February 16, 2004

What's the Antonym of "White House Aide?" (Things Worse Than I Could Have Imagined Department)

An aide is somebody who works for you who helps you--who does odd jobs, who provides you with information, who advises you about issues on which you need advice. What do you call somebody who provides you with misinformation? What is the antonym of the phrase "White House aide"?

It turns out that, at least as far as economic policymaking is concerned, things inside the Bush White House were worse than I had imagined possible--even though I thought that I had already taken account of the principle that things are generally worse than you imagine.

Let me tell a story:

Throughout the fall and winter of 2002-2003, reporters would try to learn about the likely effects of deficits on interest rates. They would call the Brookings Institution or the Urban Institute or any of a large number of other places where economists roost. "What would be the effect on interest rates of an extra $200 billion deficit?" they would ask. And they would get back the consensus estimate: "If you increase the government's yearly deficit by $200 billion, and if the higher deficit is expected to persist indefinitely into the future, then interest rates are likely to rise between 0.5% and 1.0%."

And then the reporters would call Glenn Hubbard, then-chair of the president's council of economic advisors. And they would ask him, "What would be the effect on interest rates of an extra $200 billion deficit?" And he would answer, "If you increase the government's deficit next year by $200 billion, and then erase that deficit and return spending and taxes to their previous levels the following year, then interest rates are likely to rise by an insignificant amount--0.03%." Except that Glenn would not say the words in italics to anyone except himself (a version of the doctrine of "mental reservation" as it were). And, of course, Glenn was right: a one-year temporary increase in the deficit that is expected to be quickly ended has next to no effect on interest rates. The thing to fear is large deficits that are expected to persist for a long time.

Got the distinction? Short-term deficits have next to no effect on interest rates. Long-term deficits have substantial effects on interest rates. Got it? Good. The reporters certainly didn't.

The reporters would then write their stories, most of them headlined: "Opinions About Effects of Deficits Differ." Most of them, I think, were under deadline and did not have time to listen to and think about explanations--offered by me, by Peter Orszag, by Bill Gale, by Bog Greenstein, by Bob Reischauer, and many, many others--that we were answering the "multi-year deficit" question, that Glenn Hubbard was answering the "one-year deficit" question, and that ours was the relevant answer because the administration was planning multi-year deficits. Some reporters were thick as mud and barely understood what a deficit was, and weren't too interested in learning. Some reporters understood very well, but thought that appearing to contradict White House sources was a career-limiting move. And a few actually tried to explain what was going on to their readers.

And we would sigh, and curse the ineptitude of the press corps. But we would take comfort from one thing. The fact that Glenn Hubbard was so very careful with his language in response to direct questions--always, at least as far as I could see, rephrasing the question as the one-year-deficit question before he answered it--meant that at least internal administration decision making was not being fed misinformation. The misleading was confined to reporters. On the inside, we were sure, Hubbard was telling his political masters and the High Politicians the straight story. He was telling them that large deficits expected to persist had substantial effects on interest rates which would show themselves when the economy returned to something like full employment.

But now it turns out that we were wrong. On the inside, Glenn Hubbard was telling the High Politicians and his political masters that a $200 billion deficit raised interest rates by only 0.03%, and made no effort to teach them the distinction between the effects of a temporary and the effects of a long-term deficit. From the shorthand stenographic transcript of the November 26, 2002 White House meeting of George W. Bush with his economic policy and political staffs contained in Chapter 8 of Ron Suskind's The Price of Loyalty:

"Glenn [Hubbard] thinks that a deficit of $200 billion pushes up interest rates by just three basis points [or .03 perent]," [Deputy Chief of Staff] Josh Bolten interjected, bringing things back to the key issue of whether the dividend tax cut was affordable.

"That's right," [Glenn] Hubbard said. Sitting next to him, [Treasury Secretary Paul] O'Neill shook his head. [Alan] Greenspan and he had been running tables on the effects on deficits for years; that figure was wildly low.

So it was not just reporters who were being misled by Glenn Hubbard's giving the short-term deficit answer when he was asked the long-term deficit question. It was George W. Bush and the rest of the White House senior political staff as well.

Things inside the Bush White House are indeed much, much worse than I could possibly have imagined.

Posted by DeLong at February 16, 2004 10:11 AM | TrackBack


No damn kidding. But wait, the "aides" have a plan!

"Under Fire Over Jobs, Bush Hones Upbeat Message : TAMPA, Fla. (Reuters) - President Bush said on Monday that, contrary to recent polls and his Democratic challengers, there is an 'undeniable' sense of economic optimism sweeping the country."

