Felix Salmon

The Obama administration’s biggest macroeconomic mistake

Felix Salmon
Oct 13, 2011 14:05 UTC

I’m late to Ezra Klein’s big article about whether the Obama administration could have avoided our current economic woes, because I was having dinner last night with the head of the Bureau of Economic Analysis, and I wanted to see what he had to say first. And I’m glad I did!

In any case, here’s Ezra, who looks at the famous chart projecting falling unemployment with the stimulus plan — something which, obviously, never happened.


To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

This is an argument I’m very sympathetic to. There’s a counter-argument, which Ezra goes into at some length, which says that even if we’d known how bad the economy was at the end of 2008, it simply wasn’t politically possible to get a bigger stimulus than the one we got. But how far off were we, really? I talked to the director of the BEA, Steve Landefeld, last night, and he made the case that we weren’t all that far off. If he’s right, the Romer and Bernstein projections wouldn’t have been all that different even if we’d known the exact figure.

One thing it’s important to remember, here, is that the numbers Ezra’s quoting are quarterly figures which are then annualized by raising them to the fourth power. So what we’re actually talking about, for the fourth quarter of 2008, was en estimate that the economy had shrunk by 0.9% that quarter, which was ultimately revised to say that the economy had in fact shrunk by 2.2%. That’s a big difference, of 1.3% of GDP in one quarter alone. So how come, if you look at the size of the recession as a whole, the revision actually seems to shrink, to just 1%?

The revised estimates show that for the period of contraction from 2007:Q4 to 2009:Q2, real GDP decreased at an average annual rate of 3.5 percent; in the previously published estimates, it had decreased at a rate of 2.8 percent. The cumulative decrease over the six quarters of contraction is now estimated as 5.1 percent, compared with 4.1 percent in the previously published estimates.

The problem here is that the “previously published estimates” were the ones which came out a few months after the Romer-Bernstein graph, showing the economy shrinking by 6.3% in the fourth quarter of 2008. Here’s the BEA’s chart; note that it simply doesn’t show the 3.8% estimate.


But what this chart does show is that the really big miss, as far as GDP statistics are concerned, was in the fourth quarter; the other quarters weren’t nearly as bad. And I just don’t believe that a single datapoint for advance GDP would have thrown off the unemployment estimates of some of the world’s smartest economists by that much. Would Romer and Bernstein have projected slightly higher unemployment numbers if they’d known the truth about GDP? Probably. But I doubt they’d have been substantially higher. And there’s no way that their “with stimulus plan” estimates would have gotten anywhere near 10%.

Ezra does a very good job of explaining why that is. Romer and Bernstein were basically treating the recession as though it were a common-or-garden cyclical downturn. Which was a big mistake, and one which was pointed out in March 2009 by Carmen Reinhart and Ken Rogoff. “The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage,” they wrote, adding that “so far the U.S. experience has mirrored past deep banking crises around the world to a remarkable extent”. And economies simply do not recover quickly from deep banking crises — financial crises, as a rule, cause L-shaped recessions rather than V-shaped ones.

The fiscal prescription for an L-shaped recession is very different from the fiscal prescription for a V-shaped recession. And what we got was a prescription for something which would accelerate the pace at which we recovered. It was not something which would try to fix the fundamental problem of overleverage, which both caused the crisis and which now threatens to hold back the economy for a decade or more.

Here’s Ezra:

In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.”

To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The Obama administration, perhaps cognizant of the politics, was not nearly so bold. It focused on stimulus rather than housing debt. The idea was that if people could keep their jobs and pay their bills, they could pay their mortgages. But today, few on the Obama team will mount much of a defense of its housing policy.

Overall, I’m still unhappy with the state of macroeconomic statistics. I’m not necessarily unhappy with the BEA itself, which basically just has the job of cobbling together GDP data from a very disparate set of inputs, many of which — especially when it comes to the financial sector — are of surprisingly low quality. But I do think that we’d be much better off with a coherent, unified, and well-funded system of data-gathering, rather than outsourcing it to dozens of different public and private sources.

And I’m definitely (albeit with hindsight) unhappy with the way in which the Obama administration hasn’t even tried to fundamentally tackle the enormous amount of debt in the US economy, and the way in which that debt overhang is likely to hold back economic growth for the foreseeable future. We’re turning Japanese, here, and we’re not doing a damn thing about it.


