January 20, 2003
Glenn Hubbard

Original 2003-10-15: A bunch of reporters are calling me asking what I think about Glenn Hubbard...

Glenn Hubbard is a brilliant teacher, a thoughtful and creative researcher, and (by all accounts) has been an excellent administrator at Columbia Business School. He is excellent company--witty, quick, and highly intelligent. He has served with distinction in the Bush II Administration as Chair of the Council of Economic Advisers, playing a weak hand (for this is not an administration where people care deeply about whether its policies are substantively good for America) with considerable skill. Even though it is hard to see the imprint of his knowledge of economics in policies like the steel tariff, the farm bill, or the 2001 tax cut, he has been in there pitching for the good guys.

However, recently Glenn has fallen off the extremely difficult tightrope that a White House economic adviser must walk. He has let himself get boxed into a position the soundbite version of which ("no evidence" that swings in the deficit of the scale seen in the United States affect interest rates; the belief that the 1990 Bush and 1993 Clinton deficit-reduction packages substantially fueled the 1990s boom is "Rubinomics... complete nonsense") is radically inconsistent with what Glenn believes and teaches students in his Money, the Financial System, and the Economy textbook (see especially page 661, but there are lots of other pages as well).

Once you have fallen off the tightrope, it is almost impossible to get back on. Bluntly, White House Media Affairs, White House Political Affairs, and the White House Chief of Staff now know that you will say whatever they want you to say. Hence when the inside-the-White-House balancing of interests and power groups that determines what options get submitted to the president takes place, your views are ignored--for you will play along anyway, and there are other groups to be appeased and conciliated that will not. Hence once Media Affairs and Political Affairs have gotten your number, you are essentially useless in your principal function: to serve as the White House's compass needle telling them where magnetic north--good economic policy--really is.


Addendum 2003-01-16: I did not--but I should have--noted above that the pressures that Glenn has been and is under are of unimaginable intensity. It is not only nearly impossible to get back on the tightrope once you have fallen off, but it is nearly impossible to walk the tightrope for any extended period of time at all. Two years successfully walking the tightrope is not a bad run--better than average, in my opinion.


Addendum 2003-01-18: I have a precis of Chapter 24 of Hubbard's Money, the Financial System, and the Economy. It contains two quotes from Hubbard that are strong statements of unadulterated 200-proof "Rubinomics", both from page 653: "The large increases in the federal budget in the early 1980s... an expansionary, outward shift of the IS curve, creating short-run pressures for higher output and interest rates"; and "By the late 1990s, an emerging federal budget surplus put downward pressure on interest rates."


Addendum 2003-01-20: TAPPED has printed an email I sent them on the relationship between Hubbard's recent public comments and chapter 24 of his Money, the Financial System, and the Economy:

Brad DeLong emails...:

I had been focusing on how Glenn Hubbard's recent attacks on "Rubinomics" and his denial of a significant effect of long-term budget deficits on interest rates, investment, and growth were inconsistent with the theories he taught in his textbook.

I should have read more carefully. In the concluding paragraph of Chapter 24 of his Money, the Financial System, and the Economy textbook, he applies his theory to analyze the effects on interest rates of the increase in the deficit under Reagan and the elimination of the deficit under Clinton. His recent attacks on "Rubinomics" are also flatly contradicted by the description of events he teaches in his textbook: you can't say that the claim that deficit reduction in the 1990s fueled the boom is "Rubinomics... complete nonsense" if the one thing you have to say about fiscal policy in the late 1990s is that deficit reduction put downward pressure on interest rates (and thus boosted investment); you can't say that deficit increases don't have a significant effect on interest rates if one of the two things you have to say about fiscal policy in the early 1980s is that the Reagan deficits put upward pressure on interest rates.