Posted by: John H. Farr on February 16, 2004 10:26 AM


Perhaps Hubbard simply took it for granted that no one in the White House cared about events that might occur more than a year into the future.

Posted by: Matt on February 16, 2004 10:39 AM


So. It wouldn't do any good if W read the papers. If only Bush blogged.

Posted by: tstreet on February 16, 2004 10:47 AM


As an economist, there is a limit to my capacity to assume that people are ready to act against the incentives given to them by their masters... Not that I don't believe that people can have a sophisticated utility function in which things like "honour to serve one's country truthfully" appear. But that if every time you try to raise your utility level that way, you just succeed to make a fool of yourself, then... What I am more puzzled by is why someone like Mankiw reveals us that he has a higher level of utility playing the clown for this White House than outside as an honorable academic critic.

Posted by: Jean-Philippe Stijns on February 16, 2004 10:50 AM


This is too easy on Bush. Everyone wants to believe he is a nice guy, just misinformed. He is not a nice guy. He told his minions to staff his administration with people who will support the program. They support the program. The dead fish rots from the head.

Posted by: Cal on February 16, 2004 11:00 AM


Hmmmm......Tough choice here. Do we have a fool led by idiots, or an idiot led by fools?

Is it possible that ideology is so paramount, reigns so supreme in every reckoning, that the administration and all its aides and advisors are completely blinded?

Or do we have the Manchurian administration? Set into place with the intent to destroy the economic foundations of the country, and with that to wither the roots of democracy?


Posted by: Derelict on February 16, 2004 11:03 AM


? Saboteur.

Posted by: big al on February 16, 2004 11:06 AM


an Ira Magaziner?

Posted by: CalDem on February 16, 2004 11:06 AM


Brad -- You say "He was telling them that large deficits expected to persist had substantial effects on interest rates which would show themselves when the economy returned to something like full employment." I notice that we haven't returned to full employment, and don't appear likely to any time soon. Is this a mere coincidence?

Posted by: cafl on February 16, 2004 11:21 AM


But Isn't Dumbya the "MBA Presidient" - Certainly a Harvard MBA has a macroeconomics requirement?

>>Do we have a fool led by idiots, or an idiot led by fools?

Yes, obviously.

>>Or do we have the Manchurian administration? Set into place with the intent to destroy the economic foundations of the country, and with that to wither the roots of democracy?

Is Grover Norquist the kingmaker, or just another puppet?

Posted by: fasteddie on February 16, 2004 11:23 AM


Is it the case that the pressure of deficits on long-term interest rates is stronger when the country is at full employment? Why shouldn't we see long-term interest rates going up right now? I don't see why the point we are at in the business cycle should make a big difference for long-term rates.

Posted by: Gabriel on February 16, 2004 11:43 AM


i think the originator of this sight is being too harsh on the press, and the business/economic reporting...

As a former journalist, newspaper reporter et cetera...working nights, with very, very , very low pay, working holidays, no extra, bonus.
Starting news boy is like $14,000 per year for a weekly; then you can get boosted up to maybe $23,000 by the time you are in your 20's and by the time you are 33-years old- you may earn $33,000 annually, Did I say work nights and weekends for the rest of your life.

So you think this type of job will attract the great-test minds, - that the greatest thinking minds that may end up at a prized academic seat may give up his job to go work for a newspaper, say in Detroit, or Alabama, Or even in DC and rub elbows with the white house elite and beg for scraps, any scrap.
Then have your editor, which is owned by Murdoch or some other mogul with vested intrests in the current administration tax climate, and this editor makes probably $44,000 if he is lucky, and if he goes against corporate policy and sheds the wrong story that offends the wrong party- he is not an "editor" any more

so if you want a better press corp, make the press work environment and pay a more conducive place to attract the "greater" minds away from academia (or Aca-menia) and the MBA jobs - then you may see reporting like the stories that broke open "Watergate" or the type of journalists whom were relentless during the Iran=contra scandel

Now we have Stasi-style news bureas and only people who critize from afar. If you want real reporting have the next Marge Schott donate a few billion to start a "non-profit" news organization that can attract the best minds, pay them great salary, give equal time, and take no advertisers/
in fact have 2 of them: 1 for the left; the other newspaper for the right- so everyone can be happy and not feel jadded


Posted by: Dave S on February 16, 2004 12:04 PM


"Or do we have the Manchurian administration? Set into place with the intent to destroy the economic foundations of the country, and with that to wither the roots of democracy?"

