Eeyore the Donkey vs. Felix the Cat

Is James Fallows allowed to be this snarky?

"Black, and very, very lucky." - James Fallows: have had my disagreements with Niall Ferguson, as chronicled several times -- here, here, here, and here. But I had thought they were simply on the merits -- how to interpret the financial and strategic tensions between China and America, whether there was any serious historical parallel to be drawn between the rising China of Hu Jintao and the rising Germany of Kaiser Wilhelm. (Ferguson said Yes; I said No.)

Everything about such discussions is conditioned by Ferguson's constant reminders that he is a professional academic historian and therefore deserves deference for whatever historical connections he sees. This morning in the Financial Times he once again shows off the insight that professional training can bring. The essay on American politics begins:

President Barack Obama reminds me of Felix the Cat. One of the best-loved cartoon characters of the 1920s, Felix was not only black. He was also very, very lucky. And that pretty much sums up the 44th president of the US as he takes a well-earned summer break after just over six months in the world's biggest and toughest job.

Hu Jintao is Kaiser Wilhelm; Obama is a black cartoon cat. I look forward to Ferguson's discussing this over a beer with his Harvard colleague Henry Louis Gates.

May I say that not Hu Jintau = Kaiser Bill but rather "Wilhelmine China" is a useful thing to think about not as a historical parallel but instead as a historical yardstick? China over the next generation will not act like Imperial Germany did in the years before World War I. But China is a rapidly-industrializing great power ruled over by an aristocracy that has lost its belief in its ideology of rule and is losing its social role and yet seeks to hold on to its power. The last time we saw this happen in world history was indeed Wilhelmine Germany. In Wilhelmine Germany one right-wing response was to try to "busy giddy minds with foreign quarrels"--to try to make people mad at Russia, France, and Britain rather than at their own privileged and parasitic Junker-class aristocracy. It's a yardstick against which to assess deviations: it's not a model or a parallel.

Ta-Nehisi Coates is bemused:

Ta-Nehisi Coates: I'm sure Ferguson has the sort of brain-power that could extinguishes galaxies. I read this lede, and said to myself "I shouldn't be so offended, so politically correct, that I don't actually read the guys column. I don't think that was a smart decision. I found the piece to basically be a long-winded concern-troll. And then it ends with this:

Even Felix the Cat's luck ran out during the Depression. His creator Pat Sullivan drank himself to death in 1933, baffled that audiences now preferred mice like Mickey and Jerry. President Obama should take note.

Right. Obama should take note. From a cat. Because, you know, the cat is black too. Like Obama.

I must confess that when I saw the FT link "Obama Felix" I thought the column was going to be a Rome-Washington comparison. I thought it was going to compare Obama's attempts to restore normal, sane politics to the republic of America after the Bush clown show to first-century BC Roman dictator Lucius Cornelius Sulla Felix's attempt to restore the constitution of the res publica Romana after the Marian uproar[1]--the agnomen "Felix," you know. And when I learned that the "Felix" was supposed to be "Felix the Cat," I thought it was inapt. Rather than compare BHO to Felix the Cat, I thought that Niall Ferguson should have compared himself to Eeyore the Donkey.

Let me explain:

Two--substantive--things struck me about Ferguson's column. The first is Ferguson's reversal of field on the stimulus package. Today:

A runaway deficit may soon test Obama’s luck: His stimulus bill has clearly made a significant contribution to stabilising the US economy since its passage in February.... [C]redit where it’s due... the president deserves at least [a] bronze [medal]. According to Moody’s, the ratings agency, the stimulus package has saved more than 500,000 jobs. Without the jump in government spending, GDP would still be in a nosedive.... [T]he stimulus package had a sound macroeconomic rationale...

Ferguson last April:

This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition): Niall Ferguson: Now we are in the therapy phase, and what therapy ar we using? Well, it is very interesting because we are using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman, Milton Friedman, that is, that is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the 1930s. I am fine with that. That is the right thing to do. But thre is qnother course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes, John Maynard Keynes, and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year and the issuance therefore of vast quantities of freshly-minted bonds. There is a clear contradiction between these two policies, and we are trying to have it both ways. You cannot be a Keynesian and a monetarist simultaneously, at least I cannot see how you can, because if the aim of the monetarist policy is to keep interest rates down to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.... [T]here is going to be... a very painful tug-of-war between our monetary policy and our fiscal policy...

And:

Andrew Purcell: Krugman was lost for words. “Boy,” he shook his head, “Oh dear.” He took issue with Ferguson’s sums and with neoconservative economics as a who.... On the core subject of deficit spending, Ferguson could not find a single ally.... [I]n one last defiant gesture, revelling in his role as pantomime villain, reached for the ultimate conservative put-down: “If you wanna try the Soviet model, fine...” Krugman and Soros groaned loudly. The audience booed. Moderator Jeff Madrick interrupted once, then twice, talking over Ferguson’s objections. “We’re doing you a good turn by not extending this ten minutes,” he suggested...