1. If to dig deeper into BEA’s publiations one can find an unofficial estimate of the uncertainty in the GDP growth rate of 1% per year or annualized 4% per quarter. Thusall revision you have mentioned are within the limits and 8.9 not worse, actually, than 6.3%. Both values inside 4%.
2. Okun’s law is very relibale for the US(http://mechonomic.blogspot.com/2011/1 0/some-corrections-to-david-altigs-job.h tml) but BEA statistics makes a big difference when used as it is – dhttp://mechonomic.blogspot.com/2011/10/ beware-of-bea.html
3. real proble is that there is no comparability of GDP estimates over time – http://mechonomic.blogspot.com/2011/10/b eware-of-bea.html

Posted by ikitov | Report as abusive

Chart of the day, median income edition

Felix Salmon
Oct 10, 2011 13:22 UTC

Why has no one thought to do this before? Every month, the Current Population Survey goes out to a nationally representative sample of more than 50,000 interviewed households and their members. And in one of the questions, those households — or at least the households who didn’t answer the same question the previous month — are asked how much money they made, in total, over the past 12 months. That question has now been asked in 138 successive months, since January 2000. Which means that with a bit of clever analysis, it’s possible to put together an apples-to-apples comparison of what has happened to household income every month.

And when you do that, the results are very scary indeed.


The red line, here, is median real household income, as gleaned from the CPS, indexed to January 2000=100. It’s now at 89.4, which means that real incomes are more than 10% lower today than they were over a decade ago.

More striking still is the huge erosion in incomes over the course of the supposed “recovery” — the most recent two years, since the Great Recession ended. From January 2000 through the end of the recession, household incomes fluctuated, but basically stayed in a band within 2 percentage points either side of the 98 level. Once it had fallen to 96 when the recession ended, it would have been reasonable to assume some mean reversion at that point — that with the recovery it would fight its way back up towards 98 or even 100.

Instead, it fell off a cliff, and is now below 90.

In dollar terms, median household income is now $49,909, down $3,609 — or 6.7% — in the two years since the recession ended. It was as high as $55,309 in December 2007, when the recession began.

Some of this decline has been hard to see because nominal incomes have been holding very steady: before taking inflation into account, median household income was $51,465 in December 2007, and $51,140 in June 2009. But even then, over the past two years, nominal incomes have shrunk significantly to the current level of $49,909.

All of these numbers come from Gordon Green and John Coder, economists who both worked at the Census Bureau for more than 25 years. They’ve now set up a private company, Sentier Research, to collate these household income figures every month; the full report costs a reasonable $20.

Why is this work being outsourced to private-sector economists, rather than being done by the Bureau of Labor Statistics and published officially? I’m having dinner with a government statistics wonk on Wednesday, and will be sure to ask him.

But in the absence of any good reason to discount the reliability of these numbers, it’s definitely worth taking them seriously, and asking why incomes have eroded so quickly and dramatically over the past two years. We’ve known for years that America has a huge unemployment problem. But I had no idea that the plight of the employed was this bad.


Regardless of the unemployment rate, when you look at the trend starting in Jan. 2000, the slope is only interrupted by the housing bubble (2006-2008). This generated an increase in income; all the builders, real estate agents, bankers, and house flippers. When that burst, we went right back to where we would have been. I don’t see a definite correlation between the two pieces of data. It’s like saying, “when ice cream sales go up, there are more shark attacks”. Maybe there is another piece of data that ties to two together – like it’s a hot summer so people go swimming and eat ice cream. I would like to see a chart of the household income index for 1982 to present to get an idea on how well trickle down economics has worked.

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Unemployment’s here to stay

Felix Salmon
Oct 7, 2011 13:04 UTC

There’s no particularly good news in these numbers. For every glimmer of good news, like the upward revisions to previous reports totaling 100,000 new jobs or so, there’s an offsetting piece of bad news, like the broad U6 unemployment rate jumping up to 16.5% from 16.2%.

And the number of people unemployed for more than six months is now 6.24 million — up by 208,000. The long-term unemployed — the least employable of the unemployed, and the most intractable problem in terms of getting America back to work — are now 44.6% of the total, up from 42.9% last month, and 41.8% a year ago.

