Nouriel Roubini Begs for Alan Greenspan to Save Us

Brad Delong: Not going to happen.

Looks like Roubini got much of what he asked for...

It also seems, given Big Al's explicit linkage between the current account & budget deficits, that he's not taking recent Fed research on this (finding a weak link) too seriously.

Greenspan also said that he favored private accounts as a way to increase funding for future benefits. He urged caution with private accounts because he did not know how bond traders would react to the exchange of explicit debt for implicit debt but he stressed that he has always favored private accounts as a way to provide assets to low and middle income citizens. Sounds like a plug for the ownership society to me>

he's also linked the current account with mortgage debt :D

btw, here's mcculley on the market consensus' view on why long bond rates are so low and the curve so flat :D

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF_Feb_05.htm

Consensus market opinion presently holds – and has held for well over a year! – that the yield curve is “too low and too flat.” Applying a bit of reverse engineering, we can conclude that this viewpoint is grounded on some combination of the uncovered interest rate parity hypothesis and the expectations of future policy rates hypothesis. This combination gives voice to two strains of talking-head commentary:

· The yield curve is both too low and too flat because Fed policy is too accommodative, generating excessive domestic demand growth and an ever-rising U.S. current account deficit, implying a falling dollar, which will beget rising U.S. inflation and with lag, nastier than expected Fed tightening.

· The yield curve is too low and too flat because the “failure” of long rates to follow short rates up is generating easier financial conditions, fostering above-potential domestic demand growth, which will tighten U.S. labor markets and put upward pressure on U.S. unit labor costs, generating accelerating inflation, and with a lag, nastier than expected Fed tightening.

These two “justifications” for the yield curve being too low and too flat are, of course, complementary not competing: they both lead to the same conclusion, just arriving at it through different channels, the former international and the latter domestic. And most elementally, these rest on the notion that the yield curve is under-estimating either future inflation or future real short rates; or both!

The sound bite NPR played at lunchtime made Greenspan sound like a proponent of SS reform (Medicare too).

Speaking of SS, there has been some really informative discussion hear regarding the SS situation, false assumptions, etc. but I've not seen anything (nor could I find it when I searched) that compares annual SS tax revenue against annual economic growth figures. I was just curious if this would validate, disprove, or have no bearing on whether using real/anticipated economic growth numbers vs. those used in the SS solvency reports was an appropriate/accurate argument.

Thanks in advance.

From a post on Angry Bear, I learned that some research says that the budget deficits here do not have as great an effect on the current account deficits as some might have thought.

The figure seems to be about 20%. I always figured that we could blame the Bush administration (or any administration that is so fiscally reckless, for that matter), but not entirely, as it's not just the budget deficit that makes all the difference. As PGL pointed out, Brad also noticed this and said he had .3-.4 in his head.

No matter, it's something, but it's not everything. Still, even if it's as low as 20%, it's nothing to sneeze at, and I have to ask, how much blame should we level at the Bush administration? In this post, Brad seems to agree with Greenspan that a pretty big chunk of the blame goes to those guys, but does anyone think differently? If so, why?

A money manager I know told me that the low long bond rates are because the market is pricing in a recession when rates would have to be lowered. I don't know if that makes sense or not but that was the only guess he could come up with when I asked him.

Just to reiterate, I heard the same NPR blurb. The gist was Alan Greenspan says the economy is doing very well, and firming, and that Greenspan supports President's Bush's plans to overhaul Social Security, although Greenspan would be more cautious.
The impression was that if Greenspan had to the control to either pass or block Bush's proposal as it is, he would agree to implement everything Bush is proposing.

Maybe it is that ingrained supply side economics keeps inflation from percolating down through the general economy, while the investment sector is flooded with cash, so that any vehicle, whether it be stocks, bonds, real estate, etc. is awash in loose money.

Stuart: "...but I've not seen anything (nor could I find it when I searched) that compares annual SS tax revenue against annual economic growth figures."

Consulting the SSA's annual report at
http://www.ssa.gov/finance/2004/Financial_Section.pdf

you can get an idea of tax revenue versus annual economic growth by comparing charts 2 and 3 on pages 179 and 180. They are clearly forecasting that the SS tax base (hence tax revenues) will be a slowly shrinking share of GDP. If you assume that the 6.3% or thereabouts of GDP that is required to pay the currently promised benefits is reasonable, then the question is what the tax base should actually be.

The Treasury has been issuing far more short term than long term debt. Also, corporate savings are near record levels and there has been less need to issue long term debt than might otherwise be the case. So there is a supply limitation. At the same time private and institutional investors may well be reaching for yield and buying long term debt. Mortgage and high yield debt, by the way, is also being gobbled up for the extra yield.

