your say

John Quiggin’s criticism of us (“Tales of austerity ring hollow”, Opinion, February 16) warrants a response. We referred to Alberto Alesina’s work not because it is the only or last word on this topic, but because it is an example of a much larger literature in support of fiscal austerity (or less pejoratively, “fiscal consolidation”).

It is incorrect to suggest that the case for consolidation “rests largely on the work of Alberto Alesina”. We could also have cited a lot of other empirical as well as theoretical work, as indeed does Alesina himself.

A full examination of the International Monetary Fund and Organisation for Economic Co-operation and Development literature over the years reveals a more nuanced view than Quiggin suggests (not that the IMF or the OECD are the final arbiters anyway). We recognise nuances that we could not canvass in a 600-word article.

One is that the arguments about fiscal consolidation have to be tweaked depending on country circumstances and the credibility of the policymakers. Greece, for example, will suffer from fiscal consolidation, but that is partly the fault of the exchange rate straitjacket they are in.

But, in general, we stand by our basic proposition that fiscal consolidation is essential to the economic rehabilitation of countries with large budget deficits and unsustainable public debt burdens.

The only point worth noting is that the “pejorative” term “fiscal austerity” isn’t mine, it’s from the title of Alesina and Ardagna’s 1998 paper “Tales of fiscal consolidation: can austerity be expansionary”. If austerity is now a pejorative it’s because people know what it means, while “fiscal consolidation” remains a vaguely defined euphemism. Readers with a long memory may recall the US Repubs and Cato dumping “social security privatisation” in favor of “social security choice”

Tales of austerity ring hollow

John Quiggin
PUBLISHED: 16 Feb 2012 00:09:01 | UPDATED: 16 Feb 2012 05:35:23

As philosopher George Santayana observed, those who do not remember history are doomed to repeat it. That’s even more true of those who learn the wrong lessons from history.

European governments appear determined to provide an example.

Faced with a severe economic downturn following the global financial crisis that emerged in 2008 and 2009, these countries have adopted austerity policies, focused primarily on cutting public expenditure. The hope is that by providing room for private investors, austerity will prove to be expansionary.

As Stephen Kirchner and Robert Carling (“Give austerity a chance”, The Australian Financial Review, February have argued, this claim rests largely on the work of Albert Alesina and his colleagues, going back to the 1990s.

The central document in this literature is a 1998 paper by Alesina and Silvia Ardagna, titled Tales of Fiscal Adjustment: Is Austerity Expansionary? – a question to which the authors give a positive answer.

What Carling and Kirchner do not mention is that Alesina’s claims about expansionary austerity have been repeatedly refuted, not just by Keynesian critics but by the International Monetary Fund and even by one of Alesina’s own co-authors, Roberto Perrotti.

In fact, on the very day their piece was published, the Reserve Bank of Australia’s Statement on Monetary Policy joined the critics, noting “there are a number of elements that increase the probability that the large fiscal consolidations now in prospect could be significantly contractionary”.

(Myself and others suggested to Carling and Kirchner that they should have alerted Financial Review  readers to the fact that the research they were citing as authoritative was, at best, highly controversial, but they disagreed).

Fortunately, unlike many economic controversies, this is one case where readers can make their own judgments, since the cases studied by Alesina and Ardagna include Australia in the 1980s. It’s useful to compare the “tale” they tell with historical reality.

Alesina and Ardagna start off badly, with the statement: “In 1985, a single-party left-wing government took office and launched a stabilisation plan.” In fact, of course, the Hawke-Keating Labor government was elected in 1983, at the beginning of the recovery from the deep recession of the early 1980s.

The error here is more serious than just a wrong date. Alesina and Ardagna ignore the fact that the beginning of the expansion phase of the 1980s preceded, and made possible, the fiscal stabilisation represented by the Trilogy commitment of 1984. It is true that the government maintained fairly tight fiscal discipline but, as Keynes observed 75 years ago, “the boom, not the slump, is the time for austerity”.