It’s always a bit dangerous to try to meld the two surveys which make up the payrolls report, but I’m detecting a trend here: insofar as employers are hiring new people, they’re hiring new entrants into the labor force, rather than people making up the ranks of the unemployed. Maybe it’s recent graduates, maybe it’s former stay-at-home moms who were never claiming unemployment but who are now getting jobs. Maybe it’s immigrants. But the big picture is that employment growth is more or less keeping track with population growth, leaving no new jobs for the 14 million unemployed Americans.

It’s worth asking, in this context, whether Obama’s jobs bill would actually change that dynamic at all. It might help at the margin — if you’re working hard enough to burn through the fat reserves of highly-qualified graduates and moms and immigrants, you might eventually start cutting into the hard muscle mass of the long-term unemployed. But my gut feeling is that the effect of the jobs bill will be much bigger on employment figures than on unemployment figures.

Is there anything the government can do to bring unemployment down? Or is it now too late? If we are indeed in the early months of a double-dip recession, than I think it is too late: unemployment is more likely to go up than it is down from here. And even if the economy’s still managing to eke out modest growth, I don’t see much hope that the unemployment rate will come down to a remotely acceptable level any time soon. Realistically, America’s unemployed are here to stay. And we’re only just beginning to understand how that’s going to affect the political economy of the nation.


it seems to me that the “paradigm”of being an american is taking a much needed shift from self-gratification to creating change for the next generations. unsustainable world supply and demand has begun to be visible even to the most uninformed. that and taking away the intrinsic american “reality”that you can start with nothing and retire comfortably has been sold to the highest 5% of the land,the rest of us are no longer the working class but the new slave class.No political party can change what has been bought and sold,the 99% will have to bring back HOPE for a future.

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The alternative to tax-and-spend

Felix Salmon
Oct 5, 2011 13:22 UTC

Matt Yglesias’s post on Denmark this morning got me all misty-eyed for European tax-and-spend liberalism:

The Nordic countries have become the world leaders in combining high levels of public services with strong economic growth precisely by being pretty relentless at seeking out economically efficient ways to raise tax revenue.

To put this into a US context, two of the biggest and most daunting long-term problems facing the US economy are (1) the fact that Americans aren’t as well educated as their counterparts elsewhere in the world; and (2) the fast-growing obesity epidemic.

Both of these problems are caused, in large part, by America’s very high levels of child poverty.

So if you fix the child-poverty problem, you’ve made a serious dent in both the education problem and the obesity problem.

What’s more, the child-poverty problem really is one of those problems which can be fixed quite easily just by throwing money at it. Give enough money to children in poverty, and they’re not poor any more. Problem solved — at least to a first approximation.

Of course, doing that is expensive, and needs to be paid for. Lower poverty will cause higher growth in the long term, but funding a permanent poverty-reduction program with deficit spending is still not something I’d recommend. So a responsible government adjusts its income so that it can pay for such a thing. The great thing about governments, after all — unlike households — is that they have a lot of control over how much money they’re bringing in. If a government wants more money, it just needs to raise existing tax rates, or implement new taxes.

So you bring in a new tax. On fatty foods — which would also, at the margin, help on the obesity front. Or on financial transactions. Or on carbon. Ideally, something you wouldn’t mind seeing less of. You take the revenues from the new tax, and you use them to make the country a better place. And if the tax is well designed, it will have no visible effect on economic growth.

But in the US, this kind of thinking is anathema not only to the right but also to the left. If fiscal conservatives want to reduce the deficit, they always look first to spending cuts rather than to new taxes — despite the fact that taxes in the US have almost never been lower than they are now.

As a result, the biggest and most daunting long-term problems facing America — things like the fact that the number of uneducated fat people is growing alarmingly — remain unaddressed, and largely ignored.

Is there a conservative way of addressing such issues? I don’t think there is — I think that conservatives will simply say that questions of education and nutrition are a matter of individual choice, and that the government should not concern itself with such things. But if we continue down that road, I fear that the unemployable underclass will only continue to grow. And that anger at the powers that be — whether it comes from the Tea Party or from Occupy Wall Street — will only continue to grow along with it.


@ FifthDecade Was that when only White landowners could vote? When we slaughtered millions of indigenous people and stole their land? When we were enslaving millions of African-Americans, raping them and subjecting them to breeding programs? When marital rape wasn’t a crime? During Jim Crow? When people were dying in coal mines? When we were putting Japanese Americans in internment camps and stealing their property? When women were imprisoned for risking their lives for an illegal-but-necessary medical procedure? When our president refused to acknowledge the disease ravaging the gay community? When Matthew Shepard was beaten? When Rodney King was beaten? When we elected a anti-Semitic criminal as president? When we supported dictator after brutal dictator, terrorist after brutal terrorist and continue to support the drug trade around the world?

