Savaged By A Dead Sheep
The reference to the deceased quadraped is one I’ve had occasion to return to more than once — it comes from the ferocious Labour Party debater and then-Chancellor of the Exchequer Dennis Healey, describing the experience of oratorical combat with the his successor in that post, the Tory Sir Geoffrey Howe. It may well be too kind when applied to the Business and Economic Editor of the Atlantic.
Seriously: Fallows is a seasoned and deeply knowledgeable reporter, one who actually does what folks used to do with more frequency — study, seek real sources, talk to lots of folks, master a literature, stay with a story over decades and all the rest of the things real journalists of the first rank actually do.
A contest of wit, literary skill, and especially knowledge and or wisdom is no fair fight…except for this:
Fallows is not one for ‘tube wars. I’ve read his stuff for a long, long time, and he says his piece and then almost always moves on to the next issue. If you check out his blog since he wrote on the piece that has offended McArdle you’ll see a great piece putting GOP Sen. Inhofe’s disastrously dangerous flying and “safety-is-for-little-people” attitude in proper context; an analysis of the non-event of the Michelle Obama waved-off landing, memories of Tim Hethering and the like. I can’t imagine that it pleases him when McArdle calls him colleague before attempting to dress him down, but life is short, and people with actual talent have better things to do with their time.
Which leaves it to me to take note of a post that once again demonstrates the axiom: Megan McArdle Is Always Wrong™.
In this case, I rather think she knows she’s wrong — or rather she has to argue an obviously false case. I say has to, because for all her grand title, her function at The Atlantic seems to be to come up with some argument-like word string that provides cover for known failures of policy, argument, and ideas.
The give away starts with her first substantive paragraph. She writes:
…they [Standard and Poor’s] do spend a great deal of time analyzing government finances, much more than James or I do.
Ahhh…the argument from authority again, one of McArdle’s favorites.
The question, as Fallows pointed out, is not whether S & P analyzes government or private financial instruments. Here’s Fallows:
S&P knows nothing more about U.S. budget prospects than you or I do. [Italics his. Bold mine.]
I’m sure you can catch the trick McArdle hopes to play here. Fallows said nothing about anything technical to do with US government bond market operations. He’s arguing that S & P is making a judgment that they are ill-prepared to make, on the politics of the budget.
McArdle’s assertion that the rating agencies are expert at the task of rating debt is itself a stretch — she could, perhaps, take a look at a real financial journalist’s account of the rating agencies incompetence and intellectual weakness, say, in Chapter 6 of Gillian Test’s excellent Fool’s Gold. Michael Lewis in The Big Shorthas some choice stuff on the agencies’ sheer bland ignorance of the instruments they were supposed to rate of, among others, S & P — see, e.g. the material in Chapter 7. She could also take a look at the comments by Warren Buffett in his 2008 letter to the shareholders of Berkshire Hathaway, among other venues.
But the deeper issue is that McArdle is trying to slip in an assertion that all S & P was doing was expressing its ordinary business judgment. They are not; as Fallows points out — along with plenty of others, including S & P itself:
“we see the path to agreement as challenging because the gap between the parties remains wide.”
No financial judgment there — just one more political prognostication.
No wonder, then, that McArdle speeds hastily by her ham-fisted opening gambit. Full tilt, she heads to a marvelous bit of disengenousness:
You make think that their opinion is crap, in which case you should say so–[Gee — thanks MM! — ed.] but I cannot understand why we’d quibble with the format in which that opinion is issued. S&P has been issuing these sorts of things for a long time, and I don’t think it would make much difference if they started doing so in blog form.
This is a display of verbal dexterity along the lines of the old joke — it was used in Calvin and Hobbes, but waaaay predates that cultural icon — about the little boy on the first day of kindergarten who spends the whole day in hope after his new teacher says, “Sit here for the present.”
“What? No gift, after I sat there the whole *&%!# day!”
Recall what Fallows wrote:
To repeat Clive Crook’s point, S&P knows nothing more about U.S. budget prospects than you or I do. They’re saying they have an opinion on the state of Congressional-White house dealings on the budget. Fine. Go on a talk show or start a blog.
Let me channel my inner McArdle here:
“Oh. You’re not complaining that S & P musn’t publish their reports in an easily updated, web-published format?
This is sarcasm?
Oh. I see. My bad….”
Really. I don’t have a lot of respect for McArdle’s capacity for argument at the best of times, but this is pathetic, even for her.
Next up, a tasty dish of word salad:
Moreover, their opinion does actually matter, since previous rounds of financial regulation have embedded financial agency ratings deep in the structure of our financial markets.
This is a usual bit of McArdle sleight of hand. Fallows says the S & P opinion is worthless, and wonders why the news media got so hot and bothered.
Oh no! says McArdle: that damn fact that the financial markets deal in risk means that ratings decisions do matter (not to mention, as she doesn’t, that the quality of those decisions matters even more.) But to continue:
If James or I scream that the US debt picture is unsustainable, we will not move markets. If S&P downgrades US debt, this will trigger a sell-off, even if the people selling disagree with their assessment.