In the bond market I cover, the reason interest rates are so low is that demand is vastly outstripping supply. There's loads of cash around from maturing debt, while corporate bond issuance is relatively low. Risk appetite has also increased dramatically. I'm not saying this explains everything, particularly why people are investing in bonds rather than anything else, but it's certainly the main dynamic within bonds.

We have to at least consider that, whatever Greenspan may think about the cause of low long rates, he may have been trying to talk long rates up. Remember the minutes of the December (?) FOMC meeting, in which investors excessive appetite for risk was mentioned? Greenspan touched on that issue again today.

There is more risk at the long end than at the short end. A flat curve and low real long end rates means there is a very thin risk premium built into long Treasuries. Similarly, there is a very thin risk premium in spread product at long maturities.

And yes, Greenspan ducked any responsibility for the deficit. The president made him wrong, but Greenspan goes to the Hill twice a year without showing any sign that his partisan support for Bush's tax cuts is in any way responsible for the deficit. Greenspan may be able to tell himself that he is just avoiding comment on particular policies or individuals, but he'll neven convince me. He was partisan, he was wrong, and he is insufficiently honorable to admit to either.

This strikes me as a dangerous bond market, yet there is little volatility. Long term rates have risen moderately for all the cautioning. There is remarkably little volatility in the stock market as well.

kharris wrote, "He [Greenspan] was partisan, he was wrong, and he is insufficiently honorable to admit to either."

You're right, though your words are understated.

Greenspan will no doubt go down in economic history as a villain.

anne, Ginger Yellow:

High demand for longer-term bonds at the expense of short-term?

I guess that implies investors forsee a looming recession and declining equity returns - and they are desperate to find anything that will provide good yield in 2006-8's weak market. It also follows that investors expect low inflation and low interest rates. That sounds like a bearish bond market to me... the yield curve hasn't flipped yet, but it's getting close.

Ginger Yellow wrote:

"the reason interest rates are so low is that demand is vastly outstripping supply. There's loads of cash around from maturing debt, while corporate bond issuance is relatively low"

I agree.

It all ties into SAVINGS,DEFICITS, FINANCIAL ASSETS, and NONFINANCIAL ASSETS.

Financial wealth concentration has allowed for SAVINGS (rich people do not need to spend all their income so they SAVE).

To compensate for lack of demand, governments run DEFICITS.

Government DEFICITS trade FINANCIAL ASSETS for NONFINANCIAL ASSETS.

Low rates will be with us until we are willing to tax the rich (take their cash from them so they can no longer SAVE) or the rich (include foreign CB's) decide to spend their "income" on NONFINACIAL ASSETS rather than SAVE FINANCIAL ASSETS.

It's not in the "interest" of people in power to "understand" interest rates, just look at Japan.

How much has the money supply risen in the past, oh 6 years? Right then. Where are you going to put all that money?

By rational expectations of future behaviour long bond rates should be higher.

By supply and demand - as Ginger points out - there's too much money seeking too few bonds.

Ian's right. Greenspan only has himself to blame for a profligate monetary supply policy. To be fair, we are entering a period of increased international tensions. We have never been closer to WWIII in my opinion. The markets are jittery because of this, and the classic play is to slide asset balances into bonds which may also be propping up the market.

So there is both a long term and a proximate cause that is influencing the matter. There are a lot of dollars floating around and people are scared, so they are sticking them into bonds.

We have asset inflation. Too much money chasing too few investments - and no (or very little) trickle down effect. Real estate -> too high. Stocks -> too high. Bonds -> too high. Expectations of future GDP growth -> too high.

There's a lot of cash sloshing around, with no where to go; a rational money manager would probably try to buy renminbi (Chinese) assets, but that's easier said than done. Everything else, which is available long, is, to varying degrees over-priced in dollar terms, if you expect some combination of increased inflation, increased U.S. short-term interest rates, an adjustment in the value of U.S. currency vis a vis China, and some dent in U.S. corporate profits and economic activity as a result of some combination of those three. And, really, what else can one expect? Where is there room for decreased interest rates, unchanged Yuan/dollar exchange rates, or monetary deflation?

Ginger Yellow is correct. There is ton of liquidity and no demand for it. Just look at the Corporate finance markets. Companies who normally borrow are awash in profits, cash flow is growing, and have record amounts of cash on hand ( See recent issues of CFO Magazine; see Feb. 12 Economist article "A world awash in profits".) The result is very little corporate demand for cash. Capital expenditures by SEC reporting corporations remain low since the last recession. Why should it grow? These companies are still getting productivity growth with measely expenditures of cash. Talk to a corporate lending officer. These guys are not seeing many transactions. All of this will change. The question is when and what will be the trigger? Apparently a $1.30 Euro, $42 plus oil and a war are not going to do it. Maybe Greenspan's retirement will do it?