This country has never been great; it used to be powerful. The two are not synonymous.

You can not turn a society built on the exploitation of some of its members for the enrichment of others into a fair and equal “all in it together” society without first recognizing that history and reacting against it. We must purposefully reject the culture of our forefathers if we have any chance of becoming a modern state and realize that we are in this together. Those who have been rewarded by these systems are kept apart by their guilt and fear of having it all taken away again, while those who have been punished know that all the good intentions in the world can come to naught over and over again.

Our culture is based on scarcity and fear; it is impossible to wish that away. If rich White men used to feel secure it was only because they knew they’d be the last to suffer when the chips came down. Most Americans have never had that luxury.

Posted by BlakeA | Report as abusive

The negative correlation between obesity and indebtedness

Felix Salmon
Oct 2, 2011 17:34 UTC

Michael Lewis says something very odd in his big piece on California and the phenomenon of overconsumption:

The succession of financial bubbles, and the amassing of personal and public debt, Whybrow views as simply an expression of the lizard-brained way of life. A color-coded map of American personal indebtedness could be laid on top of the Centers for Disease Control’s color-coded map that illustrates the fantastic rise in rates of obesity across the United States since 1985 without disturbing the general pattern.


Here is the map in question; if you go to the site and see it animated over time, it is indeed quite scary. But it doesn’t look remotely like a map of American personal indebtedness.

Indeed, if you download the Fed’s list of total debt balance per capita, by state, it looks nothing like this map at all. The Fed only lists the ten biggest states, and the overall average, which is is a per capita indebtedness of $47,260.

At the bottom of the personal-indebtedness league table are Texas ($34,640 of debt, 31% obesity) and Ohio ($34,090 of debt, 29.2% obesity).

Meanwhile, the states at the top of the personal-indebtedness league table are California ($73,300 of debt, 24% obesity), New Jersey ($60,560 of debt, 23.8% obesity), and Nevada ($60,190 of debt, 22.4% obesity).

In fact, indebtedness and obesity have a strong negative correlation. If I plug the obesity rates for the ten largest states into an online correlation calculator, I get an amazing -0.843 correlation between obesity rates and personal indebtedness. What Lewis wrote is so false that the opposite of it is actually true.

Now there are strong connections between debt and obesity. For one thing, both have been increasing steadily over time. And a German study last year showed that over-indebted Germans were more than twice as likely to be obese as their financially-successful counterparts. But here in the US, Texas, with its responsible lenders and no housing bubble, is much fatter than places like California and Nevada, which went on bubble-fueled binges of borrowing and irresponsible lending.


One must be careful in using correlation statistics. There is a well known statistically significant correlation between ice cream sales in London and deaths in Bombay India. Interesting and strange, it does not mean that Londoners should eat less ice cream to save those in Bombay.

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¿Hard Keynesianism Chileno? ¡Claro po!

Mark Dow
Sep 30, 2011 16:23 UTC

By Mark Dow

Matthew Yglesias has an interesting new post on Hard Keynesianism. It was succinct enough for me to be able to read the whole thing in between my tactical trades this morning and write a brief response.

He makes the basic points that (1) symmetric countercyclical fiscal policy is at heart of true Keynesian thinking (as opposed to much of the faux and pseudo Keynesian characterizations that pass for public discourse these days) and (2) it is hard to do.

He also insinuates by way of the case of Chile that the courage to do this comes from the center-left (in this case, the Concertación coalition) that governed over the surplus years, only to fall apart in 2010 when the center right took over.

I don’t myself want to insinuate that Matthew Yglesias isn’t serious or smart. In my view, he is both. And I sympathize very much with the two basic points. But, as I like to say, the most dangerous place to be is in between someone and what they want to believe. And I think his desire to confer virtue onto the center left and vice on the center right misses two important idiosyncratic, Chilean features that have more to do with outcomes there than do politics.

First, Chile is a small open economy dominated by trade. Copper is its most prominent export. Its Copper Stabilization Fund, established in 1985, makes it much tougher to spend windfall proceeds from copper sales. And copper prices quadrupled in the 2004-2008 period. In fact, given this structure and that kind of rise in copper, it would have been next to impossible not to generate big surpluses in Chile.