As bad as the deficits are, are they really as important (for the future economic health of the country) as things like education reform, entitlement reform, spending-on-health-care reform? Trade issues?

No matter whether the administration is "planning" to run gigantic deficits in 2009 and 2014, isn't it really far more likely that political pressure (even via Congressional Republicans) will force some deficit reduction onto Bush, even if he wins in `04?

(I sure wish Vegas would hire Brad Delong to set their "line" on future deficits - I'd go place a few bets on the under....).

I'm not even sure I believe the deficit is the worst part of the tax cuts - what I don't like to see is the abandonment of what I see as the essential (de facto) Clintonian wisdom that in an era characterized by heaps of undeserved (not truly subject to market forces) income (mostly of course corporate execs, but also lawyers, doctors, academics, et al), shifting the tax burden towards those undeserved incomes is necessary (or at least helpful) for greater (if extremely difficult to quantify) "efficiency" (micro foundations?) purposes.

Sure, I'm probably nuts....

Posted by: Joe Mealyus on February 16, 2004 12:05 PM


> Idiot led by fools, or fool led by idiots?

Going by the available evidence, you would have to say a "foolish idiot led by idiotic fools."

Seriously, my read of Suskind is that you have the classic incompetent CEO syndrome. Almost any CEO looks great when things are going smoothly but the proof is when things go to crap. A lot of people assumed that Bush was a great manager because he made everyone wear a tie and do meetings on schedule. Order and discipline, they said. Not like that messy Clinton.

Fact is he has no record of successful management and that was totally ignored in 2000. And you see the result.

Posted by: Alan on February 16, 2004 12:06 PM


Would Bush have taken any macro classes at HBS?

Posted by: praktike on February 16, 2004 12:14 PM


I am completely baffled as to how Bush can have the gall to say that "economic optimism" is sweeping the nation? Is he kidding? Look at these numbers:

If we don't get this guy out of office....

Posted by: Bill on February 16, 2004 12:15 PM


Doh, here: http://wahoobudd.blogs.com/trial_and_error/2004/02/your_telling_me.html

Posted by: Bill on February 16, 2004 12:16 PM


NOt worried about deficits?
Just check out the Governator's problems in Kalifornia!
Just imagine if A.S. had a printing press....
Or better yet a computer and A.G. and B.B. for complicit accomodation.
Maybe the question of the year shouldn't be why is gold so expensive, but why is oil still so cheap?

Posted by: Allen M on February 16, 2004 12:19 PM


"White House Gremlins"?

Posted by: zizka / John Emerson on February 16, 2004 12:43 PM


Is Hubbard stupid, or does he know he's lying? Is there something in the Geneva Convention that says the Red Cross can visit us? Maybe we should contact the Hague and schedule a hearing room for the "economic crimes against humanity" trial.

Posted by: Phil on February 16, 2004 12:49 PM


Things are so screwed up, one gets paranoid. Just imagine that the Chinese are using some of their vast funds of dollars to bribe important people in the White House, once the economy has tanked, and the US army is bogged down in Iraq, then take over Taiwan.

Posted by: big al on February 16, 2004 12:50 PM


practike writes:
> Would Bush have taken any macro classes at HBS?

That's unclear. First of all, I don't know whether or in what ways their curriculum has changed since GWB's time. But if you go to the web site of HBS, you can download a lot of stuff on their program:


In the "learning" section, they have a list of required courses. I think this boils down to:

Finance I
Financial Reporting and Control
Leadership and Organizational Behavior
Technology and Operations Mangagement

*Business, Government and the International Economy
The Entrepreneurial Manager
Finance II
Leadership, Governance and Accountability

And then electives for two semesters. The starred course is described this way:

# This course introduces tools for studying the economic
# environment of business to help managers understand the
# implications for their companies. Students will learn the
# impact of the following:
# National income and balance of payment accounting
# Exchange rate theory
# Political regimes
# An examination of both the gains and the problems from
# regional global integration:
# International trade
# Foreign direct investment
# Portfolio capital
# Global environmental issues

I think that seems to cover some macro issues. The further electives in the field are these:

# Economic Strategies of Nations
# Institutions, Macroeconomics, and the Global Economy (IMaGE)
# Managing International Trade and Investment
# The New Private Sector: Managing Privatization, Regulation and Deregulation

...but I don't see any requirement to take any of these if you would rather take, say marketing, finance, or "entrepeneurial management". As far as admissions requirements go, I see:

# Because our MBA curriculum is fast-paced and rigorously
# analytical, we strongly encourage all applicants to complete
# introductory courses in quantitative subjects such as
# accounting, finance, and economics before coming to HBS. For
# some candidates, we may make admission contingent upon
# their completing such courses before they enroll.

