The Narrative Fallacy and the Debt Ceiling

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?

Stocks now down for year as economic concerns grow:

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?

If The Debt Ceiling Is Raised, What Changes?

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.

Continue reading If The Debt Ceiling Is Raised, What Changes?

Financial Craziness But Treasuries Still Safe Haven

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.

A Tale of Two Train Conductors

There are a lot of analogies out there about how the American economy is a train headed for a cliff and Congress is arguing about how to stop it from going off the cliff. I think I’ve got a better one.

Once upon a time there was a train. It had two conductors, Ronny and Donny, and every now and then the passengers would change their minds about which one of them should be guiding the train. Now the train was climbing a mountain, because it seemed that this led to (ahem) a higher standard of living then if it remained on the ground. (The farther up they went, the more wood from trees it took to keep the train going, but they just kept going farther up the mountain to get more trees.) Soon the train was very, very far up the mountain. The air was foggy, and they couldn’t tell how much higher the mountain went, but they knew that eventually they would get to the top and that the train tracks ended there, and there the train would crash. So the passengers built a catapult on top of the engine, and had Ronny and Donny launch a big boulder that landed somewhere ahead on the tracks, figuring that they would stop the train when they got to the boulder.

Sooner or later the train approached the big boulder. The passengers told Ronny and Donny that they wanted to keep going up the mountain for now, so they chose one of them to pick up the boulder and launch it farther along the tracks. This continued on for several years, and sometimes the passengers would change their minds about who should be in charge of kicking the boulder along the tracks, too.

One day while Donny was conducting the train and Ronny was in charge of the boulder, the train got close to the boulder again.

“Go move the boulder, Ronny,” Donny said.

Continue reading A Tale of Two Train Conductors

The Struggles of the Long-Term Unemployed

Econ bloggers have been discussing this topic for awhile, but now it’s even making its way into the New York Times (I saw the same article on Yahoo! Finance yesterday). The longer you’ve been out of work, the harder it is to find work, because your skills get rusty and if you’ve been out of work for a year you don’t look as attractive as someone who’s currently using those skills at a job. There are openings out there, but we are hearing about increasing numbers of employers saying they are only interested in workers who currently have jobs, or essentially, “Unemployed need not apply.” Well, now what are you supposed to do, right?

Of course, there are NYTimes readers who view this as discrimination and want a legislative fix. But, like a lot of things, I think this problem is part of a strong enough reality that you can’t just pass a law to make it go away. Employers have enough applicants right now that they can be picky about hiring the best workers, regardless of how much you try to make them consider unemployed workers along with employed workers. (A bit of a straw man here, but what are you gonna do? Some sort of affirmative action that mandates a percentage of new hires have been unemployed for more than X weeks? Just thinking about the bloated regulation required to stop businesses from getting around that law’s intention has my head screaming boondoggle!)

Of course, there are Marginal Revolution readers who don’t view this as a problem at all. Back in February TomHynes remarked, “It doesn’t matter. Hiring an employed person creates a job opening at his former company. Eventually a job goes to an unemployed person. Which is better – five employed people get slightly better jobs and an unemployed person gets a job, or an unemployed person gets a job?” I like this thinking because it’s clever, and because it fits my bias about problems solving themselves without government help. But I’m not convinced that it fully works in reality, either, because if such remarks are true now, they would also be true in a situation where there aren’t millions of long-term unemployed folks. In that situation, there are still enough employed and recently unemployed folks to work the merry-go-round, so when you add the long-term folks to the mix, what stops them from being ignored just like the times when they aren’t there at all? When an employed person creates a job opening at his former company, it may eventually “trickle down” to an unemployed person, but how do we do know that this process is happening fast enough with the long-term unemployed to make a difference? The sheer numbers of the long-term unemployed are nearly proof that it isn’t.

This is one of those complicated issues about which I don’t have a strong, informed opinion. There are two sides to me here.

Continue reading The Struggles of the Long-Term Unemployed

Debtpocalypse & Treasury Forecasts Don’t Add Up

I’m still not sure how concerned to be about this upcoming debtpocalypse or whatever. For one thing, the stock market is supposed to crash, and Treasury interest rates are supposed to rise (and if money’s being pulled out of both investments I’m not sure where it’s going to go… Euro bonds? No way. Commodities? Not with oil dropping every time the global economy coughs. Gold, maybe? Not all of it… I just don’t know.)

But more on those Treasury bond interest rates. We keep hearing that the United States will suffer irreparable damage to its credit, and that not increasing the debt ceiling will lead to the interest on our debt going up by so much that we would actually be increasing the debt! That sounds pretty bad. So why do I keep reading about non-pocalpyse forecasts like this one?

If the U.S. defaults on some obligations after Aug. 2, even if it pays bondholders, S&P forecasts short-term interest rates would rise 0.50 percentage points and long-term interest rates by 1 percentage point.

In the very same article, I read this:

Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 2.96 per cent July 22 in New York, from 2.91 per cent on July 15, according to Bloomberg Bond Trader prices.

Still, markets through last week hadn’t demonstrated great concern about the potential for a default. Yields on 10-year- notes remained well below the average of 4.06 per cent during the past decade.