Fine. Well than why the big fiscal deficit in 2010? Yes, center-right Sebastián Piñera was elected that year. But it was not Chile’s biggest event. The tragic 8.8 earthquake in February that hit Chile’s central coast was. The deficit corresponded to the massive amount of spending the government trotted out to counter its effects. It was not reflective of the difficulties of time-consistent fiscal policy.

Now, back to trading….


It’s an interesting idea, but I think that Chile in 2009 is a poor example. The prior Concertacion president – Michelle Bachelet, who was not running for re-election as the Chilean constitution does not permit consecutive terms for Presidents – was unpopular for most of her term. One of the biggest issues was a botched overhaul of the Santiago public transit system, as well as other charges of mismanagement or corruption directed at her cabinet. I would submit that the Concertacion loss in 2009 was largely due to the public’s view of management/execution failures – as well as a sense that 19 consecutive years in power for the party was long enough – and was not a vote against their macroeconomic policies.

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Charts of the day, CBO testimony edition

Felix Salmon
Sep 14, 2011 14:05 UTC

Two charts jump out at me from Doug Elmendorf’s presentation to the Joint Select Committee on Deficit Reduction. The first is the sheer size of various loopholes in the tax code:


If you want to make a serious dent in long-term deficit reduction, this is a good place to start. Everybody knows that Social Security and Medicare — pensions and healthcare — comprise a massive part of the government’s future spending. What’s less well known is that pensions and healthcare are also the two biggest tax expenditures in the tax code: the deductibility of healthcare premiums will cost the government about $650 billion over five years, with the deductibility of pension contributions running it a close second. That’s over a trillion dollars in lost revenue right there. Add in the mortgage-interest deduction and the lower rates on long-term capital gains, and you get to $2 trillion pretty quickly. Double that to get a ballpark ten-year figure.

This is something that proponents of private health insurance don’t often grok: that it’s heavily subsidized by the federal government already, due to its tax-exempt status. And it stands to reason that if the government is going to spend hundreds of billions of dollars a year subsidizing private health insurance, then it ought at the very least to get some kind of control over the healthcare industry in return. If you want to keep the system fully private, then fine, but don’t ask the government for massive subsidies at the same time.

As for the tax deductibility of pension contributions, Mark Miller wrote a great post on the subject in June, in which Teresa Ghilarducci makes a very strong point.

Ghilarducci argues that retirement saving wouldn’t decline if the deduction disappeared. “There’s no evidence that it increases saving; much of the academic literature shows that higher income people are simply moving investments they would have made anyway [in taxable accounts] to a tax-preferred account. And there are 25 million taxpayers in the bottom two quartiles who don’t take deductions, so they’re getting no subsidy at all from the federal government on their contributions.”

Everybody’s talking about the necessity of making hard choices: there are lot of hard choices here which could have an enormous effect on government revenues while at the same time simplifying the tax code and even maybe allowing a reduction of the headline rate of income tax. I’m in favor of taking a whack at all of the bars on this chart, with the exception of the EITC. Doing so would make the tax system more progressive, simpler, and more lucrative. Which is exactly what we need.

So, that’s one opportunity facing the deficit committee. But here’s something scarier:


This is the official CBO unemployment projection, on which all of its economic forecasts are based. And it shows unemployment plunging to 5% after 2015. That’s considered the long-term unemployment rate, and I guess that 2015 is considered the long term, or something. In any case, it ain’t gonna happen — there’s absolutely no reason to believe that the economy will suddenly add an enormous number of jobs in four years’ time.

As a result, actual tax revenues are going to be lower than the CBO is projecting, since the CBO is anticipating revenues from millions of people who won’t in fact be employed. And government expenditures on unemployment insurance, Medicaid, and the like will be substantially higher than the CBO is projecting.

So when we get to work on the deficit, it’s important to remember that the problem is bigger than the official CBO numbers would have you believe. Partly because the CBO is assuming things like a 30% reduction in Medicare payments for physicians’ services after 2011, which simply isn’t going to happen. And partly because the CBO is being incredibly overoptimistic on the unemployment rate. So let’s get to work on reducing the size of those loopholes. It’s the only way we can credibly free up enough money to provide the stimulus the economy needs right now.


“Offer to pay the college educations for all doctors and nurses that stay in the profession for ten years, to limit expected future shortages of these professionals.”

