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Oops!!

With all eyes and all headlines fixed so intently upon Boston’s two Caucasian Bombers, hardly anyone has been paying attention to revelations of a far more devastating disaster that unfolded close nearby, but which were generally buried on the inside pages of our major newspapers.

I refer, of course, to the Harvard Spreadsheet Glitch [1], the discovery of a calculation error in the early 2010 research of celebrity-economists Kenneth Rogoff and Carmen Reinhart. The Rogoff-Reinhart findings had been cited by officials and international agencies throughout the world as proof of the devastating economic impact of accumulated national debt.  As a result, most governments focused their Great Recession response on the need to minimize deficit spending and cut budgets rather than try to reduce unemployment via Keynesian pump-priming, which according to the study led to disaster.  But Rogoff-Reinhardt had made an error in their calculation [2], so Oops! [3]

Now I am as absolutely far from being a trained economist as it is humanly possible to be, never in my life having taken so much as a single economics course or even opened the pages of a textbook.  But simple common sense and reading the newspapers tells me that the glitch in question had major world consequences, given how widely the austerity prescriptions were believed and followed by our ruling elites.

It appears that countries containing nearly a billion people were substantially affected by that widely promoted spreadsheet error, with trillions of dollars misdirected and probably many millions of citizens driven into deep unemployment and poverty.  Given that prolonged economic stress significantly lowers life expectancy, the premature death toll from that defective Rogoff-Reinhart spreadsheet likely reaches far into the hundreds of thousands.  Whichever drunken grad student typed in the wrong numbers has much to answer for, or perhaps we should just prosecute Bill Gates for selling a genocidal weapon such as Excel.

Now anyone can make a numerical mistake, and I have certainly made many in my own day, a source of permanent humiliation and guilt.  But consider that none of our financial, media, or academic elites bothered checking or confirming those erroneous calculations based as they were upon publicly available data.  Instead, they just endlessly trumpeted the results in news stories and speeches, once again manifestly confirming the total arrogant incompetence of those who rule our world.

The obvious reason for this ridiculous situation was that the Rogoff-Reinhart findings fit so perfectly well into the orthodox economic theories and perceived reality of established elite opinion that they were naturally assumed to be correct; if they had predicted something else, they surely would have been checked and rechecked and re-rechecked until even the slightest small error was found.  Our academics and journalists believe certain things to be true, and simply tend to discard or ignore evidence that does not conform to that framework, while our politicians read whatever speech the teleprompter sets before them, just like the network newscasters they increasingly resemble.  My impression is that the Brezhnevian Era of Soviet stagnation followed a similar pattern, though their politician-rulers were much far less photogenic and talkative.

What will be the negative consequences of this devastating discovery for the careers and credibility of Rogoff, Reinhart, and all their supportive colleagues and promoters?  None whatsoever I expect.  Once a few weeks or months have gone by, and more Chechen terrorism or celebrity scandals have washed away any lingering memories, then new and improved Rogoff-Reinhart economic predictions from their same Harvard spreadsheets will be just as widely distributed and believed as had been their previous ones, with the same economic pundits touting them in newspaper columns or cable television debates.  The famous words of Talleyrand regarding the restored post-Napoleonic French Bourbon monarchs comes to mind: “They had learned nothing and forgotten nothing.”

Given our current national trajectory it wouldn’t much surprise me if a sufficiently irritated and immiserated citizenry will eventually consider applying a very Bourbon outcome to our ruling elites, dealing with them in the same late eighteenth century fashion as was visited upon roiduc, and comte, with the process perhaps garnering astonishingly high ratings on national reality-television.

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#1 Comment By EngineerScotty On April 22, 2013 @ 8:39 pm

Who here thinks that if that error were discovered sooner, that national leaders and exchequers and etc. would have, instead of embracing austerity, had undertaken a program of greater Keynesian stimulus, and pursued a policy of seeking full employment ahead of deficit reduction?

And who, thinks, on the other hand, that were the paper to have been rubbished (or not exist at all), other intellectual justifications would have been offered and advanced for an austerity program, seeing as such benefits the plutocracy by increasing the values of their cash-hoards, and further adding to the desperation of the working man–who (in the West during much of the 20th century) had long gotten too big for his britches?

