Industrious Revolution: Econ 210a, Introduction to Economic History at U.C. Berkeley, February 10, 2010
Hoisted from Comments: Robert Waldmann on Barack Obama's "Throat Clearing"

Deficit Projections: Ooh Boy...

The Financial Times needs to do better quality control over its commentators:

Peter Orszag says:

budget summary.pdf

That's right. Peter Orszag is currently forecasting that the U.S. federal debt held by the public will be 70.8% of GDP--the debt held by the public less financial assets held by the government will be 63.2% of GDP.

But Niall Ferguson says, in the Financial Times: / Comment / Opinion - A Greek crisis is coming to America: What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch.... Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time...

63.2% < 100%
70.8% < 100%

I have no idea why Niall Ferguson thinks that debt held by the public will be greater than 100% of GDP in two years. I have no idea why Niall Ferguson thinks that Peter Orszag predicts that debt held by the public will be greater than 100% of GDP in two years.

And, naturally, that is not all.

Niall Ferguson writes:

Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did...

And I wonder: who does he think ever said otherwise? The advocates of fiscal stimulus I know begin their arguments for it with, "since zero interest rates plus quantitative easing are proving insufficient..." Or does he just want his readers to think that advocates of fiscal stimulus think that demand would be the same if the Federal Reserve were setting short-term interest rates at 5%--without saying so, and even though I am not aware of any advocates of fiscal stimulus who believe that?

And I read:

First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped...

And once again I wonder: who is he talking about? The proponents of stimulus I know are now saying that it has been about as effective as they expected--but that the problem has turned out to be much bigger than we thought in December 2008 when the policies were designed.

And I read:

Second, there is a good deal of “leakage” from open economies in a globalised world...

And I think: that's not an argument against fiscal stimulus, that's an argument for coordinated fiscal stimulus--an argument that has been a key part of the discussion over the past two years, even though Ferguson doesn't seem to know it.

And I read:

Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect. For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.... Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries... by the Federal Reserve and reserve accumulation by the Chinese monetary authorities. But now the Fed is phasing out such purchases... the Chinese have sharply reduced their purchases.... Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year...

To this the right answer is: perhaps, but probably not. Look at the yield curve:

U.S. Treasury - Daily Treasury Yield Curve

If ten-years go from 3.5% to 5.5%, then 30 years will go from 4.6% to 6.2%--and holders of thirty-year bonds will lose forty percent of their wealth. The private holders of thirty-year bonds, and there are many of them, are all making a very large and powerful bet that Morgan Stanley and Niall Ferguson are wrong.

And, indeed, if health-care reform had passed and been signed last month, the long-term deficits in the budget projections would now be melting away as the snow in Washington will melt away at the end of this week...