First, we had the fiscal cliff. Now we have the fiscal clifflet. Expectations about the fiscal cliff mean we’re already sliding down it. And it’s steeper than we thought. I call all of this fiscalcliffmongering: spreading hype that an economic apocalypse is going to happen if Congress doesn’t delay a bunch of tax hikes and spending cuts in January.
Or, How A Bunch of Econ Bloggers Got Fooled By A Poor Graph
Or, Mood Affiliation For My Bias That Most Academic Research Is Low-Value Rent-Seeking Data-Massaging Justification For More Low-Value Rent-Seeking Data-Massaging
Yesterday, Greg Ip blogged at The Economist about a new paper on banking crises. Someone analyzed 147 banking crises from 1970 to 2011 and found that September was an unusually bad month.
I saw an article in a business magazine the other day about the inevitability of the coming inflation and how to prepare for it from a business perspective. There have been a lot of voices over the last few years predicting harmful levels of inflation, usually as a consequence of the Federal Reserve’s recent interventions in the economy. (Here are a couple classic examples from doom-pop site Zero Hedge.)
Cool economists Justin Wolfers and Betsey Stevenson had an article in Bloomberg on Monday arguing that another debt-ceiling battle could “sink” the economy based on how costly the last one was.
Justin and Betsey believe the government needs to spend more money now to help the economy (after all, interest rates are insanely low right now), so they naturally oppose the Republican’s hypocritical efforts to restrain the debt ceiling. I believe this makes them biased to look for evidence that fights over the debt ceiling are bad for the economy. Meanwhile, I do not think the government should spend more money (after all, interest rates can go up rather quickly,) so I am biased to be skeptical of their evidence, which I believe is weak, cherry-picked, and contradictory.
Let’s look at the evidence they claim:
I recently stumbled upon the Twitter account @pollreport, which allows me to stay up-to-date on the endless barrage of presidential candidate polling but also treats me to more interesting cultural political barometers like this one:
Price of gasoline is something a president can do a lot about 54% / It’s beyond any president’s control 34% (CBS News) j.mp/xC5102
— PollingReport.com (@pollreport) March 1, 2012
Personally I think the truth probably falls in the wide chasm between “do a lot” and “beyond any control,” but digging into the link I guess they would put me in the 12% of “Unsure.” I think it’s very interesting that over half the nation (according to this poll) thinks the President can do a lot about gas prices. Also at the link, a poll from last May shows 38% blaming “oil and gas companies” for “the recent spike in gas prices.” 22% outsource the blame to “oil exporting nations,” but another 12% give it to the “Obama administration.”
If you blame Obama for high gas prices, you probably think the President has restricted drilling or is driving inflation with his fiscal policies. If you think oil and gas companies are to blame, you probably think the President can get tough with them and tax or regulate them more to limit their wild profits. Either way, half the people think the President can have a big effect on the price at the pump. (That helps explain why a few months ago Bachmann was making really bold promises to bring gas back to $2.00 a gallon, and why Gingrich is now making slightly less bold promises to bring it back to $2.50.)
But does the President really have enormous power over the price of gas, or is that a fascist fantasy promulgated by a gullible electorate that wants a mighty monarch instead of a limited, divided government?
Those pesky markets are confusing even the really smart economists these days. For the last couple months, all eyes have been on Europe and whatever is the latest country to be having major debt problems. Sonic Charmer has been blogging for awhile about the roller coaster that has ensued as headlines spit out good news or bad news about “plans” to “save” the “euro.” I haven’t bothered to keep up the details, which mostly seem to be concerned with either accounting tricks to hide the large amounts of debt that European countries have, or public relations tricks to try to convince the less indebted nations to sacrifice for the more indebted ones.
Now that I have been at my cubicle job for a year, I have taken the option of diverting a small portion of each paycheck to the chaotic markets under the guise of a retirement fund. This has had me thinking about the stock market in new ways. I’m generally rather pessimistic about the whole thing, because even though it’s been investor dogma that the stock market always goes up in the long-term, I’m coming of age at a time when the market’s basically been flat for a decade, and I see no reason to presume that the future must echo the past. But my own participation has led me to wonder if demographics will affect the future of the stock market more than anything else.
In Nassim Nicholas Taleb’s interesting book The Black Swan, he talks about the “narrative fallacy,” wherein we like to confidently prescribe reasons for random events. This happens all the time in financial news. Last Thursday the stock market dropped, and the headlines said, “Buyers exit market before House debt plan vote.” The article said:
U.S. stocks faded in the afternoon on Thursday to end mostly lower, with investors skeptical a key vote by Congress would lead to a deal to avoid a U.S. default. The S&P 500 fell for a fourth straight day as buyers kept to the sidelines while lawmakers tried to hash out an agreement on the deficit.