Alesina and Ardagna miss this point, and get wrong just about everything else about the Australian economy in the 1980s. The real doozy, though, is their conclusion in which they proclaim Australia as a successful example of expansionary austerity because: “A private investment boom was associated with profits and easier access to credit following the financial deregulation process that took place in 1985-86.”

Many readers will remember that boom, led by such heroic entrepreneurs as Alan Bond, John Elliott and Christopher Skase. Even more will remember the crash that followed in “the recession we had to have”, and the years of high unemployment that persisted well into the 1990s. But Alesina and Ardagna, writing in 1998, chose not to mention it.

Of course, it wasn’t the fiscal discipline of the 1980s that caused the crash of 1989. Rather, it was the combination of deregulation and easy access to credit to which Alesina and Ardagna correctly ascribe the boom of the late 1980s. That boom turned out to be a bubble. Throughout that bubble, governments and commentators worried obsessively about the judgments of financial markets and, in particular, the all-powerful ratings agencies. Sadly, those judgments gave no warning of the impending crash.

The history of bubble, bust and financial crisis repeated itself in the US and Europe in the first years of the 21st century. Ignoring the gigantic financial-market failure that caused the present crisis, European governments have convinced themselves that their problems are the result of public profligacy.

Relying on the discredited idea of “expansionary austerity”, they are now seeking to cut their way to prosperity. History tells us they will fail.

A few points might be worth restating, though:

* As regards the way in which the documents came into the public domain (still unclear, but Heartland alleges they were tricked into emailing them to the wrong person), Heartland and most of their supporters have shown themselves, unsurprisingly, to be stinking hypocrites. Heartland was among the leaders in publicizing and promoting the use of misleading excerpts from private emails in what they and others called “Climategate”. Now they scream about “stolen” documents, backed up by lots of the usual suspects. There’s an amusing response, with which I agree entirely, from some of the scientists victimised by Heartland and its criminal allies in the past.

* There is no such thing as an honest climate sceptic. Those who reject mainstream science are either conscious frauds or gullible believers. I can confidently predict that of the thousands of “sceptics” who made great play of the CRU email hack, no more than a handful will change their views, either on the substantive issue or on the credibility of people like Carter and institutions like Heartland, over this. Those who aren’t, like Carter, on the payroll are credulous dupes. While many low-information “sceptics” have simply been misled by reading the wrong material on the Internet, or trusting the wrong sources, the great majority of active opponents of climate science are complicit in their own deception, preferring to believe obvious lies because it suits their cultural and political prejudices.

* It may be worth restating the absurdity of the claim that genuine scientists (unlike Carter) are motivated by money. Leaving aside the absurdity of the suggestion that the scientists make their career choice because they were after a highly-paid job, there’s the fact that mainstream climate science has the overwhelming endorsement of scientists in all fields. It’s certainly true that the global warming problem has meant more funding for climate science, but there’s only so much in the budget, and much of this money has come at the expense of other fields which are no longer given priority status.

You can get more info, and donate to support the project, here

To try and avoid scatter, I’m not allowing comments on this post. Ideally, wait for the site to go up at Crikey. I’ll foreshadow, though, that I don’t support a position of blanket opposition to CSG, which is likely to be something of a minority view in this context.

Although Kirchner is a blogger himself, he and his co-author could be forgiven for missing my post. But Alesina’s work is probably the most-refuted piece of economic analysis put out (though never published in a peer-reviewed journal) in recent decades. It’s been demolished not only by the usual suspects like Krugman and DeLong (and me), but by the Economist, the IMF and even by one of Alesina’s own co-authors, Roberto Perotti.

Charitably assuming that Kirchner and Carling had managed to miss just about every publication on the question of austerity in the last year, could they not have spent 30 seconds with Google before hitting “Send”? A search on Alesina+austerity reveals a torrent of criticism, none of which they mention.

It is hard to know which is worse – the possibility that Kirchner and Carling, presented by the CIS as expert economists, were ignorant of all this, or the alternative hypothesis that they knew it and decided not to mention it. Either way, it’s an appalling breach of elementary standards of research.

