The Results Are In for the Brüning and Mellon Memorial Prizes!

The 'Creditanstalt' Vienna is Pleased to Announce the Election Results for the Heinrich Brüning and Andrew Mellon Memorial Prizes.

Results for the Heinrich Brüning Memorial Prize for Self-Defeating Macroeconomic Stabilization Policy (aka Austerity):

		Polldaddy.com poll			Google gadget poll		Total
	Count	Percentage		Count	Percentage		Count	Percentage
Olli Rehn, Vice-President of the European Commission	19	23.75%		12	33.33%		31	26.72%
David Cameron, British Prime Minister	23	28.75%		7	19.44%		30	25.86%
Angela Merkel, German Chancellor	12	15%		7	19.44%		19	16.38%
Jens Weidmann, German Bundesbank President	9	11.25%		6	16.67%		15	12.93%
Wolfgang Schäuble, German Finance Minister	11	13.75%		3	8.33%		14	12.07%
Nicolas Sarkozy, former French President	3	3.75%		0	0.00%		3	2.59%
Helmut Kohl, former German Chancellor	1	1.25%		1	2.78%		2	1.72%
Other:	2	2.50%		0	0.00%		2	1.72%
Total	80	100%		36	100%		116	100%

The winner of the Brüning Memorial Prize, by a hair over David Cameron, is

Olli Rehn,

Vice-President of the European Commission

Olli Rehn on receiving word of being awarded the Brüning Memorial Prize

Vice-President Rehn will receive the sum of One Million 'Euros' in Deutsche Bundesbank TARGET2 Claims on the ECB, contingent on his relocating to Germany.

Results for the Andrew Mellon “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate” Memorial Prize for the Expeditious Resolution of Banks (aka Bank Runs):

		Polldaddy.com poll			Googgle poll		Total
	Count	Percentage		Count	Percentage		Count	Percentage
Wolfgang Schäuble, German Finance Minister	23	37.10%		4	13%		27	29%
Jeroen Dijsselbloem, Dutch Finance Minister and Euro Group President	14	22.58%		13	41%		27	29%
Jens Weidmann, Bundesbank President	12	19.35%		5	16%		17	18%
David Stockman, former OMB director under Reagan	5	8.06%		7	22%		12	13%
Angela Merkel, German Chancellor	7	11.29%		2	6%		9	10%
Nicolas Sarkozy, former French President	0	0%		1	3%		1	1%
Other:	1	1.61%		0	0%		1	1%
Total	62	100%		32	100%		94	100%

The joint recipients of the Andrew Mellon Memorial Prize, in a photo-finish tie, are 

Wolfgang Schäuble, German Finance Minister

and 

Jeroen Dijsselbloem, Dutch Finance Minister and Euro Group President

Will the happy award winners adopt a bail-in template on the lines of the Cyprus rescue to divide their spoils?

The two distinguished winners will have to share the prize sum of One Million 'Cypriot Euros' (subject to capital controls and bail-ins of the ECB) according to a formula of their own choosing. If they cannot agree on a formula, the prize money will revert to the Central Bank of Cyprus for the support of orphans and widows.

The award ceremony will take place on May 11, 2013 in Vienna to commemorate the world-historical May 11, 1931 bank resolution of the Creditanstalt, a defining event in the evolution of European integration and cooperation, and a model for contemporary economic policy.

Particulars about the ceremony will be announced shortly by the Prize Committee on this website.

Technical Note: The polls were conducted using the Blogger.com polling gadgets April 7-9, and April 9-May 5 using the Polldaddy.com polling gadgets. The results of each poll were merged.

Only Two More Days Left to Vote for the Brüning and Mellon Memorial Prizes!

Some of the best people do it. They've already voted in the elections for the 'Creditanstalt's' Heinrich Brüning and Andrew Mellon Memorial Prizes. Have you?

Use the right sidebar polling gadgets to cast your vote! Absolute anonymity guaranteed. Your identity will not be communicated to the troika!

Polls close on May 5 at 12:00 (UTC+1 Vienna time)!

More information about the Prizes can be found at the Prize Announcement Post.

More on the Current Account Cookie Jar Dilemma

The current account cookie jar dilemma even has religious dimensions

Returning to the Sinn-Soros debate at project-syndicate, it's obvious that even highly trained economists like Sinn do not seem to fully understand the fallacy of composition when applied to international economics.

Germany's dilemma is the following. Germany would like to keep its export surplus growth model, which means she wants to maintain  the over 5% current account surplus-to-GDP ratio she has achieved over the last decade. At the same time, by wage deflation, 'structural reforms' and austerity, she wants the Eurozone peripheral countries to improve their 'competitiveness' without Germany making any contributions to a unit-wage-cost rebalancing on her side (except contributing to the minimum bailouts necessary to prevent the periphery from collapsing completely).