Are trained doctors leaving the profession? I know that many are reluctant to enter general practice, due to income disparities between the specialties, but I haven’t heard of any leaving for other fields.

And isn’t the supply constrained primarily by medical school acceptances? There are many more hopeful applicants than seats. Those denied admission may be weaker students, perhaps, but are still generally very bright people.

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How journalists deal with economists’ ethics

Felix Salmon
Sep 1, 2011 18:02 UTC

Craig Silverman emails with some questions about the proposed economists’ code of ethics, which I think is an excellent idea. He has an interesting angle: how does this affect journalists? Here are his questions, with my answers.

I’m first of all wondering if you knew there wasn’t a code of ethics from the American Economists Association? If it’s new to you, I’d like to hear your thoughts on the lack of a code.

Absolutely. I’ve been writing about this for a while, and a lot of credit has to go to Charles Ferguson, who made the issue a central part of his Oscar-winning documentary, Inside Job, from which the above clip is taken.

There are lots of good reasons why there isn’t a code, with the main one being obvious to any economist: economists make more money when there isn’t a code than they would if such a code existed. And economists, even more than normal people, tend to act to maximize their own income.

Mostly, economists delude themselves that what they publish is exactly what they think, and is not tweaked so that the conclusion is what the people paying them want it to be. This isn’t true.

If you were aware of it, I’m wondering if you have thoughts on whether this presents a problem for journalists interviewing economists?

There’s definitely a problem here. For instance, Ric Mishkin was a natural interview on the subject of Iceland, seeing as how he’d written an in-depth study of the country. The study didn’t mention that he was paid a six-figure sum to write it, however — and journalists talking to him could easily be excused for not knowing that fact. What’s more, journalists shouldn’t feel the need to ask about conflicts and payments every time they talk to an economist — it makes interviews unnecessarily adversarial.

As a result of the calls to adopt a code, the AEA created an ad hoc committee to examine whether one should be created. What would you like to see in a code for economists?

Ideally, a code of ethics would say that economists can’t write papers about people and institutions they’re receiving money from. A disclosure rule is a poor alternative, but it’s better than nothing. Such a rule could be really simple: if you’re an economist with an academic affiliation, then you have to disclose all sources of outside income; such disclosure would include exactly how much you’re being paid. After all, the degree of conflict clearly increases with the amount of money involved: a million-dollar payday is going to have more effect on what an economist is likely to say than a hundred-dollar check.

As a financial journalist, I’m wondering if you have advice for other journalists in terms of using economists as sources. For example, do you ask if they have any conflicts of interest related to the issue you’re talking about? If they’re with a university, do you check their academic CV to see who they’ve consulted for?

As a rule, I don’t. And academic CVs, as a rule, tend not to include precisely the consultancy and speaking gigs which raise the most conflicts. This is one reason why the absence of any code of ethics is such a problem: there’s almost no way to find the necessary disclosures any other way. As a result, it’s all too easy to end up in situations like this one, where a story needs to be updated/corrected when a conflict is pointed out.

In general, do you think a professional code of ethics can have an impact on the way someone — economist or otherwise — conducts themselves with a journalist?

I’d like to hope so. All too often economists and other professionals feel comfortable with lies of omission when talking to journalists, simply not mentioning a fact that they know is germane. A good code of ethics should address this: even if there’s a disclosure somewhere about a conflict, the onus should not be on the journalist to find it, but rather on the economist to proactively mention that conflict to the journalist.

Finally, I’m wondering if you see any parallels with the Ben Stein story and this issue? (I realize he is not a professional economist, but he does identify himself as one…)

There are a couple of parallels: Ben Stein had a public gig at a respected institution (the New York Times), and he had to give up that gig when he started accepting money from the evil FreeScore.com. Similarly, if economists want to take lots of money from big corporations like banks or hedge funds or oil companies, then they should first consider the ethics of doing so, and how they will reflect on their academic institutions. There are similar conflicts in the life sciences, but it seems to me that the debates there are more out in the open. Economists don’t even seem to like to talk about ethics, let alone actually adopt a formal code. Which is sad, but, given the incentives involved, understandable.


Them too :p

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The damage already done by the debt ceiling debate

Felix Salmon
Jul 14, 2011 17:55 UTC

Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington.