Bonds and Equities*******************************
There is the possibility that the bond and stock markets are pricing in a social security tax increase. The Republicans do have a majority in the House and the Senate. All they need is a political cover for another Reagan type combined social security tax increase and income tax decrease.
If we have compulsory social security private equity accounts to go with the compulsory social security treasury bond accounts that collectively make up the social security trust fund, we could force the lower income people to save even more than the 12/13% of income they are saving now in the form of treasury bonds in the social security trust fund.
That would get long bond rates down and the price earnings index up. That is literally the only thing I can think of that would do that.
Real Estate**************************************
If we assume massive immigration to the US in the near future, that would keep real estate high, also. The coming migration of workers to the flyover for import replacement primary and secondary production jobs in coal mines, steel mills, and automobile factories would have less impact on metrocoastal real estate values if there were a corresponding immigration from overseas to the metrocoastal and flyover regions.
Currencies***************************************
But there is nothing I can think of that would keep the dollar high in overseas markets. Our balance of payments deficit is too high.
Even mass emigration of all the Gulf oil sheiks to the US with their Swiss bank and brokerage accounts is not enough money to keep the dollar up.

http://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm

This strikes me as confusing testimony by Alan Greenspan. Though there are jokes that the Federal Reserve Chairman can be hard to understand I generally find little problem understanding. Evidently investors did not find the testimony alarming. Stocks were little changed while long term bonds sold off moderately.

Mr. Willis -

As for the ability of the Administration to use the Republican majority in the Senate to railroad through a proposal, please recall that changes to Social Security, under the Byrd Amendment, must be passed by 60 senators.

As for the price anomaly in the long bond, Brad Setser

http://www.roubiniglobal.com/setser/

has found that the Treasury has been issuing proportionately fewer 10 year Notes. Whether this is just in answer to Asian CB demand for shorter-term debt or represents a sub-rosa attempt to drive the price of the long bond upward remains a question.

The reason the Treasury is issuing relatively less long term debt has to be that it holds down the present cost in interest. Locking in long term rates would be more expensive, so borrow short. Treasury officials may believe use of short term debt may lower costs even in the long run if interest rates stay relatively low.

The Treasury has also been lending money out at rates lower than the Federal Reserve's Fed Funds rate. They're supposedly lending out 'surplus' cash in daily auctions as shown in the announcement.

http://fms.treas.gov/tip/auctions/tio-auction-results-91-02162005.pdf

This has been going on for nearly 18 months now.

Was the SOB even asked about financing the deficit?? About backing off a portion of the evil tax cuts??? Why do I think not?

MTC
There is no constitutional basis for that statement about the Byrd Amendment. Cloture is also just a rule in Congress, and not an article of the constitution. Fifty one percent and a president is all you need. The Supreme Court might weigh in on defaulting on the Social Security Trust Fund, but not on supplementing it.
It would raise all kinds of hell, but this is not a conservative Congress.

Walter: The notion that the poor are "saving" 12.4% of their income in the form of the trust fund is just silly. Most of FICA goes to today's retirees; a small portion -- the SS surplus -- goes into bonds.

anne -

Your assertion that the greater issuance of short-term debt is an attempt reduce interest payments has great merit. If a constriction of the issuance of long-term debt is a Treasury policy goal then why or how can Mr. Greenspan claim to that the decline of long-term yields is "hard to explain"?

Mr. Willis -

Yes, but the Senate would first have to put the bell on the cat.

MTC wrote, "As for the ability of the Administration to use the Republican majority in the Senate to railroad through a proposal, please recall that changes to Social Security, under the Byrd Amendment, must be passed by 60 senators."

What's the "Byrd Amendment"? There's such a thing as a "Byrd Rule," which is a way to prevent Senators from sticking extraneous items into budget reconciliation bills.

Again, I was puzzled by the threads in Alan Greenspan's testimony which was at once assuring and worrisome. Is economic growth a projected problem? Is inflation a projected problem? Wages have trailed productivity increases by considerable margins these last years. Is the Fed worried about wage increases? Why are we not pleased that long term interest rates have stayed so low? Why is there no mention of the decline in federal revenue? Oh well.

anne wrote, "Again, I was puzzled by the threads in Alan Greenspan's testimony which was at once assuring and worrisome."

Given Greenspan's obvious ideological agenda, why are you puzzled?

There is the answer, we must separate out the monetary policy aspects of the testimony from the fiscal policy suggestions. Alan Greenspan may worry about federal debt, but the worry will be spending and not revenue related. The wish is to limit spending in any possible way and include Social Security and Medicare in the limiting. I should not be surprised or puzzled, because Greenspan has turned from worrying about a budget "surplus," to supporting tax cuts to rid us of the surplus, to telling us we can not afford Social Security for baby boomers who have been building a Social Security surplus for a generation.