But what does increasing 'competitiveness' mean in international economics? Raising exports faster than imports (in the most generous sense, including services and tourism), i.e., moving into current account surplus. Now the sum total of all countries' current accounts must be zero, by definition, so this is a zero-sum game. So if e.g. Spain moves into surplus, somebody else has to move into deficit. If Spain's gain in 'competitiveness' does not come at the expense of Germany (say by exporting more wind turbines, automotive parts and Mediterranean holidays to Germans than Mercedes and machines she imports from Germany), where will this gain come from? From China, the USA, Abenomics Japan? Certainly possible, but even Germany runs a bilateral current account deficit with China at the moment, so I don't think this likely. Some of it will have to come from a reduction in Germany's current account surplus with the rest of the EZ (which still accounts for more than 40% of her trade).

But the ultimate guiding principle of German policy remains defending her current account surplus at all costs (in the name of hard-won competitiveness - see Bundesbank president Jens Weidmann's 2012 rebalancing speech at the BIS for the clearest statement of this obsession). People like Weidmann and Sinn seem to implicitly think a rebalancing of EZ current accounts can come entirely at the expense of the rest of the world (something I already hypothesized back in 2011 in my blog "What does Germany want..."), but I think this is completely unrealistic. Some of it will have to come at the expense of Germany's current account surplus (though that does not necessarily mean at the expense of her people's welfare - quite the contrary, this can be income enhancing, even mutually - income is not a zero-sum game).

In contrast, Sinn's one-sided competitiveness adjustment policy calls for lowering Spain's prices and wages by 20-30%! In view of the well-known downward nominal wage rigidity, this would call for inconceivable mass unemployment ('structural reforms' are a delusional euphemism when we are talking about such unprecedented wage deflation) to accomplish. But even if, using some kind of wage-setting magic wand (such as a devaluation used to represent), we could accomplish this overnight, the resulting domestic demand collapse due to debt-deflation and the high multiplier would erase Spain as a viable economy long before exports could pick up enough to make up the difference. Plus all of the mobile, educated skilled workers would have fled the country by then (which is already happening). So Spain's ultimate productive basis - her human capital - would have been destroyed in the process. This reminds me of US strategy during the Vietnam War - "we had to destroy them to save them."

So either I am crazy or Sinn and Weidmann can't do the maths and let go of some cookies for the common good.

For more economists' views on the current account adjustment issue, see e.g.:

Hans-Werner Sinn, Akos Valentinyi, "European imbalances".

Alexandr Hobza, Stefan Zeugner, "Current-account surpluses in the Eurozone: Should they be reduced?"


Michael Pettis, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, 2013


Peter Temin and David Vines, The Leaderless Economy:
Why the World Economic System Fell Apart and How to Fix It, 2013

The 'Creditanstalt', Vienna, Announces the 'Merkel Moratorium'

The 'Creditanstalt' Vienna Proudly Announces the

'Merkel Moratorium'

Herbert Hoover taking office in 1929.

Hoover proclaiming the Moratorium in 1931

Hoover inspecting occupied Germany in 1946

You too can join this illustrious Ahnengalerie

Hans-Werner Sinn and George Soros have been debating Germany's role in the Euro crisis at cross purposes at project-syndicate. Naturally I had to throw in my two cents, so I came up with the brilliant idea of the 'Merkel Moratorium'. Like all of my brilliant ideas, it will be attributed to the 'Creditanstalt' Vienna:

Maybe Germany could make the first step on the road to recovery by issuing a "Merkel Moratorium" suspending international debt payments, analogous to the Hoover Moratorium of 1931 that was the first step out of the Great Depression (followed by abandonment of the Gold Standard and rearmament Keynesianism). This suspended not only Germany's WWI reparations but also the private American Dawes Plan debt that was actually financing them, and was then fully repudiated by Hitler. The Allies had learned their lesson from the Versailles Treaty and did not reimpose the 675% prewar debt level on occupied Germany, allowing it to start the Bretton Woods era practically with a clean slate (more than was vouchsafed the UK - see Robert Kuttner in the NY Review).

 The US, as net world creditor, could afford to absorb these losses and even went on to recycle its export surpluses in the Marshall Plan. Now the world has come almost full circle and Germany is a major net creditor. Does it have any alternative to debt forgiveness and recycling its trade surpluses with the Eurozone periphery? That austerity, deflation and forcible debt extraction are self-defeating is something we already learned in the 1930s. And a Eurozone breakup would be an even bigger debt write-off for Germany. So it's time to unclench the fist in the current account cookie pot and start doing something constructive.