DeLong cites lines from a paragraph of Hubbard's book to support his point; here's the full text [of the final paragraph of chapter 24]:

Earlier in the chapter, we described the big changes in fiscal policy, monetary policy, and productivity growth that took place in the 1980s and 1990s. We can use the IS-LM-FE model to analyze these events. We can represent the large increases in the federal budget deficit in the early 1980s by an expansionary, outward shift of the IS curve, creating short-run pressures for higher output and interest rates. By the late 1990s, an emerging federal budget surplus put downward pressure on interest rates. Two major monetary policies dominated the period. The major monetary contraction beginning in late 1979 can be represented by a contractionary upward shift of the LM curve, putting upward pressure on interest rates and downward pressure on output in the short run. In the late 1980s and 1990s, the increase in the credibility of the Federal Reserve's anti-inflation stance reduced the public's expectation of inflation. The decline in expected inflation can be represented by a downward shift of the LM curve, putting downward pressure on interest rates and upward pressure on output in the short run. Finally, growth in productivity in the economy can be represented by an outward shift of the FE line, increasing output. The rise in energy prices in the early 1980s reduced productivity in the short run, shifting the FE line to the left, reducing output.

Posted by DeLong at January 20, 2003 07:53 AM | Trackback

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So if Hubbard has fallen off the tightrope and can be safely ignored by the Rove-ing Lunars, and presumably he's one of the good guys, how long do you think it'll be before he escapes the circus?

Posted by: Cowboy Kahlil on January 15, 2003 11:39 AM

To Hubbard's defense, this MBA administration has no intention to listen to anything coming from Academia. Business people know better. The best thing he could do for his reputation and the country is to resign of his own will.

Posted by: Jean-Philippe Stijns on January 15, 2003 11:46 AM

Glen Hubbard pets cats and dogs and Republicans and is every so smart. Who cares? Secretary Paul O'Neill was and independent voice to the Administration, while Laurence Lindsey and Glen Hubbard are merely happy to have been or be cheerily part of this Administration.

The President never wanted a gaggle of independent economists jabbering away.

Posted by: on January 15, 2003 11:59 AM

Which good guys are Glen Hubbard piching for? Duh.

Posted by: on January 15, 2003 12:43 PM

Mureen Dowd - NYTimes

It's hard to understand the economic or political logic of Mr. Bush's relentless tax cuts. Felix Rohatyn wryly suggests that, if you want to push the Dow up a few percentage points, it would be better to take the $360 billion in tax breaks and use it to just buy stocks directly.

Thank you, Glen Hubbard.

Posted by: on January 15, 2003 12:48 PM

January 14, 2003

Stimulus for Lawyers
By PAUL KRUGMAN - NYTimes

My colleagues on the editorial page dubbed the Bush administration's proposal to eliminate taxes on corporate dividends "The Charles Schwab Tax Cut." Indeed, the idea seems to have originated in remarks Mr. Schwab made last summer in Waco. But a closer look suggests that it should actually be called the "Tax Complication Act of 2003": it will do little if anything to create jobs in the economy as a whole, but will be a bonanza for tax lawyers and accountants.

In fact, even some of the lobbyists you would have expected to cheer the plan now believe that it is so complex as to be unworkable.

By now you've probably read a lot about the economics of the administration's plan; all the criticisms are true. The plan has nothing to do with stimulus, since less than a dime on the dollar will arrive in the next year. Its benefits are almost ludicrously tilted toward the very, very affluent. (Exercise for readers: Explain how the administration can claim that the average family receives a $1,083 tax cut, when 80 percent of families will receive less than $1,000, most less than $300.)

But you may not be aware of the huge technical problems with the plan's centerpiece, an end to taxes on dividends....

Posted by: on January 15, 2003 01:00 PM

My tentacles within Treasury Tax Policy have gone numb, so I don't know what Treasury Tax Policy thinks about implementation and enforcement issues.

But the fact that it is hard to figure out what Treasury Tax Policy really thinks is not a good sign. Paul Krugman may well be right.

Posted by: Brad DeLong on January 15, 2003 03:08 PM

I've been thinking more about this whole interest rate process and the dismal science in general and its just plain not simple. In yesterday's WSJ, some editorialist showed a graph of deficit predictions over the last 4 years vs. real interest rates (based on TIPS which i showed you before I think) and it clearly shows the real interest rates have continued to decline over the last 2.5 years or so even as 10 year deficit projections have grown. How is this possible not just for a year, but over several years for us so far this time around and almost a decade for Japan in the 90's and even for the US in the 1980's?

