Monthly Archives: April 2013

The Lethal Lemons on the Road to Bangladesh

By William K. Black

I wrote yesterday about the “control frauds” (in which the person controlling a seemingly legitimate entity uses it as a “weapon” to defraud) that target purchasers of bad quality goods (“lemons”) and employees.  The example I used to explain these concepts was the collapse of the building housing garment factories in Bangladesh.  Continue reading

Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky)

By Matthew Berg and Brian Hartley, Ph.D. students
University of Missouri-Kansas City


We find that the correlation between government debt-to-GDP ratios and future growth in Reinhart and Rogoff’s (2010a and and 2010b) dataset results from outliers which come from the country most suggestive of the hypothesis that slow growth causes high levels of government debt – Japan. This evidence strengthens and reinforces criticisms recently made by Herndon, Ash, and Pollin (2013) of research suggesting a negative relationship between government debt-to-GDP ratios and real GDP growth rates. As Reinhart and Rogoff (2013) recently and quite correctly noted, “the frontier question for research is the issue of causality.” We join Reinhart and Rogoff’s call for more research illuminating this important question. To that end, we use Reinhart’s and Rogoff’s dataset, as corrected by Herndon, Ash, and Pollin (2013). Following and reinforcing Dube (2013) and Basu (2013), we use LOWESS regressions and distributed lag models and find evidence suggesting that correlation of government debt-to-GDP ratios and future growth are much more likely explained by “reverse” causation running from slow GDP growth to high government debt-to-GDP ratios than by “forward” causation running from high government debt-to-GDP ratios to slow growth. Furthermore, what little evidence there is for forward causation appears to stem almost entirely from Japanese outliers. Because – as economists generally recognize – Japan is the clearest of all cases of reverse causation, this considerably weakens the argument for forward causation. In addition, we find tremendous heterogeneity on the level of individual countries in the relationship between current government debt-to-GDP ratios and future growth. This suggests that even if substantial evidence for forward causation is eventually discovered in cross-country studies, the effect will likely be small in size and unreliable, and therefore not relevant to economic policy decisions in any particular individual country. Our findings are suggestive, but not conclusive, and more research is needed. We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality. Continue reading

What if George Akerlof had written about Lethal “Lemons?”

By William K. Black
(Cross Posted at

If you have studied economics at the university level in the last 35 years it is likely you were introduced to the concept of “asymmetrical information” and George Akerlof’s famous 1970 article on markets for “lemons” (American slang for an automobile of terrible quality).  The Nobel committee that awards the prize in economics singled out that article for special praise in deciding to make him a Nobel Laureate in 2001.  The article discusses the implications of asymmetrical information in a number of contexts, but at least two of the contexts involved what criminologists call “control fraud” and a third involves the risk of fraud by borrowers.  Most of the examples Akerlof discussed involved fraud.  The frauds he analyzes concern deceit about the quality of goods being sold or the borrowers’ ability or willingness to repay a loan.    Continue reading

Can Modern Economics be an Ethical Science?

By Payam Sharifi

The subject and discussion of Ethics for economists is a recent but welcome phenomenon.  The creation of the documentary “Inside Job” highlighted the ethical issues facing economists.   Various outlets, consisting of many from outside the economics profession as well as some inside, have been demanding that economists and economics itself adopt a code of ethics.  Many articles, blogs, and academic papers since that time have been beating the drum for a code to be adopted, as a simple Google search will show.  The recent Reinhart and Rogoff flub has also reinvigorated this debate.  The objective of this exposition is to show why economics (as it exists currently) cannot, and will not, ever be able to adopt that code of ethics.  Well, why not…as I’m sure some of you are asking.  Many other professions have a code of ethics that they adhere to…why is it that economics cannot do the same?  There are in fact many reasons why this is so.  I also advance another approach to economics that has existed for decades, if not longer, in the search to answer the question that forms this essay.  Another, but seemingly unrelated topic that is sometimes debated among mainstream economists is the need for economic theory itself to change.  As we seek to answer the question of whether Modern economics can be an Ethical science, we will find that the question of economic theory is in fact related.  Continue reading

Reply to Reinhart and Rogoff’s NYT Response to Critics

Warren Mosler
(Cross-posted with permission of the author from
The Center of the Universe)

The intellectual dishonesty continues. As before, it’s the lie of omission.