I'm lazy so I am not bothering to look up the proportion of the National Debt that is short-term. But if it is rising, and (more importantly) if it is large, then the U.S. fiscal deficit could balloon out of control quite quickly. We all know the arithmetic of the government budget constraint. It happened in Canada 20 years ago. I have a friend who was responsible for the debt restructuring. After the Ministry of Finance stopped bragging that they had 'created' a money market, they did a bit more bragging for restructing (out to two years) to claim they had 'refunded' the debt.

If foreign lenders are staying short, it means they don't have confidence in the United States, and want to keep their options open for a future rise in the rate. This is crash city if the risk premium forces up the debt service and the government refuses to make people pay for it by raising taxes. I guess I'm in the camp that is amazed that the yield curve is so flat. I can't understand why the ten year rate isn't 7 to 8 percent.

The Byrd Rule (my error in terminology) forbids the inclusion in the Federal budget reconciliation bill of any legislation recommending changes to Social Security.

It's been my opinion that inflation of the seventies wasn't cured by Volcker raising rates(How do you cure an oversupply by reducing demand?), but by supply side economics squeezing surplus money up the economic ladder and government borrowing skimming it off the top. The excess money ran out in '87, when the markets siezed up. Greenspan opened the taps and and things started up again.
The situation now is that huge supplies of surplus wealth have built up. The derivatives markets are essentially a form of parimutual wagering that serves to maintain a lot of surplus money in solution. The government debt is actually necessary to store all the extra wealth the rich are accumulating.
The question is; Why? Ninety years ago, Henry Ford understood his workers needed to be able to afford what they made. It is a circulatory process; Raw materials, labor, ideas, etc. rise up. Material wealth, social order, etc. precipitates down. With more energy rising then materials precipitating, we have these storm clouds of wealth building up at the top. When it bursts, the wealthy are going to loose out as much as anybody. Historically it's called revolution.
Money is a tool, not a God. It's not supposed to be put on a pedestal and worshipped, it's for lubricating the economy. As a form of economic circulatory system, money is actually a form of public commons, just like the highway system and what we have is a tragedy of the commons, as those who can, take as much as they can. When the system breaks down, history doesn't pitch the people and keep the system, it's the system that gets pitched.

Brodix, Macro 101 => rates up-inflation down.

Hey, does Anne have a webblog yet?

OK, so just to recap this...

1) Long-term bond rates are way lower than you might expect. It's not clear why this is, but it might be due to a lack of supply.

2) Simultaneously, more and more US govt debt is becoming short term. And more and more of the debt is held by foreigners.

Speaking of debt, private debt has also gotten very high, and a lot of this debt is secured by real estate assets that might be priced currently at unsustainable levels.

4) Any hint of serious inflation outside of the real estate sector will be met with aggressive short-term rate hikes.

5) Real GDP growth is the essentially the sum of employment growth and real productivity growth.

6) Productivity growth rates are quite high, and not really decreasing much.

If all of this is true, I see so many ways for this to go very wrong in the near future. Any shock that causes an old-fashioned recession with a -2% annual growth rate over 4 quarters will cause, given a productivity growth rate of (say) 4% per year, a 6% decline in employment. And then things really get ugly.

If ugly really does happen before November 2006, I think it's safe to assume that Republicans lose 50-100 seats in the House. This might not be the worst political outcome in the world, depending on who wins those seats.

Remember, the Republican voters are still going to be there. They may switch to the Democratic party in the 2006 election, but they will be voting in the Democratic primaries, too. Sort of like when the Republicans invited the old Southern Democrats into the Republican party and the Southern Democrats ate the Republican party alive.
Figure on a lot of turbulence as the old Republicans and the Liberal Democrats become defacto third parties to the majority Libertarian Democrats.

http://quote.bloomberg.com/apps/news?pid=10000039&sid=aLm76TyE5mnQ

Greenspan Undermines Bush's Social Security Plan: John M. Berry

Feb. 16 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan's testimony yesterday before the Senate Banking Committee undermined virtually all of the Bush administration's arguments for diverting some Social Security tax payments to fund private retirement accounts.

The Coming Energy Crisis or Peak Oil

"Fertilizer, DVDs, rubber, cheap flights, plastics and metals. None of these things have anything in common, right? Think again. An ingredient in all of them, in one form or another, is oil.

Oil is the precious primer of the world economic engine, making it hum. Oil provides 40% of the world's energy needs, and nearly 90% of all transportation. It's also a building block for many products and goods. Cut supplies of this natural resource and life as we know it could change.