Come now, Ron. Don’t be naive. If, after all, the leaders of the world were scientifically-informed technocrats, doubtless this revelation would have by now resulted in the world’s central bankers firing up the printing presses, no? That doesn’t seem to have happened….

#2 Comment By Grumpy Old Man On April 22, 2013 @ 9:00 pm

I doubt that our plutocrats and their public official retinue pay that much attention to the jabbering of economist, especially if they have to read spreadsheets to understand them. And I thought the economic orthodoxy was more neo-Keynsian.

However, in one respect, you are correct, sir. Nothing what John Derbyshire calls the “Tutsi” class do can permanently disgrace them. Cases is point–Bill Ayers and the Boudin woman. Apparently one can place bombs and commit robbery, and in a few years rejoin the intelligentsia. By this standard, arithmetic errors are as grass.

#3 Comment By TomB On April 22, 2013 @ 10:30 pm

I don’t know that it’s possible for anyone to be more delighted than I have been seeing the great Ron Unz identify the “elites run wild” culture that we’ve developed, but I suspect he’s wrong in this particular case, and indeed 180-degrees wrong.

Notice, that is, the sort of effective assumption that Unz made that the error in question effectively reverses the conclusions that are to otherwise be drawn from Rogoff and Reinhart’s work.

Except that … *nothing* I’ve read indicates that’s the case, and what I have read indicates that the mistake either just modestly lessened the strength of those conclusions, or basically didn’t undermine those conclusions at all.

As I understand it the conclusion that Rogoff and Reinhart originally reached was that there is a suggestive correlation between public debt at a certain level and slow economic growth. (Excepting the kind of public debt taken on in the immediate aftermath of a financial crisis.) And they purported to show this correlation by looking at the experiences of a good number of instances.

So okay, this error has now been found in their past work and what do Rogoff and Reinhart say? Well, after noting that a big number of other papers from a big number of other sources “virtually all find very similar conclusions to [our] original findings, albeit with slight differences in threshold, and many nuances of alternative interpretation … the weight of the evidence to date–including this latest comment [after correcting for the error]— seems entirely consistent with our original interpretation.”

See: [4]

And what does the careful Phil Levy say in Foreign Policy? Well, careful enough to not even take Rogoff and Reinhart’s post-error discovery talk of “no effect,” this is what he still says about the reaction to the discovery of the error:

“There are a number of reasons to see this as an overreaction. The episode is a bit analogous to a researcher finding that a daily Twinkie adds 10 pounds over a year. A subsequent study finds that, with different methodology, a daily Twinkie might add only 5 pounds over a year. Then the baying pack howls that they knew Twinkies were good for you all along, they abjure dieting, and stuff themselves with cake and cream filling.”

See: [5]

I thus think the situation is at the very least as Levy finds it, and with the true Elite Blob being on the side of the “baying pack” Twinkie eaters, who would be the absolute last to consider that perhaps the error only modestly detracts from the merits of Rogoff and Reinhart’s original stand, much less R&R’s present stance that the error doesn’t really affect their conclusions at all.

In short it seems to me clear that the true Elite Blob we ought to be concerned with here are not these two economists who have never given any evidence of a desire to become “public intellectuals” or “public commentators” or etc., much less self-interested politicians or loudmouths. Instead it seems to me clear that the real Elite Blob of the sort that’s been running wild has been those who have been saying for decades that you can spend and spend and spend and run deficits until your eyes bleed and it will in fact have only a *positive* effect on growth—so justifying the spending spending spending on their pet causes that we’ve seen.

And as further evidence of who the Elite Blob really is here I’d point further to the reaction to R&R’s mistake. Just as Levy notes, it’s the typical howling polemical Elite Blob/pack reaction: Don’t go looking into the details of the matter, but instead just use the superficial aspect of it to pretend it just *totally* undermines what it so conveniently always wanted undermined.

I.e., exactly the sort of thing that Paul Krugman did in reaction to the discovery of this error in saying “Did an Excel coding error destroy the economies of the Western world?”

And what did R&R do? Take a close look at the error, eliminate it from their work, and see what still stands.

No, Mr. Unz, it seems to me you got this one 180-degrees wrong. As troublesome as it may be in compiling a list, just because someone is a Harvard professor doesn’t make them one of the Blob Elites who have so been doing a number on us I don’t think. Somehow, it appears, a few genuine good people still manage to wiggle their way into otherwise elite positions.