Others would know better than I do whether that amounts to an insistence that you take macro before being admitted, or whether some combination of courses in other "quantitative subjects" would do. Also, they have to take the GMAT; is a background in maco assumed for that test?

In any case, I found it interesting to see what a student at HBS might be (or not be) expected to learn. It's both more and less than I would have thought.

Posted by: Jonathan King on February 16, 2004 01:03 PM


Go, go Brad go!Paul and Greg are surely with you!

Posted by: Peppone on February 16, 2004 01:14 PM


After reading all of these comments I am left with a question: Why would anyone doubt that the ONLY thing the White House wants to know is what image projection will best serve to get them reelected? They may be idiots or fools or even perfectly rational people - the true bottom line, the one hypothesis that explains all of their actions is that THEY DONT CARE. So long as they get what they want for themselves and their friends, the rest of us can rot in hell. I am surprised that people like Hubbard and Mankiw, who I know dont believe the crap that they say, continue to work there when they have perfectly good jobs to return to if they like (and Mankiw will be doing this soon, I expect). But IT DOESNT MATTER ONE IOTA whether they tell the Bushies the truth or not. The Bushies only hear what they want to hear. They only do what is in their narrowly construed self interest. This is actually something of an advantage to us on the other side - It makes them very easy to predict.

Posted by: steve kyle on February 16, 2004 01:22 PM


Business Week:
Inventing The "Clinton Recession"

Economists who go to Washington always struggle to maintain their objectivity against the political demands of the administration they work for. Based on its latest performance, the CEA seems to have lost the battle.


Posted by: bakho on February 16, 2004 01:38 PM


When "potential GDP" is postulated, does it conventionally refer to Q4/Q4 GDP like the Fed uses or does it refer to change full-year GDP this year from full-year GDP last year? Thank you.

Posted by: Mitchell on February 16, 2004 02:05 PM


Joe, the only reason that political pressure to "do something" about deficits will arise is if enough of us point out just how damaging structural deficits are. Simply relying upon the problem to solve itself because sooner or later someone will do something is no way to get better policy....

Posted by: howard on February 16, 2004 02:36 PM


(Slightly off topic):

Has anyone noticed that there actually seem to be some grownup Republicans in (of all places) Virginia? The head of the Republican majority in one of the houses there just announced his own plan for tax _increases_, since no other governmental response would cut the state's deficit without causing the disruption of essential services.

Would that Republicans in California (not to mention Washington!) would be as sane...

Might be worth a commentary from a more learned perspective than mine, Brad -- or anyone else cognizant of Virginia politics.

Posted by: PQuincy on February 16, 2004 03:21 PM


Of course Bush thinks "economic optimism" is sweeping the nation. The only people he ever talks to are constantly shoving fistfuls of cash into his pockets, and they are very optimistic that their bribes will pay off big time.

Posted by: Charles V on February 16, 2004 03:46 PM


An alternative explaination is not that Hubbard was keeping anything from Bush and Cheney, but rather that he was providing them with internal cover.

Posted by: SW on February 16, 2004 04:41 PM


Kozinski: have you been reading? In the short term the deficit means nothing. The problem is that we are creating structural deficits that go out a long, long time. Then you run into the baby boomers entitlement time bomb. But, of course, if you are related to the Justice of the same name, then you are an ideological hack, too.