But while some experts say the world runs no risk of running out of oil, others disagree. Sounding the alarm is the Association for the Study of Peak Oil and Gas. Its president is Kjell Aleklett, a physics professor at Sweden's Upsalla University.

'[During] the next 30 years we will find more than 150, maybe 200, but probably not, but 150 billion barrels of oil is roughly what you're going to find,' Aleklett said. 'And during the same period, we will consume 1,000 [billion barrels of oil]. So that means we are now digging deep into the reserves we have at the moment.'

Aleklett is among a group of international experts - ex-oil executives and geologists - who believe there is less oil percolating under the ground than the oil industry acknowledges. They say the world has burned up nearly half of all its oil - an estimated 900 billion barrels of crude.

In industry jargon, that halfway point is the 'peak', after which reserves no longer rise but drop. No one denies this will happen eventually. After all, oil is a finite resource. But these oil skeptics - so-called 'peak' oil analysts - say the 'peak' is coming sooner rather than later, maybe even in 2008. They paint a gloomy picture: falling oil supplies plus rising demand will equal shortages - and perhaps a rising risk of war."

http://www.atimes.com/atimes/Global_Economy/GA26Dj04.html

A Question Of Scale
"To appreciate the magnitude of the Peak Oil crisis confronting us, it's necessary to come to grips with the colossal scale of the world's appetite for oil. Humanity currently consumes about 82 million barrels of oil per day, 30 billion barrels per year, and demand is increasing more or less exponentially (i.e., doubling at a constant rate). How big of a number is 30 billion barrels? It's roughly equal to one barrel per second, every second, for a thousand years. That's our annual consumption, and it's growing rapidly.

To put this in perspective, consider the debate over drilling in the Arctic National Wildlife Refuge (ANWR). ANWR drilling proponents often talk about it in a context of 'US energy independence.' This is a cruel joke. Optimistic order-of-magnitude estimates of ANWR oil reserves are in the vicinity of 10 billion barrels. For the sake of argument, let's suppose 100% of this oil can be recovered (it can't). 10 billion barrels is enough to satisy world oil consumption for a mere four months. If it all went to the US, it would satisy US consumption for less than a year and a half. Then what?"

http://www.pastpeak.com/archives/2005/02/a_question_of_s.htm

See also:
http://divedi.blogspot.com/2005/02/coming-energy-crisis-or-peak-oil.html

Change Agent

"Conclusion: in the next twenty years, China is certain to contest militarily for the world's remaining oil with what has been the prime customer for its manufacturing output. That would be America."

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2005/01/change_agent.html

Michael,

Brodix, Macro 101 => rates up-inflation down.

If that's such a clear cut connection, then why hasn't inflation been growing lately?

Other than in investments, that is.

Silent E,

I don't think it's demand at for the long end at the expense of the short end. As Anne noted, there is just a ton of supply at the short end. Demand is good across the curve, but supply from Treasury is quite limited at the long end. Yield curve inversion, like the stock market, is an iffy guide to recession (though better than the stock market, if memory serves). When the market is distorted, for instance when Treasury announced it would kill off 30s, inversion is probably less reliable as a predictor of economic performance than usual.

Hedley,

Greenspan was asked about (lectured about) the advisability of extending expiring tax cuts, pretty much exclusively by Committee Democrats. He didn't take the bait.

His answer to why not address medical care costs problem first was interesting. He seems to believe in a productivity miracle in healthcare
to take care of the problem.

Interesting, but if we get such a healthcare productivity miracle won't overall productivity be so strong that it will resolve the SS problem?

Spencer

What of productivity in health care? We must think about what significant continued productivity increases in health care could mean, especially if coupled with Medicare bargaining on drug prices in line with Veterans Hospital policy. Suppose then we might might might lower the administrative costs of private health care insurance providers?

KHarris

Whatever might we do with an easing of corporate and personal tax cutting? There really was a surplus 4 years ago, just when a surplus was needed. Ah...

"1) Long-term bond rates are way lower than you might expect. It's not clear why this is, but it might be due to a lack of supply.

2) Simultaneously, more and more US govt debt is becoming short term. And more and more of the debt is held by foreigners."

Let me make one suggestion as to why long-term bond rates are low. Our Central Banker (Greenspan) is ideologically committed to Privatization and so is not willing to draw attention to the implications of the following chart, Central Banks overseas may be more inclined to examine the numbers at hand.

http://www.ssa.gov/OACT/TR/TR04/VI_OASDHI_dollars.html#wp94756

Examine the numbers in the right hand column under both Intermediate and Low Cost in 2035, the natural "event horizon" for the current market in 30 year Treasuries. Under Intermediate Cost you have a Trust Fund sitting at $4.7 trillion and sinking at $500 billion a year, in effect selling off its portfolio (the actual mechanics are different, but that is the practical result). Under Low Cost you have a Trust Fund sitting at $12.6 trillion and growing at $400 billion a year, in effect hoovering up Treasuries in a way that limits the supply for anyone else.

