Yesterday’s Fin ran a piece from Stephen Kirchner and Robert Carling of the Centre for Independent Studies, under the headline “Give austerity a chance” which was a pretty accurate summary of the contents. It’s paywalled, but you may be able to read it by clicking here. The piece relies almost exclusively on the work of Alberto Alesina and his colleagues, promoting the zombie idea of expansionary austerity. As I pointed out here, the most influential of these pieces by Alesina and Ardagna, is riddled with errors, at least as it applies to Australia.
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.
John Quiggin 
Paywall? You mean we’re expected to pay for an article titled “Give austerity a chance?”
What a hoot.
I have a vision of people with swaying arms singing in unison …
all we are say — ying
is give pain a chance
Perhaps teh US Constitution could be amended to guarantee the right to:
Life, liberty and the pursuit of misery
JQ, it seems to me the ‘give austerity a chance’- promoters are either confused or are trying to exploit a confusion.
IMHO, there is a confusion between ‘austerity policy’ as in Alberto Alesina (ie a general policy prescription) and policy measures specifically aimed at saving the current international financial market operators and those whose preferences have been influenced by neoliberal believes from themselves. Greece serves as the point of confusion.
Expansionary austerity is an absurd notion on a par with ideas for a perpetual motion machine; the latter ignores the laws of physics and the former ignores the empirically observed behaviours and regularities (laws) of macroeconomics.
The modern microeconomics championed by these neoclassical economists considers humans to be a “continuum of infinitely lived agents normalized to one” to quote a recent IMF formula. Their disconnect from reality is total. They think “Emergent Phenomena” must be a new funk-jazz band.
How clever. “Give Austerity a Chance”. Expansionary austerity simply an oxymoron from the mouths of morons. How about, Austerity, like Charity, should start at home?
I notice that those preaching austerity rarely practise it themselves, and are not really proposing anyway that the austerity ought to apply to themselves, in terms of, for example, pay-rises or a by having a holiday from receiving a ‘bonus’. No, their pay-rises and bonuses must continue to be paid, and that pay unrelated to profit or any obvious sign of performance, unless performance is counted as the speed with which they cash their bonus cheques.
Why do places like the CIS not only have charity status, which they ought not to under any good definition but why is it like some others named in the act? A very special status indeed.
Why do places like the CIS not only have charity status, which they ought not to under any good definition but why is it like some others named in the Act? A very special status indeed. If Wilkie can’t get anything on gambling due to the perfidious Gillard and the equally perfidious Labor maybe he should simply try to get the CIS’s name removed from the Act?
Awaiting moderation?
Is perfidious not allowed?
Or is it morons?
German advisor has given austerity the finger, so to speak.
http://www.guardian.co.uk/commentisfree/2012/feb/06/europe-cant-cut-and-grow
Sinclair Davidson has a puff piece in the Drum http://www.abc.net.au/unleashed/3818614.html The counter factual would be, where would our economy be without govt intervention? The evidence from the US is that TARP was critical to economic recovery.
I’m not going to pay to read that. But surely the case for austerity is a little different in Australia now? We’re not in a liquidity trap, as evidenced by positive interest rates with low unemployment. Surely the government could now balance the budget, with aggregate demand kept up by loose monetary policy? I don’t say they actually should do this, but austerity here and now needn’t actually be contractionary.
Sam
February 9th, 2012 at 23:07 | #11
Reply | Quote
….
Surely the government could now balance the budget, with aggregate demand kept up by loose monetary policy?
Why do you think the government is so confidently predicting a surplus in 2013? Perhaps because it actually makes economic sense. As smith said; you can’t be a Keynesian on the way down a not one on the way up.
@Charles
They’re not. They were for a while and then Penny Wong said – wisely – that it’d be the first thing to go overboard if Europe worsened.
I don’t think that piece is firewalled after all. At any rate, it took me straight to it.
On the topical application of the argument: is there any consequence of Greece not accepting the current Austerity package, and consequently defaulting, that is worse than the consequences of accepting it?
Economists do not write for the popular press in order to make recondite economic theories accessible to the public. They do so in order to promote their personal preferences about how the world ought to be.
The Centre for Independent Studies would have written almost the same article if Alberto Alesina never existed. Ditto, mutatis mutandis, for Professor Quiggin’s articles.
That’s a little reductionistic. There are such things as truth and intellectual precision, and I would like to think that the writers for the popular press I respect (JQ, PK, Nouriel Roubini, many others) do so because they believe they have an understanding of how economies work that is worth sharing, and ideology comes alongside and a somewhat behind that.
