TRNN REPLAY December 13, 2010 A World Upside Down? Deficit Fantasies in the Great Recession

Robert Johnson: Austerity and stagnation real risk to debt-to-GDP ratio

Yves Smith post dated Sunday, November 11, 2012. Cross posted from Naked Capitalism.

The Lady Doth Protest Too Much: CBO Director Asks for a Chat Regarding Our Post on Their Questionable Health Cost Increase Model

As regular readers may recall, last Monday, we put up a post titled “Fed Budgetary Experts Demolish CBO Health Cost Model, the Lynchpin of Budget Hysteria.” We received a voicemail and a related e-mail Wednesday morning. This is the text of the e-mail:

Greetings, Susan.

I am following up on my voicemail to see if we can arrange a time either today or sometime this week for you to speak with our director, Doug Elmendorf. He wanted to speak with you about your blog post that appeared Sunday on Naked Capitalism regarding CBO.

I am copying Brianne Hutchinson, Doug’s executive assistant, who will work with you to find a convenient time for the call. You can reach Brianne by e-mail or directly at:[xxx].

We look forward to hearing back from you at your convenience.

Kind regards,


Deborah Kilroe
Associate Director for Communications
Congressional Budget Office
2nd and D Streets, SW
Washington, DC 20515
[phone number and e-mail address omitted]

This was our reply, which went out in the wee hours of Thursday morning:

Dear Deborah,

Thanks for your messages yesterday and sincere apologies for the delay in replying.

While I am flattered that Director Elmendorf is interested in discussing my post, I must confess to being puzzled by the request. The piece is a write-up of a journal article by two economists working for the Federal Reserve Board. If the CBO objects to their analysis, those issues should be raised first with the authors. I would of course be willing to issue a new post if they were to modify their analysis after speaking with members of your staff

The post also mentioned other matters relating to CBO which are in the public domain. One is Lan Pham’s claim that she was directed to exclude information such as foreclosure trends and chain of title issues from her analysis of the outlook for the banking sector and the mortgage market and that her efforts to include this and other “negative” data led to her being fired. That is a very troubling charge, given that every private sector housing analyst has used trends in foreclosures as a significant input in their housing price forecasts since the crisis.

The post also cited a paper by Thomas Ferguson and Robert Johnson on the CBO’s forecasts of debt levels relative to GDP and the CBO’s curious failure to present net, as opposed to gross, debt levels. I cited their Roosevelt Institute Working Paper; their paper was later published in the International Journal of Political Economy. I have been advised by an academic in my readership that the paper was brought to the attention of staffers at the CBO, who did not dispute the Ferguson/Johnson analysis but also indicated that the CBO would not correct its public reports. These three instances, taken together, point to a pattern of CBO acceding to Administration interests, so it is hardly far-fetched to question its independence.

I have a policy of not entering into private conversations on published posts. If you feel a correction is warranted, please tell me why in writing. If you can substantiate factual inaccuracies, I will of course make either a correction of the existing post or issue an update, depending on the severity of any error.

Thanks for your interest.



In other words, the CBO asked to have a conversation for unspecified reasons, presumably because they were unhappy about the post they mentioned. That’s fine, but they should make an argument, not try for private chats. Yet after my request for them to present any objections in writing so as to prevent misunderstanding and keep personalities out of the mix, they’ve gone silent.

In addition, if they were confident in their analysis and their lack of outside influence, why would they bother dealing with noise from the peanut gallery? If you are an analyst, you submit your presumed objective view, and your client does whatever he does with it.

But to get a sense of what is at stake, if you read the newest CBO document on the deficit, it is not a dispassionate analysis of budget math alternatives. This is an advocacy document. It has the tone, the use of overly simplified language (below 8th grade level, which is the level used to spoon feed journalists, as opposed to higher reading levels that you see in other types of reports. Contrast both the look and the writing style with this FHFA Inspector General report, as an example: text paragraphs, no nice bullet points and generous use of white space, not much coddling of the reader).

A simple illustration: look at how this paragraph on the first page is not an analysis of budgetary options, which is the CBO’s role. This shows the CBO pushing for a particular set of outcomes (taking immediate steps to reduce the deficit) rather than simply providing analysis of the budgetary outcomes of specific legislative actions (click to enlarge):

And to add insult to injury, it does not take much in the way of investigation to debunk these unsubstantiated arguments. Paul Krugman has already, in terse form, shown how the usual economic models suggest than the outcome of running continuing large fiscal deficits is a weakening of the dollar rather than a rise in interest rates. The CBO needs to explain their theory of monetary policy and primary dealer behavior to explain how the prices of Treasury bonds could collapse and cause a fiscal crisis.

The evidence from the closest comparable to the US, which is Japan in its post crisis era, in fact suggests the exact reverse of the CBO fearmongering, namely, that fiscal tightening in a post crisis economy is likely to precipitate financial firm failures. The collapse of Japan’s real estate and stock market bubbles caused a severe contraction in household consumption and private investment spending which culminated in a brief real contraction in 1994. Once the stimulus from the expanding budget deficit began to work, real GDP growth regained momentum.

By 1996, the same calls for austerity that we hear in the US now led to increases in taxes. The contraction in public spending on top of very fragile private sector spending – akin to the situation that most nations face today – caused a massive contraction in 1997 and 1998 – which increased the budget deficit (via the automatic stabilisers) and added to the public debt ratio (given both debt was rising and GDP was falling). Most importantly, it also led to a second wave of financial firm failure, including one of the four biggest securities firms in Japan, Yamaichi, as well as some of its long term credit banks.

So if I had to guess, this would be the reason for the CBO’s peculiar anxiety. It knows it is going out on thin ice and wants to rein in any inspection of its choice to insert itself in the budget debate on the side of the hawks.

Original NC link

Cross posted from Naked Capitalism by Yves Smith dated Sunday, November 11, 2012

Yves Smith is creator of the influential blog, Naked Capitalism, a top ranked economics and finance blog with over 250,000 unique visitors each month. Smith has been working in and around the financial services industry since 1980 as an investment banker, management consultant, and corporate finance advisor. Smith has appeared, on CNBC, CNN, and FOX Business News, and has written over 40 articles in venues such as The New York Times, Slate, and the Christian Science Monitor. She lives in Manhattan.

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Yves Smith has written the popular and trenchant financial blog "Naked Capitalism" since 2006.

Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review. Yves is a graduate of Harvard College and Harvard Business School.