Posted by: Cal on February 16, 2004 05:01 PM


also to Kozinski:
I think you are missing the point. The whole argument is about the feasibility of reducing the deficit. Everyone seems to be agreed, as per Cal, that if the deficit is not decreased, long term interest rates are liable to rise sooner or later in a fiscal and monetary environment that will be difficult to handle, to put it mildly.
So the debate revolves around that, there seems to be no debate about that among any group of even half-way mainstream economists.
So for me, the crucial point of Feldstein's article is how convincing is his argument that deficits will be reduced. I don't find it convincing at all, for several reasons.
First, his arguments are weak on their face. For example, he anticipates savings in defense spending after force restructuring. What force restructuring? There is no force restructuring in the foreseeable future that has any significant implications for budget over the long term. Look at the current request. Three new jet fighters and more advanced Naval vessels, when nearly every defense analyst that I have read says that we do not need all that, and these are cold war holdovers that the defense-industrial complex wants in order to make some dough. Most analyses that I have read say we need one or two new fighters and no new naval vessels right now.
Much of Feldsten's argument works because he redefines things in tricky ways that I don't think is very believable. Note that he carefully separates out terror and homeland defense related spending from what he calls discretionary spending. That is a joke. Look at homeland security spending, for a big chunk of that, every state gets the same lump sum amount -New York, California, Rhode Island, North and South Dakota. Does anyone believe that this is a rational allocation of homeland security money? Does anyone believe that all that is going to really efficient programs for homeland security? Much of that money is political pork. Yet by carefully defining whatever spending category doesn't fit his argument as not true discretionary spending, Feldstein can make the numbers work out the way he wants.
Note that his argument about Social Security and Medicare is also doubtful. It depends on some undefined reform, but if I remember correctly this will mean Feldstein's ideas for privatization of these social welfare programs. And Feldstein thinks that these reformes will result in Feldstein's predictions of very big increases in national productivity growth savings that very few other economists find credible.
The hard fact are as follows:
1. There are no hard facts of empirical tests that can decide (right now) exactly when long term interest rates will rise and by how much, so everyone seems to be going by theory and extrapolation from past experience,
2. Most economists believe that in the long term, averaged over business cycle, long term interest rates will be higher with deficits that without,
Of course, if you have some hard facts or statistics that will decide the matter, then please present them here. I think it will be a scoop for the blog.

Posted by: jml on February 16, 2004 05:33 PM


I not a big proponent of deficits, but Prof. DeLong is wrong when he says that an increase in the deficit long term will raise interest rates measureably. Take a look at the chart at the bottom of this article:


When the deficit was at its worst in the late 80's and early 90's interest rates were holding steady or going down.

By the way where did my first post go?

Posted by: Kozinski on February 16, 2004 06:03 PM


Let me get this straight: According to Suskind, Bolten ( underling) speaks for Hubbard ( Bolten winning the Aid award IMO) attributing to him a position that not even Bush, as a graduate of Harvard Business school, should be able to countenance. And then...Glen supports this position.(!)
Beware that moment of inattention Mr Hubbard.
Does O'Neill check his ears by asking Hubbard to clarify? ("Glenn, we are talking about the effects of long period deficits...") No. I guess O'Neill had already made up his mind about Hubbard. And I suppose there were other days when Bolten had to put words in his mouth too.
For any accomplished economist, the WH seems to breed cases of clinical depression.

Posted by: calmo on February 16, 2004 06:09 PM


thanks, Kozinski, I think the latest link is more useful than the Feldstein article.

Posted by: jml on February 16, 2004 07:36 PM


I have to say, however, that regardless of whethere there is a direct link, or weak or a strong one, may not make much difference in terms of what is a sensible approach to deficits and debt. Suppose long term interest rates are completely unpredictable. Suppose is is just unpredictable. Given the history of interest rate fluctuations, do we want to run the risk of servicing a large debt with high interest rates over the long term. When we have to service those evil selfish nasty baby-boomers (speaking as a barely post-baby boomer myself)?

I'll read the links, but would be interested in otehr people's evaluations of the research.

Posted by: jml on February 16, 2004 07:41 PM


It's funny that throughout The Price of Loyalty O'Neill expresses respect for Hubbard as a non-idealogue and honest broker (unlike, say, Larry Lindsey).

It's funny because the book demonstrates how the respect is completely unwarranted. Hubbard consistently takes the side of the idealogues vs. O'Neill and Greenspan.

"Eliminating the double taxation of dividends is a game changer," Hubbard added. "Game changer" is one of Bush's favorite phrases. (299)

Posted by: David on February 16, 2004 07:55 PM


Bushco is made up of neither idiots or fools (I ought to know). It is made up of financial geniuses.

Do you ask if bank robbers are idiots because when they rob a bank it harms the economy of surrounding community?

Bill Gates is nothing compared to Bush. Bushco delivered trillions of dollars to his rich constituency. Do you really think those coupon clippers give a shit about Social Security or Medicare?

Posted by: The Fool on February 16, 2004 08:02 PM


Uhm Brad you have not *just* learne dthat the Whitehouse is worse than you imagined. A month ago You quoted the entire transcript of that meeting http://www.j-bradford-delong.net/movable_type/2004_archives/000018.htm(and I quoted your quotation (http://rjwaldmann.blogspot.com search for Glenn or fired).

