Sunday, November 22, 2009

Help! Tyler made my head explode

When he referred to this post by Krugman as one out of "two of the best recent economics blog posts, in some time." In fairness, Tyler did do some basic CYA by noting in parentheses that he wasn't sure if he agreed with the post.

So lets break it down, KPC style:

"From various bat squeaks I’ve put together a view of what I think lies behind the surprising — and damaging — deficit squeamishness of the Obama administration."

Ok, so we start off with a double WTF. Bat squeaks? Is he making fun of Larry Summer's speaking voice?

And what is this about the "deficit squeamishness" of Team Obama?

People, the fiscal 2009 deficit was $1.4 trillion! And thats not just a one time, caused by the recession, deal. According to the CBO, the deficit in 2019 will also be over $1 trillion. Plus Team Obama seems willing to sign on to a health care reform bill that will in all probability further raise the deficit beyond current projections.

I am sorry Paul, but I just don't see any reluctance of the Obama administration to run big deficits.

Krugman then claims, without any supporting evidence, that the main reason why we are running such tiny, puny, pusillanimous deficits is that the government believes that further borrowing could cause long term interest rates to skyrocket because it would unwind a sort of carry trade going on where people are borrowing at ultra low short term rates and lending out at higher long term rates. As he puts it:

"Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market."

PK thinks this is a dumb argument. So do I. However, I don't happen to think it is why our deficits are what they are (which to PK is small, but on planet earth where I live, it is fairly large).

People, if Team Obama really wants to run a bigger deficit in theory (which we have no real evidence that they do), but are not doing so in practice, the reason why is much more likely to be that they fear the political fallout from all of us irrational people who would object to such a policy.

I actually agree with Krugman that the government could borrow a lot more money without any directly adverse macro consequences in the short to medium term.

I just didn't see anything in the way the original stimulus bill was constructed and implemented that would make me believe that another round of stimulus from the same set of players would do much for job creation or help put our economy on a sustainable recovery path.

1 comment:

Michael Munger said...

Well, as I posted before, there may be SOME evidence for the "carry trade" claim. Still, that can't be the primary force at work here.

It does seem like you are right: The huge borrowing is having essentially zero effect on interest rates, or on the willingness of foreign investors and governments to buy our bonds, of all term lengths. That is an empirical question. I had thought that there WOULD be some effect by now, but I was wrong. That means that you and Der Krug are right.

The best argument you make is the last one, and I hope that no one loses sight of it: One could concede that the "carry trade" is not a major concern. One could concede that we are not remotely close to the limit on what our gov could borrow.

And one might STILL say Krugman is wrong. The "stimulus" package did not stimulate, and it could not have stimulated.