#4 Comment By T. Sledge On April 22, 2013 @ 10:56 pm

Ahhh, the perils of confusing correlation with causation — something that even us graduates of third rate state universities in TX were warned against (at least we were 35 years ago) !!!!!

I suspect that if the original paper in question HAD been published by some graduate student at an obscure state university, so many “elites” would have been eager to challenge the upstart for getting so much attention, that the math errors would have soon been found.

Tsk, tsk — “social sciences cold fusion” any one ?

#5 Comment By EngineerScotty On April 22, 2013 @ 11:32 pm

Bill Ayers? Really?

#6 Comment By M_Young On April 22, 2013 @ 11:33 pm

We have hardly been living in a time of austerity, and least on the monetary side of macroeconomic policy. Savings accounts pay less than zero real interest rates, while unsecured credit debt can be had at about 1-2% real interest.

#7 Comment By Annek On April 22, 2013 @ 11:59 pm

I wasn’t aware that we have been living in a time of austerity.

#8 Comment By JGF On April 23, 2013 @ 12:29 am

Thanks to Ron Unz for bringing the Reinhart-Rogoff error to the attention of AmCon readers. At the heart, RR claim a strong causation: that increased government debt causes slow growth, and that there is a tipping point at debt/GDP = 0.9 years.

However, (i) the strength of the correlation was nowhere near what R&R claimed due to data fudging and coding errors, (ii) the correlation between debt/GDP and GDP growth is stronger at LOW debt/GDP, and (iii) the data only shows correlation, and not causation.

Readers might be interested in this synopsis of the Herdon/Ash/Pollin paper:

[6]

Another UMass economist, Arindrajit Dube, analyzed the data and reached far different conclusions:

[7]

… the most important of which for me was showing the strong correlation of debt/GDP with past GDP and little correlation with future GDP. This destroys what little case there was for the theory that high debt/GDP causes low GDP growth.

Economist L. Randall Wray provides perhaps the most important criticism, however: the relationship between debt and growth is very different for a country (like the U.S.) which has it’s own floating sovereign currency than for a country which does not (like Greece today). R&R ignored this distinction in their data analysis.

[8]

[9]

#9 Comment By Richard Spencer On April 23, 2013 @ 12:56 am

The notion that *This Time Is Different* and related papers were decisive in causing the trend towards austerity is ridiculous.

Ron and the *Times* are telling themselves a “Who Done It?” story, in which some economists said something and that caused some international event.

#10 Comment By EngineerScotty On April 23, 2013 @ 1:54 am

Compared to Europe, the US hasn’t been living in a time of austerity–and you’ll note, the domestic economy is in better shape than many countries across the pond.

But things could be better here, certainly.

#11 Comment By Mightypeon On April 23, 2013 @ 2:07 am

There were larger faults with R&Rs paper.
1: The majority of their downward trend came from New Zealand, which had a single year with more than 90% debt in which they had -7.6% growth. This single result got the same weight as 20ish datapoints for growth when the UK had 90% debt. Exclude New Zealand and the whole thing falls flat.
2:There is indeed a nonlinearity associated with debt and growth, but it comes between 0% debt and 30%. There are two feasable ways to get to 0% debt, and both have ample historic precedent: A) Declare bankrupcy. B) Kill whoever you are indebted too. Austerity does not get debt to 0%.
3:The excell error is important because it allows people to relate to just how crappy Harvard research often is. People think its hard to make a distinction between 2 economic schools (actually, my heuristic for differentiating junk economic science from not junk science is simple, he who uses more history and less math is usually right), than one economic school does a) write research papers in excell and b) cant use excell given many others an excellent perespective on their work.

#12 Comment By Nick On April 23, 2013 @ 6:32 am

I never really believed anybody who argued that austerity was intended to restore growth, particularly not when it was Keynesians characterizing the alleged purpose of austerity as restoring growth.

Rather, I understood the purpose of austerity as restoring faith in the public debt of countries that had long over-spent and were continuing to do so. If you look at countries like Ireland and Iceland, after they were forced to nationalize much of their bank debt, they had no access to bond markets. Hence the IMF and/or ECB loans. Austerity was intended to restore these countries to creditworthiness so that they could return to the public debt markets. Which has happened, by the way.

