(email exchange)
Hope Obama doesn’t listen to any of that stuff!
>
> On Wed, Nov 19, 2008 at 5:42 PM, Scott wrote:
>
> Obama picks Orszag, who has written on the dangers of rising deficits
> for interest rates, and on the government’s fiscal “gap” into the infinite
> horizon, to head OMB.
>
> ”Peter Orszag, the head of the Congressional Budget Office, was picked
> to head Obama’s Office of Management and Budget, a top Democratic
> source told CNN on Tuesday. Orszag worked at the Clinton White
> House as special assistant to the president at the National Economic
> Council and served on the Council of Economic Advisers.”
>
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I am so sick of this “deficits raise interest rates” idea. When has it ever happened? I remember reading one paper, years ago, where the authors did all sorts of massaging of the data, and then came to the conclusion that there was a very small correlation (with a variable lag, which basically means that they kept massaging until they found a correlation that fit their conclusion). And yet everyone talks with such authority about the link between deficits and interest rates, as if its some sort of obvious, proven link! Just goes to show that people will see what their theory tells them, not what’s in front of their eyes…
FYI, my paper at http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf goes into (excruciating?) detail, critiquing specifically the work of Orszag and others on this. A somewhat shorter, less rambling version was published in the December 07 Journal of Economic Issues (editors made me cut 1/3 to fit it in).
Jamie Galbraith also published a very good critique of Orszag’s best-known paper at the Levy Institute back in 2005(http://www.levy.org/pubs/ppb_81.pdf), with less detail on the monetary system.
Bernanke ought to know he sets interest rates based on a vote…
Right . . . I think I wrote on the old bulletin board years ago in response to something Greenspan said that it’s truly amazing that members of the Fed don’t recognize that they set interest rates. And so it continues . . . .