Now in the real world interest on Bonds in the Trust Fund is just accounting, the real impact on the markets will be the gap between income less interest and costs, the actual gap that will need to be met by borrowing from the private and overseas market. Under Intermediate Cost we see $2.2 trillion in payroll income and $3.0 in costs, implicit demand on the market $800 billion a year. Under Low Cost we see $2.1 trillion in payroll income and $2.4 trillion in costs which results in a demand on the market of $300 billion a year.

Ignoring for the moment the odd phenomena that result in more optimistic Low Cost taking in less income from a bigger economy than the Intermediate Cost alternative, we can see that depending on your bet on the American economy over the next 30 years investors in the long bond are looking at a $500 billion dollar a year (current dollar) difference in bond supply in 2035.

Maybe the long bond is low because foreign investors are predicting that the American economy will continue to grow at or above the 2.0% rate needed to produce Low Cost and in doing so will reduce the overall issuance of bonds to the market to the tune of $500 billion a year by 2035.

It would be kind of ironic to discover that the Chinese Central Bank was operating under the assumption that the Trust Fund was solvent while the official face of the US Federal Reserve was asserting it was bankrupt.

http://www.nytimes.com/2005/02/17/business/17scene.html

The Theory That Self-Interest Is the Sole Motivator Is Self-Fulfilling
By ROBERT H. FRANK

A NEW YORKER cartoon depicts a well-heeled, elderly gentleman taking his grandson for a walk in the woods. 'It's good to know about trees,' he tells the boy, before adding, 'Just remember, nobody ever made big money knowing about trees.'

If the man's advice was not inspired directly by the economist's rational-actor model, it could have been. This model assumes that people are selfish in the narrow sense. It may be nice to know about trees, it acknowledges, but it goes on to caution that the world out there is bitterly competitive, and that those who do not pursue their own interests ruthlessly are likely to be swept aside by others who do.

To be sure, self-interest is an important human motive, and the self-interest model has well-established explanatory power. When energy prices rise, for example, people are more likely to buy hybrid vehicles and add extra insulation in their attics.

But some economists go so far as to say that self-interest explains virtually all behavior. As Gordon Tullock of the University of Arizona has written, for example, 'the average human being is about 95 percent selfish in the narrow sense of the term.' Is he right? Or do we often heed social and cultural norms that urge us to set aside self-interest in the name of some greater good?

If the search is for examples that contradict the predictions of standard economic models, a good rule of thumb is to start in France. During my recent sabbatical in Paris, I encountered many such examples, but one in particular stands out. One mid-November afternoon, I asked my neighborhood wine merchant if he could recommend a good Champagne. It was the week before Thanksgiving, and my wife and I had invited a few American friends to our apartment for a turkey dinner.

He just happened to have an excellent one on sale for only 18 euros....

Treasury has been reducing duration to reduce debt charges. It works, but it means that future debt charges become very volatile. Given what we know about the long term structure of US debt obligations even at the price of slightly higher costs, there's a strong argument they should be selling more long term notes. Many more.

This would seem to be a fine time for the Treasury to sell 30 year debt. France is selling 50 year debt. However, I wonder if the thinking at Treasury is short term debt will both lower current interest rate costs and future interest rate costs because there is little risk of long term rates rising much above the current level.

spencer wrote, "His answer to why not address medical care costs problem first was interesting. He seems to believe in a productivity miracle in healthcare to take care of the problem."

Ain't gonna happen unless they clamp down on rent-seeking by physicians, drug companies, and others.

Ian Welsh wrote, "Treasury has been reducing duration to reduce debt charges."

I thought this sort of thing started back in the Clinton years.

It did liberal. And in a situation where the expectation is lower deficits or surplusses each year, and low interest rates in the future, that's the right thing to do.

In a situation where the expectation is that debt will not be retired but will have to be rolled over and much new debt willh have to be issued you would only go to low duration if you expected that interest rates were going to get lower.

Given interest rates recently that doesn't seem like a very good bet unless you're absolutely convinced the country is going to go into a deflationary spiral.

One theory is that Treasury was trying to bridge to 2004 in the assumption that a Democrat would win and clean up the debt mess. If so, it's a bet they lost and at this point they really should (imo) be issuing many more long notes.

Where was the Chairman when the perfectly gratutitous, Mission Accomplished tax cuts of 2003 were enacted?

A tidbit from today's Greenspan testimony, in re private accounts:

"These accounts properly constructed and managed will create a sense of increased wealth (on the part of lower- and middle-income workers)."