You are not shocked shocked to find that there is gambling going on there. I think your point is that you are dismayed that the O'Neill Suskind book was instantly reduced to a claim that, by Feb 2001, Bush had decided to invade Iraq. You are also trying to remind reportersof the other horrors

Posted by: Robert Waldmann on February 16, 2004 08:24 PM


Kozinski: what is the definition of publicly held debt? Indebtedness of the public? How much each person is in debt? It is not the budget deficit. I think you perhaps are mixing apples and oranges.

Posted by: Cal on February 16, 2004 08:35 PM


>>Uhm Brad you have not *just* learne dthat the Whitehouse is worse than you imagined. A month ago You quoted the entire transcript of that meeting...<<

Yes, and a month ago I thought that Glenn Hubbard had preserved the distinction between temporary and permanent deficit increases, but that Suskind's sources had failed to register it. I now know more about the quality of the transcript from which Suskind was working, and no longer believe that Glenn made the distinction...

Posted by: Brad DeLong on February 16, 2004 08:47 PM


But doesn't the transcript show that Bush was aware of the qualification? I mean, why else have the immediate reference to holding the line on spending and counting on things to turn around on the revenue side? That is, isn't it apparent that Bush believed the deficit to be a short term problem, not a long term problem?

Posted by: Thomas on February 16, 2004 09:31 PM


Kozinski: Your chart shows nothing about expected deficits. It is the long-term expectation of deficits that should drive interest rates. Bush says he plans to cut the deficit in half, and his official budget documents show this. But the same documents show that his plan never leads to a balanced budget. The same documents show deficits falling of a cliff shortly after they are halved. The same documents describe these structural deficits as unsustainable. And these same documents omit several negatives that we know to be true today. It is this long-term expectation that shall haunt us.

Posted by: George on February 16, 2004 09:33 PM


Steve Kyle has summarized all of the economic arguments above, folks. That is what it boils down to. Of course Hubbard did what he did, and why wouldn't Bush say we're being swept by economic optimism.

They're neither fools nor idiots. They're greedy, evil, souless, hypocrits. They don't "believe" in anything beyond money and power, thus freeing themselves from the bonds of logic and sense. Whatever works is what they "believe" in. Except for the nutcases like Wolfiwotts.

Don't fall into that trap of thinking their idiots. Bush is stupid beyond belief, but he's not dumb. Don't forget it!

Posted by: Duckman GR on February 16, 2004 10:57 PM


Interest rates currently are staying low because the Federal Reserve is basically printing money, with the active collusion of the Japanese and Chinese. What they're doing is sending the federal debt overseas in exchange for cash, which then gets deposited in banks where it keeps interest rates low. The cash is coming from the massive and ongoing trade deficit, in other words, basically we're trading federal debt for actual goods.

This is not a sustainable long-term business model. The Chinese and Japanese are doing this because it helps them keep their own factories busy and keeps their own workers employed (at the expense of American factories and American workers, of course). The last thing they want is the collapse of the American economy due to massive interest hikes that'd be needed to sell these bonds if dumped onto the open market. But the Chinese, in particular, will continue this policy only insofar as it remains compatible with their foreign policy. And the cost to American workers of this hidden subsidy to imports is not going to be tolerated by Americans forever.

Posted by: BadTux on February 17, 2004 01:16 AM


"So it was not just reporters who were being misled by Glenn Hubbard's giving the short-term deficit answer when he was asked the long-term deficit question. It was George W. Bush and the rest of the White House senior political staff as well. "

So, the economic mess is an aide's fault and Bush's inner circle isn't responsible.


Is it so difficult to accept that __they are doing it deliberately__???

Posted by: Jon Meltzer on February 17, 2004 05:41 AM


Sorry I didn't have an opportunity to read comments but did any one already say "WH Machiavelli"?

Posted by: bulent on February 17, 2004 10:05 AM


I think your point is that you are dismayed that the O'Neill Suskind book was instantly reduced to a claim that, by Feb 2001, Bush had decided to invade Iraq. You are also trying to remind reportersof the other horrors.

Mind you, not a bad idea in any case.

Posted by: agrajag on February 17, 2004 01:06 PM


What I do't get is how the theory of rising interest rates as a result of long term deficits can hold up when long term interest rates have been going down for the last few years.

Posted by: ed on February 17, 2004 02:09 PM


Has anyone mentioned the obvious explanation: Hubbard is just a "company man".