It is progress that Ferguson now thinks the stimulus program has the macroeconomic rationale that he thought it lacked three months ago when it was "the Soviet model." This is good in the same way that it is good for your health status when you stop hitting yourself on the head with a hammer.

The second is that there is still a certain amount of incoherence here:

[T]he two parties would be neck and neck if the midterm elections were held today.... [T]he growing structural imbalance between federal revenue and spending scares the hell out of voters.... The deficit this year is likely to be $1,800bn.... The gross federal debt is just about to bust the $12,100bn limit set by Congress.... [P]ublic debt could rise from 44 per cent of GDP last year to 87 per cent by 2020. Spending on healthcare alone could rise from 16 to 22 per cent of GDP.... The administration itself has no plan to balance the budget. Its own budget forecasts a trillion-dollar deficit as far ahead as 2019.... The nightmare scenario is that mounting fears over US creditworthiness push up long-term interest rates, thereby choking off the nascent recovery.... Anyone expecting private consumption to bounce back is dreaming.... [T]he property crisis is far from over. The number of prime borrowers behind on mortgage payments rose 13.8 per cent between March and June. The business default rate is already above 11 per cent and is heading towards 13 per cent. The contribution of the stimulus to growth... has now passed its peak and by January 2010 will be zero. The public-private partnership to buy toxic bank assets has flopped. The official jobless rate conceals a surge in long-term unemployment to a postwar record...

Most of what worries Ferguson are short-term business-cycle worries--that the stimulus package was not big enough and that the hopes that the PPIP program could massively shrink interest rate spreads and thus boost private investment demand have been largely dashed and that hopes that property prices would start rebounding have failed to come true. These all seem to call for even larger short-run fiscal stimulus: if the private sector isn't spending enough to keep the economy near full employment, the government should. But Ferguson says--or at least implies--not: his critique is not that the stimulus package was not big enough.

Somehow Ferguson believes that these short-term worries are caused by the medium-ter fiscal gap between U.S. government revenues and expenditures and the "nightmare scenario... that mounting fears over U.S. creditworthiness push up long term interest rates.. choking off the nascent recovery." Why these are supposed to be linked is not clear. And why the nightmare scenario is to be feared is not clear either. A look at the terms on which the U.S. Treasury can borrow for twenty years:

tells us that the Treasury can now borrow for twenty years at 1.1% less than the real growth rate of the U.S. economy has been since 1929. Cross-indexing the real with the nominal yield curve tells us that investors expect dollar inflation over the next twenty years to average 2.1% per year. The nightmare scenario does not appear to be in investors' dreams.

Why not? I think the answer is in this figure:

which shows the CBO's (a) Baseline, (b) it's more pessimistic Alternative Fiscal Scenario, and (c) my even more pessimistic Alternative Pessimistic Fiscal Scenario. As I read things, there is roughly one chance in three that the medium-term government budget turns out to be more favorable than the (green) baseline: that is, after all, what happened during BilL Clinton's entire presidency. In that case, we don't have a medium-term fiscal problem (we do, however, have a long-term fiscal problem). In my judgment, there is also one chance in three that the fiscal outcome falls between the green CBO Baseline and its black Alternative Fiscal Scenario, in which case we have a problem but not a problem worse than Ronald Reagan and his enablers created for us in the 1980s or than George W. Bush created for us during his tenure--a problem we solved quickly with one single Reconciliation Bill once we stopped electing Republicans to the presidency.

There is, however, that one chance in three that things will turn out to be worse than the CBO Alternative Fiscal Scenario--and possibly even worse than my PAFC. In that case, we will have a big medium-term fiscal problem to deal with that cannot be dealt with by one Reconciliation Bill imposing marginal increases in taxes and cuts in program spending growth.

I look at the Treasury yield curve, I look at the debt projection figures, and I say: "sufficient unto the day is the evil thereof." When the unemployment rate is on a firm downward trajectory then will be the moment to take action--if significant action is required--on whatever medium-term fiscal problem (i.e., none, small, or humungous) it turns out that we have.

I don't think that Barack Obama is Felix the Cat. I do think that it is Doug Elmendorf's job to be Eeyore--and it is very very important that he do his job. But now is a time for crossing the river by feeling with your feet for the stones, not for getting out the pitons and ropes to climb the mountain that may loom out of the mist once we get to the other side.

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[1] Not that I compare the changes wrought by C. MARIUS C. F. C. F. IMP. TER. COS. SEP. to those wrought by George W. Bush and his enablers and sycophants, but, you know, I thought Niall Ferguson might.