Four posts yesterday. The first was “From the Department of Things That Are Just Too Perfect:”
Limited time this morning, so light blogging. But I can’t resist posting this. Jonathan Chait finds James K. Glassman, co-author of “Dow 36,000″ — a 1999 book that argued, based on some creative double-counting and other innovations, that 36,000 was the right value of the Dow at the time of publication — claiming that this week’s Dow high vindicates his ideas. But that’s not what’s so perfect.
No, what caught my eye was where Glassman went on the strength of his bold prediction. And the answer is, he’s the Founding Executive Director of the George W. Bush Institute.
All is well with the world.
There has been some chortling over this around the intertoobz… The second post of the day was “Fatal Fiscal Attractions:”
Oh, my. David Greenlaw, James Hamilton, Peter Hooper, and Rick Mishkin have published an op-ed in the WSJ (where else?) based on their recent paper on debt, deficits, and interest rate spreads. They really shouldn’t have — the argument in that paper collapsed under scrutiny almost the moment it was released.
Matt O’Brien sums it up. Greenlaw et al start by saying that they’re going to restrict their analysis to advanced countries, because developing countries generally can’t borrow in their own currencies, and this lack of monetary independence makes them vulnerable to shocks in a way advanced countries historically haven’t been. But the authors then proceed to offer statistical results in which the majority of their sample consists of euro area countries, which by definition can’t borrow in their own currencies — because they no longer have their own currencies.
And even a quick pass at the numbers shows that all, yes all, of their claimed result comes from troubled euro area nations:
O’Brien does a more careful takedown, doing the same regressions they do but separating non-euro from euro countries, and confirms that their result is euro-exclusive. He also finds that the really strong relationship within the euro is between interest spreads and current account deficits, which is in line with the conclusion many of us have reached, that the euro area crisis is really a balance of payments crisis, not a debt crisis.
This leaves us with a puzzle: what were the authors thinking? Particularly when one bears in mind the fact that there is, let’s say, a bit of history (from 2010) here:
Morgan Stanley had forecast that a strengthening U.S. economy would lead to private credit demand, higher stock prices and diminish the refuge appeal of Treasuries, pushing yields higher. David Greenlaw, chief fixed-income economist at Morgan Stanley, said in December that yields on benchmark 10-year notes would climb about 40 percent to 5.5 percent, the biggest annual increase since 1999. The New York-based firm reduced its forecast to 4.5 percent in May and to 3.5 percent last week.
Maybe a bit of caution, indeed a willingness to bend over backwards to avoid once again crying wolf about interest rates, would have been in order?
But there’s something about fiscal scare stories that makes economists who have done good work elsewhere careless, all too ready to jump on results that seem to reinforce fiscal fears without engaging in self-reflection and self-criticism. Maybe it’s the morality-play aspect; maybe it’s the realization, conscious or not, that you can’t go wrong with the Very Serious People by playing deficit scold.
Whatever the reason, it’s very disappointing to see economists feeding fiscal fears with work that is so obviously flawed.
The next post up was “I Guess It’s a Form of Flattery:”
OK, I guess I have to say something about this Sachs and Scarborough piece. Let’s do it by numbers.
1. I’m actually flattered. According to JoScar, I’m a marginal figure with whom nobody agrees; and of course I have no powerful institutions backing me, no billionaires with a variety of front organizations to disseminate my views, and I’m espousing a view that most insiders find anathema. Yet he has to write column after column, spend what at this point must be hours of his show, denouncing and trying to refute my position. I guess I must have some secret power that he needs to defeat; maybe the secret power of actually, you know, having the facts on my side.
2. As Kevin Drum points out, when I debated JoScar he waved away all my arguments for more spending now by claiming that he’s for it too; once he doesn’t have me there to keep him on track, he’s back to denouncing spending. I mean, now he says that he was against spending even during the worst of the crisis. That, it seems to me, is a much more consequential and indefensible inconsistency than me having wanted to pay down debt in 1997.
3. I can’t believe they’re rolling out the old line that “we did stimulus and the economy is still weak” line. We did a bit of stimulus, but many people — me in particular — warned from the beginning that it was inadequate. If you want a real experiment in the effects of government spending, you want to look at Europe’s austerity programs, where the relationship between austerity as a share of GDP and GDP growth (from 2008 to 2010) is overwhelmingly clear:
Somehow, none of this evidence gets mentioned or even considered.
4. Shame on both authors for making a big deal of the CBO’s projection of rising interest payments as a share of GDP. The CBO projects a flat ratio of debt to GDP; all of the projected rise is due to an expected rise in interest rates as the economy recovers. Deficits have nothing to do with it — and no conceivable austerity program in the next few years could make more than a marginal difference.
5. I don’t know what’s happened to Jeff Sachs. He’s been critical of “crude Keynesianism” throughout this crisis, without ever explaining what’s crude about viewing a huge slump in aggregate demand through a Keynesian lens. So his position has been a mystery. But now — playing wingman to Joe Scarborough? Really?
And he ended the day with “Friday Night Music: The Lone Bellow at Tiny Desk:”
Wow — almost forgot to post tonight. Anyway, this is the best performance I’ve seen yet by this group; no frills, just the three of them, and almost Civil Wars levels of perfection.