On the neoliberal side I think it’s easy to be intellectually dishonest as you laugh all the way to the bank (I’m thinking of that bit from Inside Job – ‘conflict of interest – what me worry?’).
http://www.oftwominds.com/blogfeb12/deleveraging-rally02-12.html
@Charles
The general point is right, but not the specific application. To quote myself
@John Quiggin
The desperate attempt to return to surplus in my opinion is an attempt to win votes, which is understandable for politicians. Although it’s harmful to the economy when the economic conditions are bad, if ALP is willing to use that surplus to manage the economy the way it is suppose to be managed after they won the election, then I don’t really have a problem with their desperate attempt. Nothing is worse than a self-driven Abbott being in power with his garbage policies.
@Tom
The surplus will obviously be a pure tokenistic one. They’ve been bullied by the coalition for years and hence politically stigmatised over economic management of budget deficits. It’s also interesting that even Abbott and Robb appear to be distancing themselves from offering a surplus for next year’s budget.
There is a political motive.
Make fiscal policy tighter and thus monetary policy is looser.
They think they will get plaudits for a budget surplus and lower interest rates.
Maybe they wil but given this mob couldn’t sell a beer on a hot day I have my doubts
@Troy Prideaux
It’s understandable as the situations in Europe and America worsen, the decision of Europe as to whether to continue with this austerity dream or stimulus recovery certainly have an impact on the difficulties of delivering a budget surplus.
So far as least the general public of Greece is largely against austerity so the situation may not be as grim as it looks, if Europe runs a stimulus recovery of some sort.
The problem is that Greece has no money and can’t borrow any.
The policy of returning to surplus is to keep Australia in step with current global thinking and to maintain its excellent rating ie to achieve the best judgement of its peers.
The problem is that Greece has no money and can’t borrow any.
Exactly why Greece has to leave the euro.
The “problem” with Greece is that the loss of democracy coupled with the impositions placed upon it by a foreign power are proving to be unpopular. The Troika need to understand this.
@Dan
In a way this is correct. However given this as a starting point, the game at the moment is:
Accept more austerity and Europe/IMF will lend you the funds so you can meet the March 20(?) deadline.
In this context, austerity is not designed to fix the economy, it is to protect the funds newly despatched.
At this point austerity is a political demand, not a economic resolution. Greece is probably better off defaulting and rebuilding its economy that slaving for the next 50 years as a economic keepsake of core Europe.
sdfc is correct.
Greece has two problems all of their own making.
They have excessive debt which they have lied about.
They are hugely uncompetitive.
They can eventually solve both problems under their own currency but I can’t see how they do either under the euro
Greece would be worse out of the Euro as its debt is in Euros. The so-called uncompetitiveness is simply that their wages and salaries and benefits are currently too high for the current Eurozone price level and their productivity. Another debt problem they have is the high interest rates they are facing. Sensible policies by the ECB, as advocated by JQ and several others would go a long way to helping. A bit of QE and inflation would help. Attempting to leave the Eurozone would be trading a crisis for a much larger catastrophe.
The fastest way to bring back confidence in Greece would be to replace Merkel with someone sensible and then for Germany to invade Greece!
Has anyone got (or seen) an implementation plan for how to get from the Euro back to their own currency? I just can’t see it.
@Chris Warren
The austerity thing is essentially a path to simply trickle away the funds. No investment = no improvement in productive/competitive capacity = no chance of recovery. But I think everyone on this forum knows that.
@Freelander
‘Greece would be worse out of the Euro as its debt is in Euros.’
I don’t think this is correct. Sure its newly-minted currency would depreciate quickly against the Euro (and living standards would drop, though that’s happening regardless), but with their own currency they are in a position to undertake QE, which the ECB obviously isn’t willing to.
‘The fastest way to bring back confidence in Greece would be… for Germany to invade Greece!’
This is probably correct 😛
@Freelander
What is the evidence that Greek wages and salaries are too high “for the current Eurozone price level and their productivity”.
In 2008 Greek minimum wages were 38% of per capita GDP, significantly less than Australia and New Zealand, and European states: UK, Spain, France, Cyprus, Malta, Portugal, etc.
http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country
As their debt is in Euros ‘their newly minted currency’ would rapidly become worthless and they would face the same sort of perils as Iceland. Which, if you remember, wanted to join the Euro when no one would take their currency. Germany couldn’t get out of its debt problems in the Weimar republic simply by printing. At least you can buy things internationally with the Euro, and you can pay off international debts with Euros as well.
@Chris Warren
The evidence is that they can’t sell their junk and make a profit. If inflation in the zone raises prices and they manage to hold their cost down by not raising wages, salaries, benefits and bonuses they will be able to sell their junk. If not they are a lost cause. In that case Greece should be asset stripped with its lands properties monuments and chattels sold off. (In the good old days the population would also be sold into slavery, but transferable property rights in labour have fallen out of favour).
Oh no moderation for a link…
Wolfson has set up a prize of quarter of a million British pounds to anyone who can solve that puzzle. http://www.economist.com/blogs/freeexchange/2011/10/wolfson-prize
will it work this time?