I’m pretty sure the facts have been brought to the attention of Kirchner and Carling. The honest thing to do would be to write to the Fin pointing out that the work on which they relied was, at best, highly controversial. If Kirchner, Carling and the CIS are unwilling to do this, we can draw the conclusion that they cannot be trusted in anything they write.

Update Sinclair Davidson at Catallaxy has a lengthy reply, but the sole substantive criticism is that contrary to my parenthetical remark, Alesina and Ardagna did finally publish a peer-reviewed paper in 2010. But the work that was actually influential was done back in the 1990s. I’ll republish my blog post pointing out what a shoddy job that paper in describing developments in Australia. Davidson’s piece is notable for the lack of any substantive defence of Alesina’s work, and also for this , offered in response to my observation that the research in question had been comprehensively demolished by the IMF among many others

Fancy that – cutting edge research into a highly politicised aspect of public policy is “controversial”. Does Quiggin think AFR readers are so dumb they wouldn’t realise that?

So, next time you read an opinion piece from the CIS you can safely assume the caveat lector “This research is probably discredited, the authors almost certainly know it, but, if so, they’re not going to tell you”.

No one expects opinion pieces to be “fair and balanced”, but if you are going to rely on work that has been subject to serious and credible criticism, you should at least point out the main criticisms and (if possible) say briefly why you think they don’t stand up. As an example, Wilkinson and Pickett’s The Spirit Level produces some striking evidence of relationships between inequality and bad social outcomes.. This work has been subject to a lot of criticism, not fatal in my view, but enough that it needs to be mentioned. I did this when I cited the work in Zombie Economics and then at greater length here

Further update While still not disputing any of the substantive points I’ve raised, Davidson digs deeper on the question of whether the original Alesina and Ardagna work was published in a peer-reviewed journal. The work was published in Economic Papers, which does not take unsolicited submissions. Rather the editors commission pieces, or you can propose a piece to them. That is, this is, as the webpage says, a policy forum, not an academic journal. Standard practice for publications of this kind is for the editors to approve (or return for revision, or, very rarely, reject) the pieces they’ve commissioned. This isn’t peer-review in the normal sense. I’ve always assumed that Economic Papers follows the standard practice in this respect, but Davidson is welcome to check it out, if he cares enough.

As a PS, I couldn’t resist checking a 700-comment thread on the US elections. I shouldn’t link, but I will. While there is plenty of not-so-innocent amusement to be had, what struck me was that most of the commenters appear to be creationists – the handful holding up the flag for evolution are getting hammered.

What’s really striking is Kerr’s discovery that ‘In 80 of the 150 federal electorates, an above-average number of people support the proposition’. I did some quick math of my own, and it turns out that 80 is almost exactly half of 150. So, next time you see a sample estimate that doesn’t suit your case, be sure to check subsamples. You, too, may find that half of them are above the average.

As I mentioned last time I wrote about my adventures on Intrade, I’m sceptical of the claim, a special case of the (semi-strong version of the) Efficient Markets Hypothesis, that the odds in betting markets provide the best estimate of the probability of political outcomes. I managed to double my small stake betting on Newt Gingrich, and might have made more if I had not overestimated the efficiency with which the Republican electorate processes information. I sold on the news of his work for Fannie Mae, and thereby missed the peak of the market when he won South Carolina.

Having made my point and learned a bit about the practical operation of markets, I meant to cash out my winnings, but that turned out to be a complicated process, and I couldn’t resist another flutter. Rick Santorum was trading at 100-1, and while I didn’t think much of his chances, those are pretty good odds in a four-horse race, especially one with no particularly attractive candidates.

He’s now 17.9 per cent (nearly 4-1 in the old language, if I recall it correctly), so I’ve now made a pretty substantial gain. There’s a bit of a cognitive consistency problem here – I didn’t really mean to make money backing Santorum, so now I need some suggestions as to an appropriate use for the money, one which would offset any damage done by backing him when he was down where he belonged. Orientation can be US, Australian or global.

Posted via email from John’s posterous