Its clearly "true" that all other things being equal, higher govt defits should increase interest rates as there is supposedly a fixed pool of global savings to draw from. But that begs the question, are all other things ever equal?

and the answer is....No
Everything in the economy is interconnected, and there never is a situation in which all other things are equal.

As I explained before, inflation expectations are the single largest determinent of interest rates, and then there are other factors such as the the Federal Reserve, willingness of banks to lend, and the strength/weakness of the US and global stock, real estate and currency markets that are more important than 1 year or 10 year deficit projections (as long as we are still in "investment grade" territory which we clearly are).

Not the the current proposed tax cut does it, (& let's set it aside for the moment), it's possible to design a tax cut (that doesn't sunset) that generates enough increased growth that the increased growth has a more powerful effect on raising interest rates than the near term deficits. However that increased growth could probably also generate such a big amount of increased tax receipts that the 10 year actual deficit is smaller, not larger, and therefore would lead to decreasing interest rates (as much as the decrease in deficit causes).

I don't think you would argue that the Kennedy tax cut overall had basically that impact, as did recent Russian tax cuts and changes. It really all depends on what else is going on in our economy and markets and the global economy and markets and the design of the tax changes.

A truly better tax system that in the first year takes in less tax receipts because its an overall lower tax rate on the economy, can easily garner more tax receipts over 10 years if it is sufficienty well designed that it enables higher real growth. (and its also true that a tax increase sufficienty well designed can be done that doesn't hurt the economy over the long run and can lower deficits and interest rates over the long run...which i will somewhat guardedly say was the result of the H.W. Bush and Clinton tax increases.).

So as a matter of economic science (art?), Glen Hubbards statement is true. It really does matter what you are doing with the money. It completely matters how taxes are changed and where that increased (decreased) private cash flow goes and more importantly how incentives for all participants in the economy and markets change.

I don't think the currently proposed tax cuts are sufficienty well designed which is why I gave it a B-. However, I do think its entirely possible to design a tax cut today that both stimulates the economy in the short run and also leads to higher economic growth over the next 10 years and therefore also decreases the 10 year actual deficit. And I do think that in particular a change in the treatment of taxes on dividends could be such a tax change. My problem is that from my knowledge, it would be allowing the deductibility of dividends by corporations not by individuals which would produce such a phenomenal effect.

Posted by: Alex on January 15, 2003 09:45 PM

I've been thinking more about this whole interest rate process and the dismal science in general and its just plain not simple. In yesterday's WSJ, some editorialist showed a graph of deficit predictions over the last 4 years vs. real interest rates (based on TIPS which i showed you before I think) and it clearly shows the real interest rates have continued to decline over the last 2.5 years or so even as 10 year deficit projections have grown. How is this possible not just for a year, but over several years for us so far this time around and almost a decade for Japan in the 90's and even for the US in the 1980's?

Its clearly "true" that all other things being equal, higher govt defits should increase interest rates as there is supposedly a fixed pool of global savings to draw from. But that begs the question, are all other things ever equal?

and the answer is....No
Everything in the economy is interconnected, and there never is a situation in which all other things are equal.

As I explained before, inflation expectations are the single largest determinent of interest rates, and then there are other factors such as the the Federal Reserve, willingness of banks to lend, and the strength/weakness of the US and global stock, real estate and currency markets that are more important than 1 year or 10 year deficit projections (as long as we are still in "investment grade" territory which we clearly are).

Not the the current proposed tax cut does it, (& let's set it aside for the moment), it's possible to design a tax cut (that doesn't sunset) that generates enough increased growth that the increased growth has a more powerful effect on raising interest rates than the near term deficits. However that increased growth could probably also generate such a big amount of increased tax receipts that the 10 year actual deficit is smaller, not larger, and therefore would lead to decreasing interest rates (as much as the decrease in deficit causes).

I don't think you would argue that the Kennedy tax cut overall had basically that impact, as did recent Russian tax cuts and changes. It really all depends on what else is going on in our economy and markets and the global economy and markets and the design of the tax changes.

