Department of "Oh Dear!": Basic Macro Briefing Weblogging

I have been complaining strongly about the failure of Republican economists to adequately brief their political principals.

It looks like it is sauce-for-the-gander time:

Paul Krugman:

Guess Who Still Believes in Invisible Vigilantes: Lots of chatter about the WSJ’s [Republican-sourced] account of how the deficit negotiations broke down…. But here’s a passage that bothered me:

On Dec. 13, Mr. Boehner went to the White House…. The president told him he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.

Oh, dear — does the president still believe that failure to reach a Grand Bargain will cause an attack by the invisible bond vigilantes, and that this is the reason we should fear the fiscal cliff?

It certainly sounds like it. This is, as Paul notes, very unlikely. When we go over the fiscal cliff short-term taxes go up, spending falls, the government deficit falls, and the government stops printing so many bonds. Thus the supply of government bonds turns out to be less than expected. Moreover, the fall in government spending and the rise in taxes (which has some impact depressing private spending) puts downward pressure on employment and output. Investors fearing recession then dump equities and buy other things--one of which is government bonds.

In the aftermath of the fiscal cliff, therefore, there are fewer government bonds than had been expected and higher demand for them than had been expected. This makes it highly likely that interest rates will fall, not rise, as we go over the cliff.

You have to spin a much more complicated story--and a much less plausible story--to get a spike in interest rates when we go over the fiscal cliff. In fact, I cannot think of a story right now in which going over the fiscal cliff generates (i) a recession, and (ii) a spike in interest rates…

Paul continues:

America can’t run out of cash… can’t experience an interest rate spike unless people see an increased chance of economic recovery and hence a rise in short-term rates. And the people who have been predicting an interest rate spike any day now for four years shouldn’t have any credibility at this point. Oh yeah, and a global recession would surely mean lower, not higher, interest rates.

If Obama is still confused about this, it has real-world consequences — in particular, it makes him too eager to reach a deal now now now, and hence too willing to concede on fundamental priorities.

If it is indeed the case that Obama does not understand the basics of the economic situation he is trying to manage, how likely is it that he can make good decisions?

If, as Bob Woodward claims, Tim Geithner really is in there analogizing the U.S. to Greece, things are not good at all…