The Keynesian delusion rests entirely on the ability of governments to continue funding themselves by issuing debt even when those countries have the creditworthiness of Bernie Madoff (i.e. “there is no there, there”). In a weak conceit to the fact that there are rational human beings buying that debt, the neo-Keynesians like Krugman have argued that this reality does not matter for countries who can print their own money, because when those countries are locked out of bond markets, they’ll just continue deficit spending by running the printing press (figuratively; keystroke money supply expansion, really). We all know exactly where this leads, to hyper-inflation, but, of course, the clever neo-Keynesians are immune from the curse of history.

If the R&R paper was misused by central bankers as a shorthand explanation for what they were really doing – conceding the reality of their profligacy and their inability to access bond markets because of it – is that R&R’s fault? What they were striving toward was determining whether a certain level of debt/GDP would become a drag on the economy. Which has relatively little to do with whether bond purchasers think you’re country is bankrupt or not.

#13 Comment By S Peter Cordner On April 23, 2013 @ 8:14 am

The idea that academics didn’t tear into the work when it was first published is incorrect. The media, the GOP, the Blue Dogs, and Europe’s factotums didn’t care… but the academics did, and said so with some conviction. This recent refined criticism is merely refined, not new.

The problem remains that the real button-pushers were hearing what they wanted to and so damn the torpedoes full speed ahead… but don’t disparage the academics. They were doing their jobs.

#14 Comment By Ken T On April 23, 2013 @ 8:53 am

Excellent article. I would only take exception with one sentence. You said: “But consider that none of our financial, media, or academic elites bothered checking or confirming those erroneous calculations based as they were upon publicly available data.” The reality is that many people tried repeatedly to confirm R&R’s conclusions, and reported to anyone who would listen that they were unable to do so. But they were dismissed as nothing but whining DFH liberals by the Very Serious People who embraced R&R. It was only when R&R finally yielded to pressure to release their own spreadsheets that the “smoking gun” was found, and the story finally started to come out.

#15 Comment By J On April 23, 2013 @ 9:51 am

“With all eyes and all headlines fixed so intently upon Boston’s two Caucasian Bombers, ”

Ron, I know you meant something by that. What?

#16 Comment By M_Young On April 23, 2013 @ 10:58 am

“The excell error is important because it allows people to relate to just how crappy Harvard research often is”

It is pretty funny that two professional economists are using Excel ™. I would think Stata, ‘R’, GAUSS, SAS, even SPSS would be more appropriate tools.

#17 Comment By EngineerScotty On April 23, 2013 @ 11:26 am

Rather, I understood the purpose of austerity as restoring faith in the public debt of countries that had long over-spent and were continuing to do so. If you look at countries like Ireland and Iceland, after they were forced to nationalize much of their bank debt, they had no access to bond markets.

A few questions, then:

1) Why is austerity, then, being promoted in places which are sovereign currency issues that still have ample access to credit? Confidence need not be restored in US Treasuries at the present time; indeed US debt remains a “safe haven” investment. Yet so many commentators think the US is a few months from being Zimbabwe.

2) Why was Ireland (to give a particular example) “forced” to nationalize its bank debt? Irish banks made some spectacularly bad bets, the vast majority of which the Irish people had no involvement in. Yet the Irish populace was “expected” to essentially retroactively co-sign the loans, and the Irish government that agreed to this policy did its level best to shovel as many Euros out of the country before an election was held and it was thrown out of office. Why is it that many of the governments of the world allow the financial markets to treat ’em like a loan shark would treat a junkie on the corner who’s over his limit?

3) Iceland, on the other hand, told its creditors to take a bath–rather than submit to austerity, it devalued its currency (having had the good sense not to join the Eurozone, it had this still available as a policy option). Usual suspects screamed “zimbabwe” and suggested that Reykjavik would no longer be able to borrow so much as a cup of flour. A few years and a mild recession hence, Iceland has mostly recovered, and its sovereign debt is returning to investment-grade. It’s not AAA or close to it yet, but prospects look far better for Icelanders then they do for many of the less-productive Eurozone economies.

#18 Comment By Adam On April 23, 2013 @ 12:07 pm

I love people that bash Keyensians. There are a couple sides involved, demand and supply, and both approaches work in different circumstances. To be always on one side or the other is blatant stupidity. Money doesn’t recognize the particular morality the austerity folks seem to want to apply.

