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April 09, 2004



I can no longer forgive politicians (of all stripes, there are no exceptions I'm aware of) who pretend to think that short-term policies have any large or traceable impact on macroeconomic trends. But ECONOMISTS who play along with this preposterous charade are especially laughable.

Krugman is a poor writer and an ignorant sophomoric dolt in anything outside his narrow area of expertise (but as he presumably relies on NYT reporting, I guess this is to be expected) -- but by virtue of his adoption of the make-believe model of politicians "managing" the economy, he's even unserious in his own "specialty."

Of course economic "policies" can affect the economy over time -- with the leverage almost exclusively to the down-side, once public goods and rule of law are provided -- but the discussion of job growth over short periods as a function of marginal tweaking of tax rates or fiscal balance/imbalance is a fantasy akin to Soviet Marxist babbling about historical imperatives and correlations of forces.

I'm waiting to see polling data that provides the responses to the question "which party do you think is better at managing the orbit of Pluto and the tides in the Bay of Biscay, Democrats or Republicans?".


Uh, there was a completely plausible economic analysis just a couple of weeks ago that asserted, and offered evidence for, the idea that the Clinton/Rubin notion of "paying down the national debt," while appearing commendable to the ordinary schmo, was taking too much spending power out of the economy and lead to the recession in the first months of the Bush Administration.

It is also pretty reasonable to assert that the "national debt" is a smaller percentage of GDP than average corporate debt is to the value of production. Most people get blown away by the size of the absolute value of the debt and ignore the ratios.

Paul Zrimsek

Given the unprecedented length of the preceding expansion, I've never been convinced that we need any explanation for the recession other than "Well, it was due."

Pat Curley

Actually, anybody who looked at the Treasury yield curve in the summer of 2000 could tell that it was extremely likely that an economic slowdown was coming. Most of the time the Treasury yield curve is normal, with longer maturities having higher yields (effective interest rates) than shorter maturities. This is natural; there is less uncertainty about the short term than the long term.

However, prior to recessions, the Treasury yield curve commonly becomes inverted, with higher yields in the short term than in the long term. For example, on July 3, 2000, the 3-month Treasury yielded 6%, the exact same yield as the 10-year Treasury. By August 1, 2000, the 3-month Treasury was yielding 6.25%, while the 10-year was still at 6%. The spread continued to widen in August and as of September 1, the 3-month yielded 6.27%, while the 10-year was down to 5.68%.

Compare that to the 1999 data. At no point in that year were the 3-month Treasury yields higher than the 10-year yields; in fact for most of the year the longer term instruments were yielding over 100 basis points (1%) higher.

Why does an inverted yield curve lead to recession? Well, it's complicated, but essentially businesses borrow short term for expansion and construction, so when short term rates are relatively high they tend not to expand and build new facilities.

That is also why finance professionals and real economists have all laughed at Krugman's continual fear of a "double-dip" recession. The Treasury yield curve is normal and steep today, which always indicates good economic times ahead. The yield curve has not been inverted since early in 2001.

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