Brad DeLong: Do As I Blog, Not As I Publish

No economist has been more consistent about the need for the U.S. to borrow and spend than Berkeley blogger Brad DeLong, who left no doubt where he stood last November when he wrote that "anything that boosts the government's deficit over the next two years passes the benefit-cost test - anything at all." That, unfortunately, is where the consistency ends.

In his June 24 post, he took University of Virginia and former Fed economist Frank Warnock to task for a Council on Foreign Relations (CFR) paper in which Warnock argued that "if the United States adds further to its debt, the privilege of borrowing internationally in its own currency might not last much longer." Warnock's conclusions were driven in part by a 2005 Fed study showing that foreign official purchases of Treasuries had a large impact on long-term interest rates. Since the accumulation of Treasuries by foreign official purchasers has been enormous since the late 1990s, rapidly rising U.S. debt levels made the U.S. vulnerable to a spike in rates if the foreign official spigot were to switch off.

My own data dredging with Paul Swartz shows that foreigners now own 57% of outstanding U.S. Treasuries, up from 37% in 1997, and that this growth has been driven entirely by government purchases, notably China's. In the two years ending in March 2005, official sector purchases accounted for 60% of new issuance, compared to about 40% historically back to 1960. On the CFR web site, I refer to the phenomenon Warnock worries about as a "reverse conundrum," named after Alan Greenspan's famous "conundrum" of declining long-term interest rates in the face of strong economic conditions and rising short-term rates in late 2004 and early 2005.

Brad DeLong was incensed by Warnock's analysis. He blasted not only Warnock for penning it, but the entire CFR hierarchy for allowing it to be published: "We are talking basic canons of data presentation here. Francis Warnock should not present snippets of the data while hiding the full time series."

Serious stuff. So what was Warnock's offense?

According to DeLong, it was that Warnock painted a picture of risky U.S. government debt based solely on dollar and Treasury price falls in 2009. DeLong smacks Warnock for ignoring the rise of the dollar and Treasury prices in 2010.

This is bizarre, to say the least. Warnock devotes four pages - nearly a quarter of his paper - to the impact of the eurozone crisis on the dollar and Treasury prices. DeLong could not possibly have missed this, for example:

"The effect of the eurozone crisis on U.S. bond flows is striking. Flows into U.S. bonds have surged. Just when conditions for U.S. debt seemed most worrisome, the world has again rushed into the U.S. Treasury market. The dollar has surged. And, despite all the domestic forces pointing toward sharply higher U.S. long-term interest rates, the continued foreign appetite for dollar assets has kept interest rates low."

What is more strange is that the day after I read DeLong's post I received a copy of the Spring 2010 issue of The International Economy, which featured a piece entitled "The Flight to Quality" by none other than Brad DeLong. The piece argued the U.S. should issue more debt forthwith. Why? Well, May was a good month for Treasury prices:

"In late May, the yield to maturity of the thirty-year U.S. Treasury bond was 4.07 percent per year - down a full half a percentage point since the start of the month. That means that a thirty-year Treasury bond had jumped in price more than 15 percent. . . . This signals a remarkable shift in relative demand for high-quality and liquid financial assets - an extraordinary rise in market-wide excess demand for such assets."

So after condemning Frank Warnock for the "intellectual foul" of focusing on a year's worth of bad data for the dollar and Treasuries (which Warnock clearly did not do), DeLong focuses on one month of data to argue that U.S. should borrow much more.

So, fellow economists, Brad DeLong's message to you should be clear: Do as I blog, not as I publish.