A truly better tax system that in the first year takes in less tax receipts because its an overall lower tax rate on the economy, can easily garner more tax receipts over 10 years if it is sufficienty well designed that it enables higher real growth. (and its also true that a tax increase sufficienty well designed can be done that doesn't hurt the economy over the long run and can lower deficits and interest rates over the long run...which i will somewhat guardedly say was the result of the H.W. Bush and Clinton tax increases.).

So as a matter of economic science (art?), Glen Hubbards statement is true. It really does matter what you are doing with the money. It completely matters how taxes are changed and where that increased (decreased) private cash flow goes and more importantly how incentives for all participants in the economy and markets change.

I don't think the currently proposed tax cuts are sufficienty well designed which is why I gave it a B-. However, I do think its entirely possible to design a tax cut today that both stimulates the economy in the short run and also leads to higher economic growth over the next 10 years and therefore also decreases the 10 year actual deficit. And I do think that in particular a change in the treatment of taxes on dividends could be such a tax change. My problem is that from my knowledge, it would be allowing the deductibility of dividends by corporations not by individuals which would produce such a phenomenal effect.

Posted by: Alex on January 15, 2003 09:47 PM

I've been thinking more about this whole interest rate process and the dismal science in general and its just plain not simple. In yesterday's WSJ, some editorialist showed a graph of deficit predictions over the last 4 years vs. real interest rates (based on TIPS which i showed you before I think) and it clearly shows the real interest rates have continued to decline over the last 2.5 years or so even as 10 year deficit projections have grown. How is this possible not just for a year, but over several years for us so far this time around and almost a decade for Japan in the 90's and even for the US in the 1980's?

Its clearly "true" that all other things being equal, higher govt defits should increase interest rates as there is supposedly a fixed pool of global savings to draw from. But that begs the question, are all other things ever equal?

and the answer is....No
Everything in the economy is interconnected, and there never is a situation in which all other things are equal.

As I explained before, inflation expectations are the single largest determinent of interest rates, and then there are other factors such as the the Federal Reserve, willingness of banks to lend, and the strength/weakness of the US and global stock, real estate and currency markets that are more important than 1 year or 10 year deficit projections (as long as we are still in "investment grade" territory which we clearly are).

Not the the current proposed tax cut does it, (& let's set it aside for the moment), it's possible to design a tax cut (that doesn't sunset) that generates enough increased growth that the increased growth has a more powerful effect on raising interest rates than the near term deficits. However that increased growth could probably also generate such a big amount of increased tax receipts that the 10 year actual deficit is smaller, not larger, and therefore would lead to decreasing interest rates (as much as the decrease in deficit causes).

I don't think you would argue that the Kennedy tax cut overall had basically that impact, as did recent Russian tax cuts and changes. It really all depends on what else is going on in our economy and markets and the global economy and markets and the design of the tax changes.

A truly better tax system that in the first year takes in less tax receipts because its an overall lower tax rate on the economy, can easily garner more tax receipts over 10 years if it is sufficienty well designed that it enables higher real growth. (and its also true that a tax increase sufficienty well designed can be done that doesn't hurt the economy over the long run and can lower deficits and interest rates over the long run...which i will somewhat guardedly say was the result of the H.W. Bush and Clinton tax increases.).

So as a matter of economic science (art?), Glen Hubbards statement is true. It really does matter what you are doing with the money. It completely matters how taxes are changed and where that increased (decreased) private cash flow goes and more importantly how incentives for all participants in the economy and markets change.

I don't think the currently proposed tax cuts are sufficienty well designed which is why I gave it a B-. However, I do think its entirely possible to design a tax cut today that both stimulates the economy in the short run and also leads to higher economic growth over the next 10 years and therefore also decreases the 10 year actual deficit. And I do think that in particular a change in the treatment of taxes on dividends could be such a tax change. My problem is that from my knowledge, it would be allowing the deductibility of dividends by corporations not by individuals which would produce such a phenomenal effect.

Posted by: Alex on January 15, 2003 09:51 PM

You supersmart guys need to figure out how not to get ensnared in the Multiple-Posting-Peril.