#19 Comment By Dahlia On April 23, 2013 @ 12:15 pm

“…and I have certainly made many in my own day, a source of permanent humiliation and guilt.”

Oh, you sound kind of depressed here. Nothing can be so bad, could it? Humility becomes us all; keep doing what you’re doing. Most of us don’t have the intelligence or the strength of character to put ourselves out there, which you do on a continuous basis.

#20 Comment By Nick On April 23, 2013 @ 12:45 pm

EngineerScotty

1) I’m not sure I understand. Austerity has been promoted in countries like Spain, Greece and Italy, where bond yields periodically spiked to unsustainable levels because of a loss of confidence. I’m not sure I understand why the U.K. keeps engaging in self-flagellation. Your guess is as good as mine there. The U.S. is a totally different animal. Those with any common sense realize that our debt problem is largely prospective; that we will become much like the PIIGS when the demands on our government from entitlement programs simply become unsustainable. Our temporal deficits are ridiculous and need to be controlled simply as a matter of good governance. Our structural deficits are disastrous.

2) Ireland made a policy decision to nationalize the debt of its banks. You can debate whether that was a good idea or a bad idea (I can, frankly, be persuaded either way, though I probably tend toward the notion that it was a bad idea because the assets were so enfeebled by the real estate crash). But after that decision, Ireland was frozen out of international bond markets. The only solution was to right-size their spending to account for the government’s debt, and that required austerity. The point is that austerity was necessary to restore creditworthiness, not that nationalizing the debto of their zombie banks was a great idea.

3) Iceland did undergo austerity; it did cut government spending significantly. And it did nationalize Landsbanki and take stakes in other banks. It has also been helped, I admit, by having its own currency because that currency was essentially demolished, making Icelandic goods incredibly cheap abroad (hooray for cod!). But Iceland also took a huge bail out from the IMF because it could not obtain credit in the bond markets, certainly not to the level necessary to resolve its banking mess. And they implemented capital controls to stop foreign investors from taking everything but the curtains.

Austerity is not a one-size-fits-all solution, and people who view it as stimulating growth are either foolish or lying. But when your country is frozen out of the bond markets, it seems the be the most effective way to restore confidence. Is it painful? In th short-term, undoubtedly so. But the only alternative I can think of is to force other countries to extend credit to their neighbors. Ask the Germans how well that is received.

#21 Comment By Mightypeon On April 23, 2013 @ 1:28 pm

@Engineer Scotty:
Basically, Austerity is good for bankers, horrible for everyone else. Unfortunatly, bankers tend to make policy decisions, if there is no conveniently placed Red Army to prevent Bankers from using “too big too fail” as a blackmail feature (if there was a Red army, any politician with some sense of pride could awnser banker extortion attempts with playing the Soviet National anthem and laugh, unless he happened to be a banana republic politician dealing with US banks) the bankers will often get their way.

@Myoung:
As Mr. Unz completely correctly stated, Harvard is a Hedge fund that tries to mimic a university. I wont forget an alcohol laden conversation I had in China about with a “regional gouvernour” about where he would send his son to study.
Quote:”Harvard? Stupidly expensive, he will get some connections usefull in the USA but thats it. Its also politically risky, in case a confrontation happens and US trained cadres go the way of Soviet trained cadres during the Sino Soviet Split. Same with the UK.
My Son is actually fairly smart and hardworking(but not smart and hardworking enough for Beijing, and I wont risk an “unusual admission”), so ill send him to the Netherlands, a Scandinavian country or Germany. I just hope he wont get too lazy.”

I ended up recommending the ETH Zürich, largely because its pretty “tough”, and Switzerland has been really neutral in the past 5 centuries or so.

#22 Comment By EngineerScotty On April 23, 2013 @ 1:37 pm

Basically, Austerity is good for bankers, horrible for everyone else. Unfortunatly, bankers tend to make policy decisions, if there is no conveniently placed Red Army to prevent Bankers from using “too big too fail” as a blackmail feature.

Exactly.

Of course, a Red Army is not required (and Red Armies can be counterproductive, given that they have never been of much use in advancing the commonweal, and they give the plutocracy a distraction), just an informed electorate and politicians with more spine.