A sense...hmmm....

Where was the Chairman when the perfectly gratutitous, Mission Accomplished tax cuts of 2003 were enacted?

What could be the possible logic in bankrupting the country?

To buy its assets at firesale prices, such as millions of acres of federal land, etc.?

Far fetched, but what are Cheney and Co. really capable of?

"Where was the Chairman when the perfectly gratutitous, Mission Accomplished tax cuts of 2003 were enacted?"

Posted by: Bob H at

Probably figuring that this would lead to Bush's reelection, due to financtial stimulus, and then to crushing deficts which could be used to shut down social programs, including SS.

It's really hard to come up with an alternate explanation of Grenspan's recent actions.

Brodix,

Cheney's "Reagan proved deficits don't matter", his energy task force run for and by energy firms, his willingness to imply that any disagreement with Bush's march to war, no matter how principled, was treasonous - I think we already know what this guy is capable of. To the victor go the spoils.

Greenspan has always urged Congress for pay-go, but Congress doesn't seem to care. There are elections to be won, after all.

Perhaps long-term interest rates aren't budging because there is low inflation. Even with hoardes of money being dumped on the economy. Perhaps all the money is going for mortgage payments on the booming housing market, and the associated property taxes. Government revenues are up. Add in high energy costs, ie sending dollars overseas, and then maybe that explains dull retail sales and lower inflation than Greenspan thought would happen.

I think he's trying to pop the housing bubble. For those who still have adjustable mortgages, that may come sooner than later. Just a thought!

In regards to "too much liquidity sloshing around" which implies there is too much cash available.

Who controls this massive amount of "liquidity" helps determine interest rates.

One must take into account micro wealth distribution. My guess is Japan has a larger wealth distribution problem than the U.S. and therefore has lower rates even though it has larger budget deficits.

Shift sufficient "liquidity" from SAVERS to SPENDERS and long-term interest rates will increase.

Query: Are there some good figures out there that would allow me to graph "percentile position of lifetime income" to "estimated 'returns' from OASI and DI on if FICA payments were 'investments'"?

CBPP has a paper showing why minorities generally get better returns than whites (and why the system is progressive overall), but I couldn't find anything in there that simply calculated an estimated return if one treated FICA as if it were going into something like an IRA.

The CBPP report I referred to is here:
http://www.cbpp.org/10-5-98socsec.htm
I imagine many of you have already seen it...

My impression is that the right-wing claims that the "return" on SS is currently expected to be negative are exaggerated, but I'd like to have figures to back this up.

Meta-query: I'm not entirely clear on how friendly this community is to off-topic questions. I considered going back a few days to some of the "stock returns" posts, where this would've been more on-topic, but I figured few people would be likely to see the question there. If there's another forum in which queries like this would be more appropriate, I'd be happy to take a pointer.

Auros wrote, "I considered going back a few days to some of the "stock returns" posts, where this would've been more on-topic, but I figured few people would be likely to see the question there. If there's another forum in which queries like this would be more appropriate, I'd be happy to take a pointer."

I like USENET myself. Try sci.econ. Threads there last quite a long time. Better have thick skin though.

I think everyone here agrees that we are at the edge of a precipice of some sort. What I would like to find is a discussion of ideas as to how things might work better. When it does come crashing down, having worked such thoughts through might be useful.

One idea which occurred to me back in the eighties, when Bush senior was dealing with the deficit and the line item veto was being mentioned, was to take the budget bills and break them down into all their items. Then have each legislator assign a percentage value to each item. The bill would then be reassembled in order of preference and the president would draw the line at what was to be funded.

The buck stops with the president, but he wouldn't have personal control over individual issues and legislators. It would also require legislators to at least glance at what they are voting for. They would also have to develop a network for their own issues and not have the leadership deciding everything. This would emphasize the bottom up nature of the legislature, as opposed to the top down order of the president.

This percentage voting might work on other issues as well. Count points, instead of votes. It would allow legislators to express a range of opinion and not just the black and white of yes and no, which would empower those in the middle with more nuanced views, as opposed to those on the extremes, who view everything as black and white.

Any opinions? Obviously I'm not a professional.

I'll just note that Cardinal Ratings systems, in general, devolve to Approval Voting when you calculate best strategy. (You can find scholarly mathematical papers explaining why if you go Googling for 'em.)

Which is to say, I like your budget proposal in general, but you'd probably actually fare better by simply having each legislator give an up-or-down vote on each appropriation.

Auros,

I will check it out after work, but could you give me a brief description anyway?