;-)

Posted by: Michael Harris on January 15, 2003 10:08 PM

>> In yesterday's WSJ, some editorialist showed a graph of deficit predictions over the last 4 years vs. real interest rates (based on TIPS which i showed you before I think) and it clearly shows the real interest rates have continued to decline over the last 2.5 years or so even as 10 year deficit projections have grown.<<

Supply and demand. Lots of other things besides expected future deficits affect interest rates. In this case, it's the demand for funds--how much corporations want to borrow--that's been in the tank. And bondholders have begun anticipating that investment demand will stay low for quite a while...

Brad DeLong

Posted by: Brad DeLong on January 16, 2003 06:13 AM

>>Supply and demand.<<

Indeed, this is particularly noteworthy in relation to TIPS, as they are on their way to becoming the financial asset of last resort for (the smart members of) the baby-boom generation -- increased demand for this one vehicle suggests lower real TIPS yields. But overall issuance of public debt is another matter, where increased supply *IS* coming because of irresponsible budgeting.

Posted by: Motts McGregor on January 16, 2003 09:49 AM

this is not an administration where people care deeply about whether its policies are substantively good for America

The Bush administration takes a more "classic liberal" view of things economic than do Social Democrats. Their framework for how the federal govt should and should not operate in a market economy is at odds with the more interventionist/redistributive views of the US left.

Rhetorically, demonizing the Bushies as being indifferent to the welfare of the nation plays well in the soundbiteland of IQ 95 television.

Here, it seems, to borrow a favorite term of the faux objective press, a little "mean spirited".

Posted by: Bucky Dent on January 16, 2003 10:28 AM

sorry about the multiple post

"Supply and demand. Lots of other things besides expected future deficits affect interest rates. In this case, it's the demand for funds--how much corporations want to borrow--that's been in the tank. And bondholders have begun anticipating that investment demand will stay low for quite a while...

Brad DeLong"

Brad, that's precisely the point, there are far more important factors than deficit projection in deciding interest rates. we could have deficits out the wazoo, but if there was no demand for money for investment by corporations (for whatever reason except high inflation) interest rates would still by lower. (yet again, Japan being the perfect example)

Posted by: alex on January 16, 2003 12:45 PM

Ah yes Bucky. Thanks for the reminder about the
"more classic liberal" Bush administration

Please humor my 95 IQ and rationalize the following facts with your explanation of the Bush administration:

1. Farm bill
2. Steel tariffs
3. New Federal agency for Homeland security
4. Expansion of Federal role in education
5. Allowing Federal funding of religious charities.

Thanks!

Posted by: achilles on January 16, 2003 01:18 PM

Brad, that's precisely the point, there are far more important factors than deficit projection in deciding interest rates.

Just because its not the dominant factor doesn't mean it should be ignored.

Posted by: Jason McCullough on January 16, 2003 02:16 PM

This is not the first time Glenn has talked politically loaded nonsense to please his political masters. He did the very same thing during the first Bush administration, over income mobility.

Why? My believe is that someone gets into the following state of mind: You feel that it's important to remain an inside player, which means that you have to show loyalty. You know that there are lots of issues that don't get big publicity, where you can make a positive difference. And so you find yourself saying whatever the big guys want, telling yourself that it doesn't matter. Eventually cognitive dissonance gets you almost believing what you say.

It's not that Glenn is corrupt by nature. But he has been put into a situation and under pressures in which it is almost impossible not to be corrupted...

Posted by: A Correspondent on January 16, 2003 03:46 PM

What I don't get in Brad's analysis is that if nobody's listening to poor powerless Glenn Hubbard, how come the centerpiece of the President's economic plan is Glenn Hubbard's own dividend-tax reform that he developed when he worked at Treasury for Bush the First (according to news reports)? If you don't like the Bush policy, maybe you could accuse Hubbard of intellectual hubris. It seems bizarre, however, to assert that Hubbard is getting rolled when he's gotten prime time for a pet policy that was previously not on the agenda of anyone but Kudlow and Cramer.

