Help, Help, I’m Being Repressed!

Carmen Reinhart, of Reinhart-Rogoff fame, has fired an intensely political salvo in the guise of an academic paper, and under the auspices of the International Monetary Fund (IMF) no less, warning the world about the dangers of “financial repression” (pdf). I don’t have time to offer a detailed critique at the moment, but suffice to say, it’s more crap-peddling from the folks who’ve brought you the “it-all-comes-apart-at-90% debt-to-GDP” meme.

Paul Krugman made a half-hearted and highly diplomatic attempt to address it, but the problems with the paper, the models, the data and the assumptions go much deeper. Briefly:

  • There’s no serious discussion of the problems in measuring inflation (pdf), especially discerning between absolute and relative price changes.
  • As Krugman points out, they cherry-dissect the data. As with her book This Time Is Different, Reinhart sweeps inconveniently critical distinctions under the rug. Is there a similar term for the enrichment of government bond holders? If not, why not? May we suggest ”financial oppression?” It would certainly help clarify the IMF’s mission as actually practiced around the world.
  • Also as Krugman alludes to, even if we accept the “financial repression” hypothesis at face value, there’s a conspicuous absence of any discussion of tradeoffs, which are a central concept in economics—but apparently only when convenient anymore.
  • There’s no mention of demographics, which are almost certainly a key factor (pdf) in both relative and absolute price changes, public debt, real and nominal interest rates, external balances, etc. Thus, like the eurozone, the paper is malformed from the start and its conclusions should not be trusted without bringing other (and better) models to bear on the subject.
  • Most glaring, and it seems typical of neoliberal economists these days, is the complete ignorance of Japan’s deflationary experience. Granted, the way the paper was constructed, that was to be expected, but for someone who has as much political (i.e., policy) influence as Reinhart, and for a paper that is inherently political despite its academic trappings,  it’s absolutely critical to step beyond one’s customary paradigm (especially when Japan calls the entire paradigm into question), as the well-being of billions of people is at stake.

As Warren Mosler and others continue to point out, because we fear becoming the next Greece—or in the case of Reinhart’s paper, the next (for example) Argentina, Bolivia, Brazil, Egypt, Mexico, Peru, Philippines, Uruguay, Russia or South Africa—our policy-making elites are doing everything they can to ensure that the world follows Japan’s recent path (also strongly associated with demographics).

At what point does this kind of thing cross the line into professional malpractice? Oh, right. Economists aren’t subject to such a thing, are they?

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