More moderation for a link… http://www.ft.com/intl/cms/s/0/16d19598-fb2f-11e0-8756-00144feab49a.html#axzz1m1rRQ6uq
but through this time?
The FT one is paywalled.
Re: the Economist’s one: I’m interested to see no-one’s got a developed answer (apart from, apparently, some guy in South Africa whose thread comment reads suspiciously like a Nigerian scam email). So they’re not even at the stage of political debate/resistance with that.
The entries closed end of February. They will anounce their short list some time in March and the winner some time after that. The Wolfson site is:
http://www.policyexchange.org.uk/component/zoo/item/wolfson-economics-prize
Hope this link got through….
Sorry. End of January they closed.
@Freelander
This is a recipe for shifting the crisis onto personal incomes. It is a consequence of the GFC and is unrelated to the proposition that:
wages and salaries are too high “for the current Eurozone price level and their productivity”.
Greek manufacturing wages (hourly compensation US$22.19) fell 3% 2008-2010, are less than in Spain, Ireland and Italy, and are near 50% the wages in Australia, Belgium and France.
According to: http://www.bls.gov/ilc/#gdp
And the capitalists want to blame Greek wages for not being able to sell junk bonds!?
Crazy.
Greek workers real remuneration is still way above China and their other competitors. Plus, the country is probably sub-optimally polluted due to ‘big brother’ government protecting workers from freely negotiating away their working conditions.
But, on a more serious note. Doesn’t matter if their wages are substantially lower, the labour costs can still be significantly higher than elsewhere because much more has to be used per unit produced. Often the reason for that is management and a variety of other factors. Nevertheless, the inefficiencies end up being reflected in the returns to less mobile factors of production.
Yes – don’t forget productivity and participation as well – all those superannuated public servants can’t be good for the national accounts.
Dealing with Greece must be a nightmare, they are dreadful fantasisers and live in a bubble world of tavernas, ouzo and souvlaki.
Years ago I was involved with agricultural commodities and was amazed at the level of corruption in Italy. The EU helped to grow corruption, funds were being deployed to farmers for growing then pulling out crops. As the job of monitoring was onerous they set a level at which farmers could self assess, to work around this farmers split holdings up between family members and then cooked the books. One investigation found that if all the citrus trees in Sicily existed they would cover the island and then into the sea filling the harbour at Palermo.
Greeks hate Italians calling them liars and then apply their own version. Corruption, backhanders, gifts – they call it the Mediterranean way.
It was a mistake allowing them into the eu and will cost dearly whichever way it goes.
@Freelander
Why has a statement that wages are too high been compared to Europe been mutated into too high compared to China?
Why has a statement that wages are too high been mutated into a statement that unit labour costs are too high?
This is just blaming workers for ideological reasons when no facts are ever presented to substantiate this attack?
Where is the data on unit labour costs that substantiates your claim?
It is worthwhile to compare the medicine that the ‘Every debt is sacred, every debt is great’ crowd prescribe for the people of Greece and for the banks that have carried out fraudulent foreclosures in the US. The settlement granted the banks does not seem to to regard every debt owed by a bank as sacred at all.
As I see it the first problem is that you can’t leave the euro overnight – it normally takes a couple of years to establish a currency, and exiting a currency takes about the same length of time.
If you are running a primary budget deficit (excluding interest payments), then as far as I see it default brings on the problems that you have been dealing with through the austerity package.
If no one is willing to lend you money then your tax revenue and your spending have to coincide within a couple of months at least i.e. instant austerity.
Of course if you have your own currency then you can print money (to pay public servants and pensioners), but if it takes a couple of years to establish a separate currency, then you have a period of all the costs and none of the benefits of default.
As I read this – http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_12464_10/02/2012_427207 – the primary budget deficit in Greece is now about 2.4% of GDP or about 5 billion Euros. When you default you no longer pay interest payments currently 15 billion Euros – so your fiscal position improves enormously.
But you have to come up with 5 billion Euros in tax increases or spending cuts to close your primary deficit. Given that the current sticking point is about 325 million Euros – http://www.guardian.co.uk/world/2012/feb/10/greece-crisis-bailout-euro-default – I think Greece is better off not defaulting.
I really do wonder how Sinclair Davidson manages to go round as an academic economist. I mean, sure he knows a lot more about economics than me, but that’s not my job is it? Whenever he gets a public comment out it always appears to be riddled with basic, fundamental biases and selective blindnesses. He never appears to come at anything neutrally, and whenever there’s been a debate on the facts of matters, he always seems to end up going down in flames. Unlike many other right-wing economists, he never seems to win a trick, he gets pwn3d every time. As the RMIT Professor, Institutional Economics, it may be that he’s quite good in his field, but he comments outside his field often?
Any institutional economist who isn’t an advocate of a reformist/redistributive state has missed something major – possibly the first lecture.