Well, this is (a) bait and switch and (b) subject to a little empirical investigation: did this statement of opinion have that result?
To (a): A downgrade of US debt would indeed have a notable effect. But that’s not what the S&P did, of course. US government debt is still rated AAA. Were that to change…big news. But a warning that some folks in the S&P offices don’t like the way Eric Cantor is eying Tim Geithner?…not so much.
To (b): How much not so much?
Not at all, in fact.
In the wake of the announcement by the ratings agency, the market for long term (ten year) US government debt actually went up — as revealed in this chart, posted at the site of someone who actually knows a little bit of economics.
But what about that terrifying drop in the equity markets on Monday? The NYSE closed 140 points down from Friday’s close (though up roughly 60 from a trough met in the immediate aftermath of what Fallows correctly termed hysteria at the S&P release. It went Back up another 65 yesterday; up just a whisker under 6% for since Jan. 1; up more than 10% over the last twelve months. Oh, and as of Thursday afternoon, the market had a third day in a row of gains, to the point that stock market indexes are up to peaks not seen since June, 2008 — well above the point where it was before S&P opened its big yap.
In other words: McArdle simply gets this one wrong.
(BTW: If she were to say that well, the S&P didn’t downgrade US debt, so technically, she’s not in error, see point (a) above. This would be McArdle wanting it both ways: S&P opinions are meaningful, unless they are not. Taking her at the implication she wants us to draw: the S&P opinion in this instance is more important than anything Fallows might say — well, the markets disagree, and by that judgment, McArdle’s assertion fails the test of reality. Q.E.D.)
Just about all the rest of McArdle’s post engages with Jame Galbraith, an economist whom Fallows quotes. Galbraith makes the point that unless the Republicans misjudge the speed of the oncoming train, the US simply won’t default — because “It controls the “means of production” for the dollars to pay off those bonds.” Galbraith adds:
If you’re worried about inflation, fine. But that’s a different matter, with a lot of other variables that count for more than S&P’s feelings.
McArdle, predictably, regards this thought with horror. First she indulges in a little history.
Inflation was a good way to ease the burden of our World War II borrowing–once the war was over.
It’s true that there were three years of significant inflation from 1946-48. But McArdle, no economist, is no historian either. Competent approaches to historical argument include looking for more than the convenient monocausal explanation that makes the point you don’t want anyone to examine too closely.
What else may have had an impact on the total debt, and on the debt-to-GDP ratio?
Well, two obvious factors are a dramatic drop in government spending made possible by the end of the Second World War (down 40% in 1946) , and a sustained record of economic growth.* Tax rates (much, much higher then) also had something to do with a key fact: after the war, the US
ran a budget surplus debt declined as proportion of GDP [Thanks to a kind reader for the correction) in 36 of the next 47 years.
All of which is to say that the actual history of US government obligations is intimately bound up with stories of national expenditure and budgeting, but above all, with the power of economic growth (plus a reasonably progressive tax code) to rein in any momentary expansion of the standing debt. Not that McArdle can stop to think about these or all the more finer-grained analyses of what happened back then, as that would limit the possibility of this kind of snark:
But it is not a good way to ease the burden of an increasingly expensive entitlement program that shows no signs of winding down.
This is code for Medicare and Medicaid and/or Obama’s health care reform. We’ve discussed elsewhere McArdle’s unwillingness to countenance even the stray thought that any cost cutting measure will actually work, so chalk this up to her “I’m not listening….” debate tactic.
Especially since these days, the debt markets are much more efficient than they were in 1948; information about the money supply is transmitted very quickly to potential buyers of our bonds. You can pull all sorts of tricks to force bondholders to eat some losses on the money they lent you–but you can’t pull them over and over. America was able to wriggle its way out of a substantial portion of its WWII debts in large part because it was otherwise pretty fiscally sound.
Wriggle out of?…See above. This is pure word salad, to be sure, but at its core, such as it is, it’s making the same claim as above: markets will price US bonds to the level of risk that these incredibly modern, efficient institutions can now readily perceive — which is why (recall) the S & P announcement was so momentous, and Fallows was wrong to scoff.
Well then, (a) if the bond market is that efficient what produced the catastrophic collapse of the commercial bond market, oh, all of two years ago or so? As, among others, Michael Lewis has pointed out over and over again, transparency has never been a feature of especially the more arcane corners of the market in debt….
and (b) more precisely on point to the topic at hand, if the bond markets are so efficient these days, why is the interest of US government debt historically low and has been for some time ?
And as long as we are talking history, it’s worth remembering that government bonds have traded in a very stable fashion for a long time; the creation of a reasonably clear and calm government debt market was one of the great achievements of British finance in the 18th century — see among much else in the significant literature on this point, Fernand Braudel’s brief essay in the second volume of Civilization and Capitalism on his view that this was the foundation of British imperial wealth and power. The US inherited both that financial technology and ultimately the power that the British were able to finance through such fiscal innovation. Not everything important has happened in Megan McArdle’s life time. Just sayin.