Instead, what we got is an electorate that seems to view monetary policy as a morality play (and inflation a mortal sin), and/or blames everything on the poor, on account of the meager scraps they are occasionally thrown.

A century-plus ago, America’s social conservatives and yeomen farmers at least had some clue about these matters–and supported bimetallism as a result. (They lost, of course). Today, not so much.

#23 Comment By EngineerScotty On April 23, 2013 @ 3:34 pm

1) I’m not sure I understand. Austerity has been promoted in countries like Spain, Greece and Italy, where bond yields periodically spiked to unsustainable levels because of a loss of confidence. I’m not sure I understand why the U.K. keeps engaging in self-flagellation. Your guess is as good as mine there. The U.S. is a totally different animal. Those with any common sense realize that our debt problem is largely prospective; that we will become much like the PIIGS when the demands on our government from entitlement programs simply become unsustainable. Our temporal deficits are ridiculous and need to be controlled simply as a matter of good governance. Our structural deficits are disastrous.

The PIIGS, of course, could not use monetary means to deal with debt, not being sovereign currency issuers. Greece flirted with the idea of sovereign default and/or leaving the Eurozone, but was “persuaded” not to. Spain and Italy don’t have the structural problems that Greece has, but have clearly been impacted by confidence problems. The UK? This could possibly just be chalked up to defending big finance, and ensuring that they get seats when the music stops playing, even if some of the public does not.

As far as the US goes, we have long-term problems moreso than short-term ones. A big issue is the asinine amount of treasure spent on the military–what foe are we arming to defend ourselves against? If there is to be austerity, however, it needs to be directed first and foremost at the Pentagon and the other hogs at that trough, not at the people.

2) Ireland made a policy decision to nationalize the debt of its banks. You can debate whether that was a good idea or a bad idea (I can, frankly, be persuaded either way, though I probably tend toward the notion that it was a bad idea because the assets were so enfeebled by the real estate crash). But after that decision, Ireland was frozen out of international bond markets. The only solution was to right-size their spending to account for the government’s debt, and that required austerity. The point is that austerity was necessary to restore creditworthiness, not that nationalizing the debto of their zombie banks was a great idea.

Except austerity is not necessary to restore credit-worthiness (which is why I brought up Iceland). When it comes to credit-worthiness, countries are more like corporations than like individuals–their credit rating is more based on their prospects going forward as much as past behavior (whereas individuals who go bankrupt are tagged as deadbeats and deemed untrustworthy, even if their economic circumstances change). A country with a stable polity, an informed populace, robust infrastructure, and a sound economy is going to likely to be able to get funding from international finance. Which brings us to…

3) Iceland did undergo austerity; it did cut government spending significantly. And it did nationalize Landsbanki and take stakes in other banks. It has also been helped, I admit, by having its own currency because that currency was essentially demolished, making Icelandic goods incredibly cheap abroad (hooray for cod!). But Iceland also took a huge bail out from the IMF because it could not obtain credit in the bond markets, certainly not to the level necessary to resolve its banking mess. And they implemented capital controls to stop foreign investors from taking everything but the curtains.

To emphasize: Iceland devalued its currency (the króna lost about 70% of its value), imposed capital controls, nationalized its banks, and sent several corrupt bankers and officials to prison. It also did, as you note, impose an austerity program. But the point is: international finance took significant losses in Iceland, and were not permitted to simply externalize the losses onto the populace thereof. And yet, Iceland now is becoming an attractive place to invest–it now has a [10] from one agency.

Why aren’t the bond markets still refusing to touch Icelandic debt with a ten-foot pole? Why aren’t the people of Iceland being punished by big finance, for their politicians’ decision to rob the world’s bankers of a miniscule chunk of their fortunes? Good Lord, many German pensioners lost money in Iceland’s banks, and yet this outlaw country is once again being permitted to run up a tab? 🙂

Obviously, things aren’t quite as some would have you believe….

#24 Comment By C. Van Carter On April 23, 2013 @ 3:54 pm

Consider reading something other than newspapers.

#25 Comment By C. Van Carter On April 23, 2013 @ 3:58 pm

Obama’s Keynesian “stimulus” did not have the effect Keynesian models predicted, yet you still see people advocating Keynesian pump-priming.