R and R are familiar with my book ‘The 7 Deadly Innocent Frauds of Economic Policy’ and, when pressed, agree with the dynamics.

They know there is a more than material difference between floating and fixed exchange rate regimes that they continue to exclude from their analysis. Continue reading

Bitcoin’s Deflationary Weirdness

By Dan Kervick

I appeared today on The Attitude,  broadcast by WNHN 94.7 in Concord, New Hampshire, to talk with host Arnie Arnesen about the Bitcoin phenomenon.  The podcast of the second hour of the show can be accessed at the link below.  My appearance occurs right at the beginning of the hour:

The Attitude – Bitcoin

The purpose of our brief discussion was just to provide some general background information for Arnie’s listeners about Bitcoin, including what bitcoins are and why anyone would buy them or accept them in exchange for goods and services.   We touched on several topics related to the Bitcoin phenomenon, but there is one very peculiar and puzzling feature of Bitcoin that we didn’t get to discuss and that seems especially important to me:  the Bitcoin system has what appears to be a built-in deflationary architecture.

Continue reading

Modern Monetary Theory – An Introduction: Part 3

By Dale Pierce

III. Taxing and Spending

MMT 101

The state’s money is a good store of value and a reliable medium of exchange because absolutely everybody needs at least a little of it. Even off-the-grid survivalists and doomsday preppers need it. Because when they pay for their hollow-point ammunition at Dick’s, or for their freeze-dried mashed potatoes at Costco, they not only pay for the goods – they also pay the sales tax. Now, Dick’s and Costco only take dollars or dollar-denominated credit anyway, but what makes the state’s money valuable is that every company has to collect the tax piece in dollars and cents – and pay dollars to the government at the close of each week or month or other accounting period. Between sales taxes, property taxes, income taxes and all other taxes, everyone knows that there will be a stable, long-term demand for the currency which the state alone can issue. If this currency is reasonably well-managed by the country’s monetary authorities, it will remain everyone’s preferred legal tender – unless a person really is a survivalist or some other kind of crank. Continue reading

Making The Case Against Austerity

By Stephanie Kelton

Neil Irwin at Wonkblog has a new post up:  The Deficit is Falling Fast. Can Washington Accept Victory?

He quotes John Makin of the American Enterprise Institute, who says, approvingly, that the U.S. has probably imposed enough austerity “for now.”  Then he shows us the evidence. Continue reading

Modern Monetary Theory – An Introduction: Part 2

By Dale Pierce

II. The Science of Government 


The wave of capitalist triumphalism that spread around the world from the 1980s on was, and remains, a very complex social, political and economic phenomenon. Future historians, if there are any, will marvel at the suddenness of its rise and the completeness of its victory. Margaret Thatcher and Ronald Reagan seemed to come out of nowhere. Working class Tories and Reagan Democrats rose up in their millions – to vote against the very parties and ideas that had made them prosperous. And which had also made it possible for many of them to send their kids to college for the very first time. The kids themselves graduated into an economy plagued by inflation and full of uncertainties and unknowable quantities that everyone, everywhere seemed determined to blame on some English guy named John Maynard Keynes. Him and his Welfare State. And all that reckless deficit spending. And all those high taxes. Who wanted to be for things like Welfare and taxes? So, a lot of those kids went ahead and took the logical next step and became Young Republicans. Continue reading

Modern Monetary Theory – An Introduction: Part 1

By Dale Pierce

Chapter One


This is Chapter One of a three-part overview of a body of economic thought known popularly as “Modern Monetary Theory” or “MMT”. The aim of this chapter is to explain the basic dynamics of our present-day “fiat-money” economy through the dual lenses of government spending and taxation. We will also explore some contested history, and examine some of the ways we need to think about money differently, now that the United States, along with the rest of the world, has gone off any version of a gold standard. The intent is to be as non-technical as possible, but some parts of the subject are, unavoidably, a little complex. In these areas, keeping the logic as step-by-step as possible will be the goal. In Chapter Two we will look at the ways money systems sometimes go haywire, through either inflationary malfunctions or through the (thankfully) less-familiar phenomenon called deflation, including “debt deflation”. Chapter Three will be about Jobs, Jobs, Jobs. Continue reading