Megan McCardle thinks this shows a “giant disconnect” between Wall Street and Washington — things which Wall Street thinks are easy turn out in reality to be extremely hard, and things which any Wall Streeter would just do as a matter of course can be de facto impossible when political posturing starts getting in the way.

I’m not sure the disconnect is all that huge, for a couple of reasons. For one thing, US default risk is impossible to hedge. US default is an end-of-the-world event, and markets by their nature can’t price such things. Conceptually, there’s no point in buying something which pays off if the world ends, since the world will have ended at that point, and in any case your counterparty won’t be able to make good on the contract.

On top of that, remember that we already hit the debt ceiling on May 16two months ago. Since then, the amount of outstanding Treasury securities — a number which normally rises steadily — has been stuck at $14.3 trillion. The fact that supply of Treasuries has been artificially constrained by the debt ceiling has surely, at the margin, helped to support prices.

And more generally there are still a lot of individuals and institutions who want to buy Treasury bonds. That number might have been falling in recent weeks, but it’s still large. The U.S. is not facing the kind of emergency we’re seeing in the eurozone, where countries want to borrow money but no one’s willing to lend to them. If Treasury asks to borrow money from the markets, the markets will always lend it money; the only question is how much interest they will charge.

This is where McArdle goes awry, incidentally: she’s worried that any new debt issued after August 2 won’t be able to find buyers if Congress doesn’t raise the debt ceiling. But there will always be buyers, and there will always be buyers at yields very, very close to the secondary-market price for Treasury bonds. Treasury bonds are fungible, and to underscore that fact Treasury could easily just reopen old bond issuances instead of creating new ones. That would ensure that there was no way of telling the difference between bonds issued “legally” and bonds issued after the debt ceiling was breached.

Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

This is one reason why I worry a lot about clever ideas like Mitch McConnell’s plan to get the debt limit raised through a novel use of the Presidential veto — or, for that matter, Matt Yglesias’s even cleverer plan for Democrats to game the McConnell scheme. McConnell is one of Congress’ foremost tacticians, but cunning tactics on either side of the aisle are the last thing that anybody needs right now.

When Bob Rubin did a nifty sidestep around Congress and magicked Mexico’s bailout billions from some dusty account no one knew about, he was playing a dangerous game. When Hank Paulson and Ben Bernanke stretched the limits of their powers almost beyond the legal breaking point during the financial crisis, their actions were understandable but also set yet another precedent. And so now, when there’s no immediate emergency at all, people are looking to the executive branch to find a way to do the right thing, and thereby giving Congress implicit permission to play out and generally behave with all the maturity of a group of rampaging destructive adolescents.

The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.


Salmon isn’t much of a negotiator and I wouldn’t want him anywhere near crucial negotiation. I could see his palms sweat and his eyes twitch in between sentences.

The big problem with this piece is it isolates out the debt ceiling from the debt. That wrenches the current negotiations out of the context of federal government spending and taxation. That’s a killing mistake and makes this piece worthless.

Let me add some of that back in and maybe Salmon can start to make sense of what’s going on.

The USFG is projected by everyone to take rapidly increasing shares of the US GNP under even very optimistic assumptions. That’s a certain catastrophe for this economy: economists estimate that 25-35% of GNP for all levels of government maximizes growth. Under Democratic proposals and baselines, the USFG takes at least that amount, just for itself, for decades to come. That is a catastrophe for economic growth: it entombs our economy in a permanent rotting decay.

That problem isn’t solved with more tax revenue, it is exacerbated. Because it is certain that politician-weasels will spend every penny of revenue and use more revenue to leverage even more spending. There is NO prospect that Obama or the Democrats would make any substantial spending cuts in the foreseeable future. The Obama budget that was unanimously defeated this Spring increased spending across the board, in fact.

The debt is a related, but distinct issue from the total portion of the economy that politicians take to hand over to their cronies. And escalating debt also crushes the future by undermining economic growth. More importantly, my son is 1 year old and unless we take action, his life chances will be substantially undermined. He and your sons and daughters will be handed massive debt that they will have to pay back. That is, by my account, evil. What sort of moral disaster thinks its ok to consume today and force their children to pay for that consumption the rest of their lives? Evil.

This moment is a chance to do something meaningful about both of those problems. To scale back the size of the federal government and to meaningfully lower federal debt. Felix Salmon, Megan McCardle, Harry Reid, and Barack Obama need to think things through, this one time, and do the right thing, this one time. Instead of what they are doing.

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