It's not a matter of lying to credulous listeners. Hubbard already knows what Cheney & the Boys want to hear -- & more importantly, what they don't want to hear. Do you think if Hubbard gave the honest answer, it would have mattered one goddam whit? Is it really lying when you're lying to a person who wants to be lied to? ("Honey, do these jeans make my butt look big?"...)

It's not like BushCo doesn't have a history of wanting - & getting - only the answers they want to hear (Iraq comes to mind). Hubbard understood this.

One thing, though -- even if Hubbard was deliberately lying to or misleading Bush & his advisors, if others in the room knew the difference, why didn't they say anything?

Posted by: ripdash on February 17, 2004 02:42 PM


On this deficit/long term interest rate debate. I have been looking through some macro textbooks, and I don't see much hard evidence one way or the other (corrections to that statement, with references to data and studies welcome). But the question is -does it make any sifnificant difference for making a sensible decision?

The conclusion that I typed out above was as follows:
"2. Most economists believe that in the long term, averaged over business cycle, long term interest rates will be higher with deficits that without"

That still seems more or less right to me, except one poster was correct that it sould really be expected long term deficits.

Well, that is the kind of wishy washy empirical conclusion that we have to live with in economics.

So here are the choices we have, taking into accout uncertainty regarding the correct theory and empirical facts:

1. The expected long term deficit (ELTD) is the most important factor that determines long term interest rates and deficits increase them other things being equal, and other exogenous things will temporarily bump them around a little bit.
2. Other things are the most important thing that determines long term interest rates, and ELTD might increase them a little also, other things being equal.
3. Long term interest rates are not related to ELTD.
4. Other things are the most important thing that determines long term interest rates, and ELTD might reduce them a little bit, other things being equal.
5. ELTD are the most important thing that determines long term interest rates, will reduce them, and other exogenous things will temporarily bump them around a little bit.

Now reflect that interest rates are exogenous, short and long term, are at historical lows, and given historical experience, exogenous factors will probably cause them to increase significantly in the foreseeable future.

So, given that, if you were a betting man, how would you place your bet on long term rates? I am not a betting man, but in any case, option 5 seems very unlikely. So I would prefer to not take a chance on long term rates staying this low for the long term. So locking in a long term deficit is bad idea because it might be very expensive to finance because of higher long term rates in the foreseeable future.

Anything wrong with my reasoning? Of course, it might not be an acceptable approach for professional economists, who may tend to claim they know more than they do, for a variety of reasons.

I keep seeing these posts about Japanese and Chinese government currency policies being the reason for low long term rates. That is interesting. But never any references to articles or data or reports. And I canot find anything very useful. Could some one help me on that?

Posted by: jml on February 17, 2004 06:52 PM


Oops, typo in last post--
One paragraph should have read

Now reflect that **IF** interest rates are exogenous, and given that short and long term rates are at historical lows, and given historical experience, exogenous factors will probably cause them to increase significantly in the foreseeable future.

Posted by: jml on February 17, 2004 07:02 PM


Pheww, I'll try one last time--
The argument should have gone:

Now reflect that the component of the interest rates that is exogenous to the deficits is at an historical low, and given historical experience, exogenous factors will probably cause them to increase significantly in the foreseeable future.

So it is more likely that the exogenous component will rise rather than fall in the foreseeable future. And then, unless option 5 (in post above) is true, then interset rates are likely to rise significantly before the debt is reduced. And therefore locking into a long term deficit that will be very expensive with high long term interest rates is a bad bet.

Whew! Why did I go to this trouble, especially since this thread seems to have pooped out?

I guess it is because I am frustrated by some of the argumentation there. People get into 'tis and 'tisn't fights over things that are not that certain. Like how tightly are long term expected deficits and long term interest rates connected.

Seems from my recent reading that we don't really know much about the relationship between long term interest rates and long term expected deficits. So we have to rely on theory and statistical analysis that is half formal estimation and half curve fitting/exploratory analysis. But look at the overall probabilities, and then it is clear that a bet that long term interest rates will not cause trouble is a very bad bet.

I'm just trying to follow Rubin's (and for that matter, Hamilton's) advice, to argue from evaluation of overall probabilities of various outcomes.

So I don't think we need to nitpick around over whether there is proof or not that there is a tight and highly predictable connection here.

Posted by: jml on February 17, 2004 10:11 PM


jml, i don't have the time right now to track it down, but the guys at the brookings institute, gale and orszag (possible spelling error?) have done loads of investigation of the empirical studies on deficits and interest rates, and they have demonstrated to the best of contemporary knowledge's ability to know that there is a link.

but it's not just "theory" that tells us this: it's the most fundamental economic relationship that tells us this: "supply and demand."

