No, I’m not talking about coding in excel - as someone who has in the past done plenty of empirical work, my overriding reaction is empathy with the researchers concerned. There - not so much by the grace of god but because no one bothered to check what we did - go us. What I’m talking about is the weak global recovery and a primary reason for it. But there is a link, which I will come to at the end.
To be honest, this post is really just to encourage you to read this Vox piece by Kose, Loungani and Terrones, which comes from the recent IMF WEO report (pdf). It tells a story in pictures (particularly comprehensive and clear pictures) that I and others - most notably Paul Krugman - have been telling for some time. In the past I have often used cyclically adjusted primary deficits as a summary measure of fiscal stance, because they are readily available and comprehensive. However as an indication of fiscal demand impact they are not ideal - just think of the standard Ricardian Equivalence experiment. So occasionally I have looked at just government spending, which is what Kose et al do in their analysis. The key chart is below.
What the chart shows is that government spending in the advanced economies has grown at a much slower rate in this recovery than in previous recoveries, and of course this recovery has been significantly slower as a result. In contrast, government spending in the emerging economies has been as rapid during the recovery as before the recession, and they have recovered rapidly from recession. Go into detail within the advanced economies group, and the pattern is clear: the greater the contraction in government spending relative to previous recoveries, the slower the recovery has been.
Their analysis also shows us one of the reasons why this happened. The advanced economies started the recovery with debt to GDP almost twice its average level in previous recoveries. At the start of the recession this was not the predominant concern, and we saw some attempt at countercyclical policy in the US, the UK and Japan, as the chart shows. But this was short lived in the UK, and was also reversed in the US and Japan, as debt concerns took over.
Kose et al also illustrate why this was a mistake. Interest rates hit the zero lower bound, so monetary policy could not offset what fiscal policy was doing. Yes, we have had Quantitative Easing (QE), but I think Jonathan Portes puts it rather nicely here. “It seems to me the idea that you risk the government’s credibility by borrowing an extra couple of percent of GDP for investment but there would be no risk to credibility by doing something [QE] which nobody in modern times in an advanced developed country has ever tried and that is generally considered to be last ditch strategy is an odd conclusion.” (The link is to a nice site by the way - on it you will also find Andrew Scott saying: “the right response for those governments wanting to hold on to AAA, whether it be Japan, US, Germany or the UK, is for government debt to show huge increases into triple digits versus GDP.”)
So we have one clear reason why the recovery from the Great Recession has been weak, and it also explains why it has been weaker in some countries than others. I’m sure its not the only reason, but is anyone seriously arguing anymore that it is not an important factor explaining our weak recovery? So the real mistake that Reinhart and Rogoff made was to push the high debt issue at the wrong time. It was I believe an honest mistake: high government debt is a concern, if only (but not only) because it makes politicians do the wrong thing in a serious recession. And of course the mistake would have happened anyway (in part because of Greece, and partly because of those who see reducing the size of the state as the overriding priority) - academics probably overestimate the importance of the research that politicians use as cover. But when history tells the story of why the Great Recession was so prolonged, charts like the one here will be what is shown.