Note: The 'Creditanstalt's' 'Merkel Moratorium' is not to be confused with the current German government's 2011 about-face on extending the lifetimes of nuclear reactors after the Fukushima disaster, also known as the 'Merkel Moratorium'.

Fukushima: another fine example of meltdown economics & complex catastrophes at work that served as a justification for a face-saving political about-face

Reinhart-Rogoff vs. New Zealand 1951: Waking up from the postmodern nightmare

[Postedit 27 May 2013: For final summing up of these issues, see post Reinhart-Rogoff vs. New Zealand: Final Round?]

[Note: You need to read the two previous posts 1,2, to understand this one!]

The discrepancies between the RR data for New Zealand real GDP growth rates and any published sources have been bugging me since yesterday morning's post. So I retrieved the original RR data from the UMaas site and inserted them into my Excel spreadsheet (yes, I'm also in bed with the devil here).

In turns out I had misread HAP's description of the four missing observations for NZ. They're 1946-1949, not 1947-1950 as I had assumed. RR do not count 1950  in the over 90% category since the NZ debt ratio dipped below 88% that year. If they had, again the result would have been reversed, since that Korean War boom value of +14.67% creeps back in. Thus we have to shift the missing RR data to make a meaningful comparison with the growth values from Maddison/Statistics New Zealand.

I have now done so in this table, where the fourth column now contains the original RR values, 1950 is highlighted in yellow to emphasize that it is not counted, I added 1952 for additional evidence, and the averages are only taken for the relevant range 1946-49 + 1951:

Year	Maddison	Maddison Geary-Khamis $90	Stat NZ $91/92	RR
1946	8.70	3.37	2.95	7.71
1947	10.91	9.56	0.42	11.93
1948	-9.92	-11.69	3.17	-9.92
1949	10.79	8.54	-5.00	10.79
1950	14.67	12.38	4.97	14.68
1951	-7.63	-9.49	15.60	-7.64
1952	4.34	1.83	-5.50	4.35
average 1946-49+1951	2.57	0.06	3.43	2.57

It's now apparent that the source of RR's growth data is Maddison. (In fact, RR state this explicitly on their data website without providing the data they used directly, so I trust that the UMaas spreadsheet has reproduced this correctly. I'm getting my Maddison values from Statistics New Zealand.) However, even now there are some strange discrepancies. The growth rate for 1946 is 1% too low, that for 1947 1% too high (highlighted in orange). [Postedit as of May 4, 2012: This discrepancy only exists for 1946 & 1947 growth rates calculated from real GDP Maddison data provided by Statistics NZ. The RR values do correspond to the growth rates derived from Maddison's original database. I have no idea why StatisticsNZ provides different "Maddison" values and whether they represent a transcription error on their part or a data revision.] Otherwise, up to slight rounding discrepancies, they are identical. The Stat NZ series looks lagged by one year, but that still does not fully explain the remaining large discrepancies.

Nevertheless, the conclusions of yesterday's post remain. If one takes the Statistics NZ value for 1951 (or include RR's 1950 value), RR's result is stood on its head: highly indebted countries grow faster!

Any result that is so critically sensitive to the inclusion or exclusion of a few observations or a slight time shift between them that decides whether you're in the war boom or the waterfront strike, cannot be taken seriously.

However, at least we can now wake up, if somewhat groggily, from one postmodern data nightmare. Only 999 more to go...

Reinhart-Rogoff vs. New Zealand 1951 Topsy-Turvy (historical-statistical nitty-gritty and postmodernist nightmare)

The more one descends into the nitty-gritty of historical reality the more one begins to experience postmodern scientific despair.

[Postedit 27 May 2013: For final summing up of these issues, see post Reinhart-Rogoff vs. New Zealand: Final Round?]

[Post-Editing Note: You need to read the last post on the centrality of 1951 New Zealand to the Reinhart-Rogoff result to understand the motivation for this post.]

I've calculated New Zealand real GDP growth rates for the period 1946-1951 based on three data series available from Statistics New Zealand, using the dating convention

growth rate (t) = 100*(GDP(t) - GDP(t-1))/GDP(t-1).

New Zealand Real GDP Growth Rates in %, Three Methods

Year	Maddison	Maddison Geary-Khamis $90	Stat NZ $91/92
1947	10.91	9.56	0.42
1948	-9.92	-11.69	3.17
1949	10.79	8.54	-5.00
1950	14.67	12.38	4.97
1951	-7.63	-9.49	15.60
average	3.76	1.86	3.83

None of these series corresponds to the data employed by Reinhart and Rogoff, although the Maddison data comes closest. [Postedit: see next post for partial data reconciliation!] Moreover, the three series are wildly inconsistent, even the two Maddison series, although the Maddison series at least fluctuate in step with one another. The Statistics NZ series seems to lag the other two by one year but still deviates significantly from them (the 1952 growth rate is -5.5%).