The supply of capital in the world, while huge, is not infinite. As demand for that capital (in the form of budget deficits) increases for that supply (which, admittedly, is itself growing, but which is always being tempted by other suitors!), interest rates must adjust.

Ed, as someone up there said earlier, what's happened thus far is that China and Japan have decided to increase the supply of capital as a form of export subsidy, but this simply can't go on forever. If China and Japan weren't increasing the supply of capital, interest rates would already have gone up to reflect the increased demand, as they will at some moment in the future.

(If i knew that moment, of course, i wouldn't be spending my time here, i'd be playing the bond market, but as the old saw goes, i can tell you what's going to happen, but not when.)

Posted by: howard on February 18, 2004 11:16 AM


Thanks for the references. As per your suggestion, I found a nice recent paper at the Brookings site by Gale and Orszag that makes the case for a fairly strong link between the two. It is a very nice survey.
But that wasn't really the point of my post. The point was to encourage people to engage in more robust forms of argument that will convince people, especially non-economists, without getting bogged down in side arguments. And I think that the deficit-long term interest rate link is a good example. Yes, I do know that the basic idea comes straight from supply and demand analysis, but I also know how difficult it can be to estimate the observable effects. And how even much more difficult it is to make any reliable predictions using that reasoning.
I guess I am looking for arguments that will more or less settle some big and important issues for a reasonable person, and will stick, despite all the strange graphs and unique and obscurely obtained analyses people will come up with to prove their point. Seems like avoidin unsustainable and dangerous levels of annual budget deficits is a big issue to me.
Now, do you have a reference for the Japanese/Chinese exchange rate stuff?
anyway, thanks

Posted by: jml on February 18, 2004 01:53 PM


jml, china/japan: again, time being tight, i can only point you in the right direction. both billmon (at the whiskey bar) and our host have done postings in which they point out the increasing percentage of government debt being held by chinese and japanese banks, and the prof here has done a posting on how it would probably take some $350B/year for that support to be sustained (all postings within, certainly, the last 90 days).

as for the big picture, i like herb stein's epigram, quoted here by the prof in the past, that "whatever can't be sustained, won't be sustained" as a means of setting up the notion that sooner or later, interest rates rise in the face of large deficits, but that may not be exactly what you're looking for.

Posted by: howard on February 18, 2004 03:29 PM


yes, thanks, I have seen those posts. I am looking for some narrative on the decision making process and thinking in China, and their long run commercial financial strategy. So when people say "well, sure that's a pile of dough, but China will sustain it forever, otherwise they cant' sell us all that stuff and emply those millions" I will be able to evaluate, and hey! maybe even respond.
Yes, the Stein quote is nice. I would like to actually find ways of arguing that draw people into understanding some of the issues and numbers, while at the same time staying away from irrelevant silly HS debater's points problems that come up on this blog. If you oversell the connection between deficits and long term interest rates in terms of reliability of the chain of temporal sequence from cause to effect, then somebody will post an chart that means not much of a lot, but *seems* to confirm their position, and then they claim you are a fool or knave. (like a couple of the links and charts posted above.)
So I guess I am trying out strategies of argument that will be more productive in convincing non-economists (if not the wing nuts)
Anyway, thanks for paying attention to my little experiment. And thanks again for the tip on the research at Brookings. It took a while to find the fiscal policy research section, but it has lots of neat stuff.
Interesting section on econometrics of deficits and interest rates. Misleading VARs again! I was taught to call them Very Awful Regressions (not always, but often inappropriately used).

Posted by: jml on February 18, 2004 04:04 PM


jml, wish i could help you more, but as someone who almost became an economist and took lots of economics courses, i guess i think too much in the neighborhood of economists.

that said, here's the general point about china: sooner or later, chinese workers, like all other workers in the history of the world, are going to want to indulge in conspicuous consumption, and by and large, in the modern world, when you want to indulge in conspicuous consumption, you buy american consumer products. When they try to do so, the fact that their government is making american goods more expensive in china will be politically untenable in the prc and they will be forced to move up the value chain to continue to compete.

does that help at all?

Posted by: howard on February 18, 2004 06:27 PM


I can see your point re Chinese workers, and agree, thanks again. I am looking for more techno-gizmo stuff on China's decision making and likely development of their investment/trade strategy. One of the subjects I know least about. So, I'm off to internetland to search for insight into China's finance-trade strategy and post anything I find interesting.

Posted by: jml on February 18, 2004 07:58 PM


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