The next day, Friday, the stock market dropped again, bringing the Dow Jones loss over the last six days to 581 points. And what did the news say? Wall St ends worst week in a year on debt stalemate. Or, Markets on edge as debt limit debate drags on:
The Dow Jones industrial average fell nearly 100 points, its sixth straight decline, as the U.S. edged closer to a Tuesday deadline to raise the country’s borrowing limit or risk the prospect of a debt default.
Wow. We didn’t know if Congress was gonna pass a bill to extend the debt ceiling by August 2 (even though that date was part of even more atrocious reporting), and apparently investors were worried. That was repeatedly given as the reason for the stock market going down all last week. Then Sunday night they hammered out a deal, the House passed it on Monday, the Senate passed it on Tuesday, and it got signed into law. So what happened on Tuesday, August 2?
The stock market fell sharply Tuesday because investors have grown increasingly worried about the economy.
Aww! So much for the buyers coming off the sidelines because the debt ceiling got raised. Now it’s just the economy! But does anybody have any doubt what the headlines would have said if the Dow had dropped 265 points today and we hadn’t passed the debt ceiling bill?
The entire debt ceiling debate boils down to two possibilities – either the United States government will begin to borrow more than $14.3 trillion dollars, or it won’t.
The August 2 date is irrelevant. Despite the atrocious news reporting that continues to insist that there will be at least a partial default on that date (the cable news stations even have countdown timers!), there have been plenty of reports suggesting that the government has received more tax revenues than they expected they would when they announced that date a few months ago, and they should be able to pay the August 2 bills and maybe even a few days more. But even if the government runs completely out of money on some date in August before they figure out a way to borrow more, I really don’t expect it to stay that way forever.
It’s been a crazy week. Ronny and Donny (from my train metaphor) are still fighting each other, and with every passing day and hour it seems increasingly unlikely that Congress will reach an agreement to extend the debt ceiling that limits how much money the government is allowed to borrow. The partisan bickering has been complicated, hypocritical, deceptive, and boring, but the commentariat has been much more exciting.
We’ve been hearing that if the debt ceiling is not raised, the stock market will crash and interest rates will go up – meaning, ironically, that it will cost the government more money to pay off its debt if we don’t let the government borrow more money now. Investors all over the world will lose confidence in the dollar and no one will want to buy our debt anymore. But as the alleged August 2 deadline has drawn near, interest rates on 10-year Treasuries have stayed remarkably low. Many, including myself, have used this as evidence that the world will not end if the ceiling is not raised. We’re biased against government spending, and when alarmists confidently declare that horrible things will happen if we don’t let the government spend more, we look for ways to prove their confidence wrong. The stock market seemed to be doing fine, too. One of the arguments was that the markets expected Congress to work something out, so that’s why they weren’t responding negatively yet.
Well, the stock market has been dropping all week, and today pretty much the entire world’s markets are in red. There is a lot of interesting movement going on – including things that involve some of the short Treasury bills due in August and insurance rates against default and other complex things. Tyler Cowen tweeted, “The excess citing of low T-Bill rates as ‘no reason to worry’ has come back to bite some economists in the bum.” Maybe the alarmists were right. Now that the market does not expect a deal, the market is hurting.
And yet today the 10-year Treasury rates have dropped even further! They were hanging out in the 2.95%-3% range all week and now are down to 2.85%. Financial articles always give reasons for every movement of every financial thing, and they’ve been saying things like, “Stocks fell today on concerns about the debt ceiling impasse. Treasury rates went down on concerns that the impasse would hurt the economy.”
Treasury rates have been really low lately, because even though in a lot of ways the U.S. is in bad shape, we have always had plenty of money to pay the interest on our debt, and we still do, and when countries around the world get into trouble, many investors stop loaning money to them and loan money to the U.S. It’s a safe hedge, and the more people that want it, the lower the interest rates go, but these investors would rather make low interest here than risk higher interest from a different country that might completely collapse and never pay them back. That’s why the 10-year Treasury rates have stayed around 3%, which is already historically low.
So the fact that today the rate has dropped even lower means that while investors may be concerned about the current situation or that some of the bills coming due in August may have trouble getting paid, they are not losing any faith in the ability of the government to pay long-term bills! They still view U.S. Treasuries as a safe haven, not only safer than bonds of other countries but even safer than stocks in the U.S. economy! (At least for now.) In fact, right now it looks like the debt ceiling crisis is lowering our government’s borrowing costs!
So some of the alarmists may have been correct that the markets would react negatively to a lack of a deal. We can no longer say, “Chill out, the stock market’s not even going down!” But I don’t think the alarmists can claim vindication here. We may not be able to cite low T-bills as “no reason to worry” at all, but the alarm was that U.S. borrowing costs would go up because T-bills won’t be low anymore, and that still has not happened. At least not yet.