Isn't it it all about "approval voting" in the first place? I originally thought of it as just up/down, but the ratings were a way to give individual legislators a method of expressing the complexities of the issues. The hope is that it doesn't devolve into some lowest common denominator to quickly, but maintains some intellectual space within the process and it is only at the final cut that the decision is made. With 435 congressmen x 100= 43,500. A tie vote isn't often likely.

Auros,

Also, I remember why I came up with the percentage voting in the first place. It was to broaden the range of factors, otherwise with a large bill a 435 yes/no's, there would likely be more then a few items with the same result, especially in the middle range.

This is the part where Greenspan advocates cutting every single social program under the sun, as per his plan, right?

That is to say, the title on this is totally wrong, in my opinion. Alan Greenspan may be a little nervous as he threads the needle, but it seems like his life's work of the past twenty years -- of dismantling the progressivity of the US tax code and the social safety net simultaneously -- is coming to fruition.

Brodix:
See here for an example of how in CR, actually using the improved expressivity hurts: http://en.wikipedia.org/wiki/Cardinal_Ratings

There's an article on how strategy plays out in Cumulative Voting (where you have a limited number of points, and assign them as you see fit) here:
http://en.wikipedia.org/wiki/Cumulative_voting

The simple explanation as to why CR reduces to AV is: Start by imagining that you only wish to differentiate between two things. In that case, there's clearly no reason not to vote the max for the one you favor, and the min for the other one.

The thing is, that logic is generalizable to the ranking of any pair of members in a larger set. Using any score in between the min and max reduces the effectiveness of your vote at achieving your desired outcome. Your best strategy is to pick every line item you personally want to be in the final result, and give a maximum vote to every one.

OTOH, if everybody actually follows this best strategy, it's true that many items end up with the same score. I can see how actually forcing a spread might be useful in terms of reducing the discretion of the president in reordering within a set of items with the same score. So, maybe what's really called for is an ordinal system -- something like Borda Count, or maybe even using STV-PR with the number of "winners" equal to the number of contestants, ranking the items based on the order in which they're selected.

Auros,

I haven't read the article yet but;

First off, yes, many legislators are going to use that strategy for a lot of items and understandably so, but as most pet projects will only have the real support of a few legislators, they will end up far down the list anyway and any that do make it up will require the cooperation among groups. This would lead to specific projects being tailored as efficiently as possible, ie. the pork would itself have to be lean.
What it would also do is allow individual legislators the option of bending under pressure, rather than breaking. If they are being pressured, rather than changing their vote, they could give up a few more points than they might otherwise have. This would put them in a much stronger bargaining position. For one thing if what they were promised in return wasn't fufilled, rather then having to stand up to the forces which steamrolled them the first time, they would have maintained a degree of backbone and so would give up less points then had they been satified. Or find another grouping to join. This would drastically change the nature of the leadership. As it is today, it is most effective as a steamroller that once it knocks down a few members, has even more momentum to knock down more and little incentive to really satisfy any but the most favored or pliant. This is what destroys the real function of a legislature, which is to filter up the wishes of the people for the administration to provide the top down order to. I see this either/or dichotomy within the legislative process as the basis for why we can only manage two parties in this country. If we can make individual legislators into more individual operaters within the process and weaken the leadership, this would work against corralling them into one side or the other.
I realize I'm making large claims here for the barest of sketches, but the current situation is, by all measure, headed for a breakdown of proportions not seen in the history of this country. The question then, is what comes after. The religious right is making plans for that day, but the secular progressive middle is just muddling along. I feel though, that while it is conservatives which lead us off the deep end, it is the liberals which crawl out the other side. Spring to winter is evolution. Winter to spring is...punctuated equilibrium.

Hmm. I take it, from your description, that you're imagining that everyone casts their votes at once, and irrevocably -- which is like a standard election. But it occurs to me that if the process of setting priorities was collaborative -- if everybody in the room had a computer terminal, and could reallocate things on the fly (including negotiation with other legislators), and the list could not be finalized until everyone agreed they were done making changes -- then the strategy would become very different. I think in that case, you may be right about the difficulty of finding backers to push a pork project above a really critical one. If the media paid attention to the session in which the ranking took place and kept track of any wheelings and dealings in which pork did get pushed higher (say, to placate a powerful committee chairman), so much the better. It could let constituents know, in fine detail, the priorities of their representatives.

Interesting.

The STV-PR method might work just as well, and would be faster (it wouldn't require the sort of long session of negotiation and adjustment), but I can see benefits to taking the extra time.

Speaking only as an observer here, the political process seems to include a lot of events, meetings, campaigning, etc. which might be effectively extraneous. If legislators gained the reputation for being focused on their work and it didn't involve as much political bootlicking, etc. it would raise the general respectability of the profession, as well as complicating the clarity of their voting record,so that it reduces their profile for the more mindless smear campaigns they have to deal within elections.