If RR had used the Statistics NZ  value of +15,60% for 1951 instead of the -7.6% one they did use, they would have obtained the exact opposite conclusion - that countries with debt ratios over 90% had significantly higher growth rates than lower indebted countries! That is the danger one runs by basing such a far-reaching conclusion on just one observation of the most minor country in the database. In any event, the gyrations in NZ's postwar growth experience had nothing whatsoever to do with its indebtedness but were rather driven by unprecedented industrial disputes and the Korean War wool export boom.

Now some nitty-gritty on the 1951 NZ waterfront lockout/strike.

1. The waterfront dispute did not entirely close the ports. After locking out the waterside union workers, the government declared a state of emergency and used military troops to reestablish some measure of port activity (as well as in the coal mines).
2. While it was the longest NZ industrial dispute, it was not the most violent one. That was the Great Strike of 1913.
3. Support strikes were staged by coal miners, railroad and hydroelectric workers, frozen meat processors and in other sectors amounting to some 22,000 workers during much of the 151 day dispute.
4. The government ultimately achieved its primary goal in provoking the dispute - the destruction of the waterside union, which had separated from the main labor federation, by branding them communists and blacklisting their leadership and activists.

One strike and you're out! (or Reinhart-Rogoff vs. New Zealand 1951)

The 1951 New Zealand waterfront strike closed the country's ports for 151 days and dealt the most serious blow to Reinhart and Rogoff's 2010 growth calculations.

Most of the discussion of the Reinhart-Rogoff 2010 debt paper since the publication of the Herndon, Ash and Pollin's critique has focused on the Excel coding error that inadvertently deleted the first five countries in the sample. (On the whole irrelevance of the study for establishing a purported 90% debt cliff, see my previous post.) While this struck many as the most egregious instance of data shoddiness in their study, it's impact on the discrepancy HAP found for mean growth rates for debt over 90% was in fact negligible.

What's really driving the 2.3% discrepancy, all of 2%, in the mean growth rate of the most highly indebted countries, is RR's treatment of the five New Zealand observations in this debt category in the period 1946-1951 (see HAP p. 10). Thus RR (cherry)picked only the 1951 value, -7.6%, leaving out the other four: 7.7%, 11.9%, -9.9%, and 10.8%, thereby lowering NZ's average growth rate when its debt was over 90% from 2.6% to -7.6%. Since average country growth rates are weighted equally in RR's scheme (as opposed to weighting each country-year observation equally, as HAP propose), this one observation is weighted as much as, for example, the 19 years of British over-90% indebtedness.

One can accuse RR of cheery picking and using biased (or at least debatable and not highlighted) weighting schemes in their study or not, as one wishes. But another aspect of the New Zealand story seems to have escaped attention.

In 1951 New Zealand was in the midst of an export boom caused by the outbreak of the Korean War (the 1950 growth rate of +10.8% is already an impressive indicator of this).

So why does growth collapse in 1951 to -7.6%?

Simple. The economy had been paralyzed by the 151 day waterfront dispute that closed down the ports and that was the longest and most violent instance of industrial unrest in New Zealand's history (a country then as now with a very high trade dependence). No wonder the growth rate tanked. It had nothing to do with NZ's indebtedness and in fact was an exception in an otherwise booming era. (See here and here for historical background. Thanks to littlegreyrabbit for raising this issue at Retractionwatch.)

In their by now numerous  but ambivalent mea culpas, RR appeal for understanding in view of the difficulties of recreating historical data. But why this is an excuse for the lacunae in their use of the panel data (the 2010 paper gives no indications of these gaps or the reasons for choosing some available years and not others) is never made clear.

But their failure to inquire deeper into why the New Zealand growth data show such an erratic pattern that had nothing whatsoever to do with the country's indebtedness seems to be symptomatic of many econometric studies that cavalierly gloss over the nitty-gritty of the historical record. Since so much of their 2010 result hinges on this one observation, the lack of such an inquiry seems all the more inexcusable in economists with such an expressed concern with that historical record.

Moral of the story: When you mess with New Zealand data, one strike and you're out!


PS: For some real historical nitty-gritty on the 1951 NZ waterfront lockout/strike, watch this superb labor history video.

[Postedit 27 May 2013: For final summing up of these issues, see post Reinhart-Rogoff vs. New Zealand: Final Round?]