Wait. For whatever reason, the interest rate on U.S. debt is over a percentage point lower than it has averaged for the last decade. Apparently a lot of investors still think it’s a safer bet than some other countries’ debt. Or maybe they just have an insane optimism that the U.S. will really increase the debt ceiling, or at least, continue to pay the debt interest. Regardless, the forecasted crisis is that the interest rates will rise a whole percentage point and go back to the long-term average?

I’m just not seeing the catastrophe.

Do Fines Help Regulations Pay For Themselves?

Recently in a comment on a news article, I read someone arguing that the beauty of government regulations is that usually pay for themselves through fines, so it doesn’t make sense to blame regulations in discussions of debt and deficit. This was an interesting point, as I had never really thought before about fines from violated regulations as a source of income for the government. But the more I thought about it, the more I thought that this viewpoint contains an inherent contradiction – even if fines completely offset the cost of implementing and enforcing a regulation.

Continue reading Do Fines Help Regulations Pay For Themselves?

I Never Wanted To Be A Light Bulb Hoarder

When 2011 crosses over to 2012, the 100-watt incandescent light bulb will no longer be legally sold in the United States. The 75-watt and 60-watt bulbs will follow in respective years. The government wants us to use more energy-efficient lighting, and some folks are hoarding the old light bulbs in advance of the ban while others mock them for exercising the right to pay higher electric bills. How did this all happen? Are the alternatives to incandescents really better? And what marked my journey from sympathizing with the hoarders, to distancing myself from them, to actually becoming one of them?

Continue reading I Never Wanted To Be A Light Bulb Hoarder

The Right To A Lemonade Stand

Lemonade Tycoon - Business License Required

Did you ever play that game Lemonade Tycoon? Well, it may be going the way of the Oregon Trail, at least in Midway, Georgia, where police shut down a lemonade stand for want of a business license.

Midway Police Chief Kelly Morningstar says police also didn’t know how the lemonade was made, who made it or what was in it.

The girls had been operating for one day when Morningstar and another officer cruised by.

The girls needed a business license, peddler’s permit and food permit to operate, even on residential property. The permits cost $50 a day or $180 per year.

One girl, 14-year-old Casity Dixon, says the three had to listen to police and shut down.

The girls are now doing chores and yard work to make money.

Well, I think that’s pretty sad. Some folks are arguing that the police were just enforcing the law of the land, but if this law is designed to be enforced at this level, then I think this law is pretty dumb.

Look, I’m not the kind of conservative that thinks “business license” is a code word for “socialism,” but there’s gotta be a reasonable limit somewhere. Does it cost $50 for a garage sale in that town? How about a bake sale? Do Girl Scouts need a permit to sell cookies? Would I need a $180 business license to sell something on eBay or mow my neighbor’s lawn for some cash?

Continue reading The Right To A Lemonade Stand

Google Plus Is Much Harder To Block

In all the excitement around Google+, I’ve tried to understand what it has to offer that existing social networks don’t. It seems fairly similar to Facebook, maybe with better options and interfaces for things like grouping friends and controlling who sees what. But it’s getting a lot of attention and everyone’s been begging for invites to try it out. Google is responding to feedback and there will surely be many changes to Google+ as well as to the competitors trying to keep up. But it has stormed past 10 million users already and it will definitely be a major player in the social networking wars, at least for now.

Anyway, today I realized one interesting thing about Google Plus: it may be the first social network that’s already integrated into an existing site (this is essentially why it could grow and acheive critical mass so fast). Facebook, Twitter, LinkedIn, Foursquare, Quora, StumbleUpon, whatever – the site is the social network. But Google does a million things already. So what makes this really interesting?

Google Plus might be harder to block. Now a lot of companies are actively engaging in social media these days, and it’s even being claimed that none of the “top 100 companies to work for” block social media, but social media can still be a productivity drainer in the workplace and a lot of companies like to block the major social networks. Block facebook.com? Easy. But who’s going to block google.com? Employees may use the search engine for their everyday activites. Some companies may even promote the use of Google Docs within their business. No one’s going to block google.com!

Of course it’s not just companies that try to block social media. Schools and universities do too. How many students will flock to Google+ if they realize that they can interact freely there?

Ah, and what about governments? An uncensored Internet makes dictators uneasy. Egypt tried to block Twitter during the revolts this spring, so Google and Twitter actually rolled out a feature for voice tweeting from your phone! China has scuffled with Google even before the Arab Spring revolters were using social media. But if a ruler wants to block social media without the backlash risk of actually blocking Google itself, it may no longer be able to.

Now maybe you can just block the subdomain plus.google.com, assuming Google’s syntax is going to stay consistent, so maybe all Google+ has done is move a social network from the domain sphere to the subdomain sphere. Still, with all the integration going on among Google’s services, it’s more complicated than it used to be.

And in their quest for an open world, I wouldn’t be surprised if Google changes the URLs to work from google.com/plus to make it even harder to block. But maybe blocking ability isn’t on Google’s mind at all. We’ll just have to wait and see.