No matter, like honey badger, McArdle don’t care:
You can argue that a small amount of inflation is preferable to the alternatives, distributing the pain very broadly in order to avoid the intense dislocations of a sudden shock. I might even agree with someone who argued this. But small amounts of inflation are not going to rid us of $10 trillion in debt.
Perhaps not, though I don’t believe anyone has argued that it would.
In any event, (a) we don’t need to get rid of $10 trillion in debt. Historically, we’ve prospered just fine at debt levels that hang at 40% of GDP.
To put that into current numbers: the CIA estimates 2010 US GDP at $14.72 trillion. 40% would be about $5.9 trillion. That leaves $4 trillion for McArdle to get rid of; or rather, less or zero if we assume that the US economy will actually continue to grow over time.
This is actually kind of important, so please forgive a digression into a wholly artificial, but illustrative bit of arithmetic:
If we assume a balanced budget (i.e. no net surplus or deficit over a period of years, whatever the ups and downs of individual cycles — which was the US norm for decades after WW II, and the last few of the Clinton years — a time so recent that even young McArdle may recall it), an annual growth rate of 3% would double the size of the US economy in 24 years.**
A small amount of inflation would accelerate that quite nicely (or capture additions to the debt produced by a budget net out of balance over time), as would a rise in tax rates from historical troughs — but I’m not arguing here that this trivial calculation is the reason to dismiss McArdle from any grown-up conversation about policy and the economy.
Rather, what this little exercise tells us is that one should pay no attention to McArdle because she isn’t honest. No discussion of debt trends that fails at least to nod at the implications of long term economic growth is even remotely useful. To put it another way: by her choice of what to ignore, McArdle ensures that she is talking nonsense throughout this passage.
But really — she has only our best interests at heart. By concentrating only on the debt, she gets to tell us why we have to take our medicine:
And the pain of large amounts of inflation is extremely painful–arguably, more so, not less so, than technical default…
Again, this is misdirection. You get the equivalent of default through inflation when the rate is so high as to make debt instruments effectively worthless; such events are termed hyperinflations.
The disastrous economic and political implications of hyperinflaton are indeed well known. So, while it’s true that high conventional inflation can be deeply unpleasant (I’m old enough to remember the seventies), at least in the American experience, such inflation neither amounted to a debt default, nor did its effects resemble those suffered by Weimar Germany, for example in 1922 and 1923.
If McArdle wants to argue that the US is currently on a path towards such hyperinflation — or the worse such event that took place in Hungary, or recent experience in Zimbabwe, and so on — then she needs to come up with some evidence that current US fiscal and monetary policy is meaningfully akin to the circumstances that attended such bursts of extraordinary declines in the value of national currencies.
She has not — and once more, as lots of folks point out to her at regular intervals, there are no signals from those with the most skin in the game that such an event is in the offing.
Enough. I admit. There is something in McArdle’s smug disengenousness that gets my goat on a deep level, and the consequence, as you’ve seen above, just ain’t pretty.
So I’ll shut up now, but for two parting shots.
First: Jim Fallows is the real deal, a journalist and analyst of great out-there-in-the-world experience. He’s someone who is always worth reading: you learn something when you do. He has to suffer the indignity of being called — and being — Megan McArdle’s colleague at The Atlantic. But the fact that their paychecks come from the same bank account does not make them equivalent. Fallows has earned what he knows through years of effort and accomplishment; McArdle knows what she knows with great certainty and gusto — but she’s the poster child for Mark Twain’s famous jibe. There is no comparison — as I hope the above has sufficiently demonstrated.
Second: When confronted by yet another example of error and flat out bad argument by Megan McArdle the question always arises: is she dumb or deceitful?
Now I concede that she might be both a dessert topping and a floor wax. But really, while McArdle may be many things, stupid ain’t one of them.
If you called her lazy, incurious, insecure or what have you, I’d probably agree — but I think she knows exactly what she is doing in her writing. She is a court singer, writing lays in praise of those who toss her scraps. I’m not really sure how much damage she can do at this point. I’d like to think that the schtick is growing old, and that her audience, large as it is, is now made up almost entirely of the choir to whom she preaches.
But maybe not. Hence posts like these.
(Also, too — writing this has kept me from going medieval on her truly delightful cooking video. I’m saving that for a special treat….;)
(And another thing: if you’ve read this far, you might want to check out a much shorter and quite lovely take down of another McArdle folly by James Bales, directly below this white whale.
*Economic output in constant dollars dropped from 1945-1946, edged down a little more in 1947, and then embarked on a steady path of growth for decades.
**I’m using here the rule of thumb known as the rule of 72. It has the canonical virtue of having many divisors — which is what dictated my arbitrary choice of a 3% annual GDP growth rate. Makes the sums come out more easily, even though it may be a shade high. But the answer is the same if you use a 2.5% growth rate and calculate assuming continuous compounding, in which case you could employ the rule of 70, which slightly understates the rate at which such compounding occurs.
Images: Hans Memling, The Last Judgment Tryptich (open), 1467-71
Albert Anker, The Crèche, 1890
Francisco de Goya, Riña a garrotazos, 1819-23