My fantasy is that when the deficit numbers start to look scary to the Rubinesque crowd, Hubbard and Daniels convince Bush to cut back on farm subsidies and to pull the plug on Amtrak...but it'll take lots of anti-deficit political pressure to get that past Karl Rove, so come on people. Stoke that deficit panic! We have a Leviathan to trim!

Posted by: steven postrel on January 17, 2003 07:20 PM

>>if nobody's listening to poor powerless Glenn Hubbard, how come the centerpiece of the President's economic plan is Glenn Hubbard's own dividend-tax reform that he developed when he worked at Treasury for Bush the First?<<

From what I've heard, it's not respect for Glenn's economic arguments with respect to how cutting dividend taxes will eliminate horrific deadweight losses for relatively little revenue losses; it's that Karl Rove and company think that the government has to do something to boost stock market values and to compensate the investor class for their lost asset values.

It would be very nice for all of us if Glenn's playing along with the "costs of deficits? what costs of deficits?" crowd now would give him more respect and power inside the White House later--if you could by playing along with the Media Affairs machine gain chips that you could later spend to make policy better--and that is, I'm sure, what Glenn hopes will happen. But at least in my experience with Karl Rove's Democratic counterparts, they are singularly unmoved by the argument that, "Since I helped you on X six months ago, you should support me on Y which will be a very hard and politically unpopular sell but which will be good for the country."

Posted by: Brad DeLong on January 20, 2003 12:32 PM

I understand your argument, but I am not convinced. Let me say out front that I am not convinced about federal deficits of the size currently contemplated having any significant impact on real interest rates, so that I am not particularly concerned about Hubbard's statements one way or another. I also don't think contradicting a textbook, even one's own, is a capital offense to intellectual credibility. As Nelson and Winter pointed out in their Evolutionary Theory of Economic Change (1982, p.7)(not about macro) "There is, admittedly, a degree of caricature when involved when texts aimed at college sophomores and juniors are nominated to represent modern economic theory....If the conclusions of the analysis are sometimes put forward without due empahsis on the qualifications to which they are subject, it is not necessarily because the importance of those qualifications is not recognized by the author. It is more likely because the students are seen as deserving a reward for their struggles with the logic of the argument, and as positively demanding clear-cut answers to put in the exam book."

In return for making a very reasonable argument about the relationship between deficits and interest rates, Hubbard got something he wanted NOW, not in the future. It is immaterial if his bosses agreed with his reasons for wanting it. In your own Machiavellian view of White House politics, the fact is that he did not barter his credibility for questionable future considerations, but rather made defensible (if convenient) statements in return for an immediate and rather unlikely policy payoff. He may ALSO get future benefits from having been a team player who had a politically useful idea that was also a good-government reform (from what I hear, the Bushies like people who solve problems this way), but that must be gravy from Hubbard's point of view.

Incidentally, I don't think Rove and Bush actually enjoy agricultural subsidies and steel tariffs. If they can arrange things so that they are pushed to get rid of them without too much political damage (a big if depending upon the amount of heat they get and how much deficit panic the Dems can talk themselves into), then I think they would be happy to be thrown into that briar patch.

Posted by: steven postrel on January 20, 2003 04:01 PM

Brad, I follow the references, but I don't see any reference in Hubbard's textbook to a "boom" nor to the causes of said "boom." Are you putting words in his mouth again?

Posted by: Thomas on January 20, 2003 07:04 PM

Thomas--
Since you accused Brad of putting words in Hubbard's mouth:
(1) Brad used the word "boom" in describing Hubbard's statements as CEA: "the belief that the 1990 Bush and 1993 Clinton deficit-reduction packages substantially fueled the 1990s boom is 'Rubinomics... complete nonsense.'" So you shouldn't expect to find it in Hubbard's textbook.
(2) Hubbard may never have used the word "boom." But Brad didn't say he did--"boom" is a description of the high growth of the 90s.
(3) Hubbard may have described as "Rubinomics" the claim that lower deficits lead to higher growth, rather than the claim that the lower deficits of the 90s fueled the higher growth of the 90s. But no matter how you slice it, he still contradicts himself. If lower deficits don't fuel higher growth, then the lower deficits of the 90s didn't fuel the boom of the 90s. And since Hubbard's textbook both makes the general claim that lower deficits cause lower interest rates, and the specific claim that this took place in the 90s, he's in trouble.

Steven--If Brad is correct in quoting Hubbard that there is "no evidence" that the deficit in the U.S. affects interest rates, isn't it highly negligent of Hubbard to put this in his textbook? A degree of caricature does not justify making assertions for which there are no evidence.

Posted by: Matt Weiner on January 21, 2003 06:42 AM

Matt--

I read Hubbard's textbook as saying there's a link between interest rates and deficits. I don't see anything at all that suggests there's a connection between either deficits or interest rates and growth.

Posted by: Thomas on January 21, 2003 01:24 PM

Quick question for Prof. DeLong re: "Once you have fallen off the tightrope, it is almost impossible to get back on. Bluntly, White House Media Affairs, White House Political Affairs, and the White House Chief of Staff now know that you will say whatever they want you to say..."

i seem to recall Larry Summers (eons ago as U/Secy Intl. Affairs of UST) making arguments about excessive current account surpluses by Japan (due to auto imports, i think) and American willingness to use the exchange rate as a bargaining tool to get Japan to ease up on auto exports..

surely, LHS knew better than to make this argument (i think paul krugman hauled him over the coals for it at the time), but i don't think it detracted from his ability to influence policy later.. and i would be stunned to hear anyone, let alone anyone in the Clinton WH, who claims that they could get larry to say what they wanted him to say..

not to say that the magnitude of the intellectual dishonesty is comparable.. but rather to argue that maybe you can walk the tightrope again even if you fall off now and again..

just curious.

Posted by: Sumit Khedekar on January 21, 2003 02:21 PM

Quick question for Prof. DeLong re: "Once you have fallen off the tightrope, it is almost impossible to get back on. Bluntly, White House Media Affairs, White House Political Affairs, and the White House Chief of Staff now know that you will say whatever they want you to say..."

i seem to recall Larry Summers (eons ago as U/Secy Intl. Affairs of UST) making arguments about excessive current account surpluses by Japan (due to auto imports, i think) and American willingness to use the exchange rate as a bargaining tool to get Japan to ease up on auto exports..

surely, LHS knew better than to make this argument (i think paul krugman hauled him over the coals for it at the time), but i don't think it detracted from his ability to influence policy later.. and i would be stunned to hear anyone, let alone anyone in the Clinton WH, who claims that they could get larry to say what they wanted him to say..

not to say that the magnitude of the intellectual dishonesty is comparable.. but rather to argue that maybe you can walk the tightrope again even if you fall off now and again..

just curious.

Posted by: Sumit Khedekar on January 21, 2003 02:23 PM

>In yesterday's WSJ, some editorialist showed a graph of deficit predictions over the last 4 years vs. real interest rates (based on TIPS which i showed you before I think) and it clearly shows the real interest rates have continued to decline over the last 2.5 years or so even as 10 year deficit projections have grown. How is this possible not just for a year, but over several years for us so far this time around and almost a decade for Japan in the 90's and even for the US in the 1980's?<
Every so often the WSJ editorial page pulls this graph out demonstrating something about Rubinomics. The simple answer is that a 4 year graph the effects of long run trend. Currently government borrowing has not increased to the levels that existed during previous large deficits, and in fact, the current deficits, as oppossed to future deficits is rather small. So the answer is 1) The graph the WSJ uses is meaningless to this discussion becuase it uses 4 observations to demonstrate the effects of a long term trend. 2) In this editorial and the graph the WSJ implicitely assumes that expectations are everything in the bond market and these future expectations of forecast deficits are already built in to current bond prices and interest rates. This is questionable to say the least.
3) That "other things being equal" phrase allows us to analyze these effects. Of course everything else changes in the "real world" but episodic events like war and ucncertainty will change, these deficits will effect the market after these other things have passed, and in turn they will surpress growth even when conditions are more favorable.

Posted by: Lawrence Boyd on January 21, 2003 03:43 PM
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