Actually, Economics is No More Rigorous Than Political Philosophy

Thursday, June 27th, 2013

It’s no secret that economists have become very powerful in recent decades, especially within policy circles. As such, the influence of the political philosopher has been reduced.

This shift is probably due to the way we perceive the two disciplines. We tend to think there’s something scientific about economic arguments; whereas we see the philosophers as merely hand-waverers, who speak in vague terms about concepts like justice and morality. In my opinion, the disparity reflects a bias that we have for rigor: for some reason, when we see an argument presented in mathematical symbols or statistical charts, we immediately get excited.

The reality, though, to anyone who has studied both economics and philosophy, is that the former is no more rigorous than the latter. Modern economists often forget that all of their conclusions hold only under ceteris paribus assumptions. To be sure, all scientific conclusions hold only under ceteris paribus assumptions. But what makes economics different – or “inexact,” as Daniel Hausman likes to say – is that the disturbing causes that aren’t accounted for in ceteris-paribus analyses often end up being a little more than insignificant. Indeed, they often end up changing the entire conclusion in unpredictable ways.

The idea is that since the economy is a dynamic, non-linear system, small changes in unimportant variables can have large effects. You may think you have a model that controls for all of the relevant causal effects of some policy, and you probably do. But the effects of the uncontrolled variables, however small, may end up biasing your model’s results in a big way. In some cases, even very small events can have significant macro effects, thereby determining which particular path the entire system will take.[1]

All of this means that macroeconomics is really difficult. As such, we should not put too much faith in the conclusions drawn from economy-wide models, whether they are microfounded or not. Such models may help to ground our thinking, but we must always recognize that the real world is infinitely more complex.

The same holds true for philosophy. The luck-choice principle used by luck egalitarians – which says that people should be rewarded for their effort, but not for their luck – is also a tool that helps to ground our thinking. In most cases, the principle should not be taken literally; almost everywhere we look, luck and effort seem inseparable. Nevertheless, the tool helps us understand what distributive justice requires, in an ideal sense.

Why is it, then, that the tools of philosophers are viewed with skepticism, whereas those used by economists are worshipped? In the debate on tax policy, we hardly ever talk about the principles of justice anymore; the discussion is always about how to set taxes in such a way that maximizes the overall economic pie. Sure, President Obama will talk every now and then about “the rich not paying their fair share,” but the reality is that, behind closed doors, the conversation is mostly about social-welfare functions and leaky-bucket problems.

I don’t have a good solution to make policy debates more balanced. As I said, we all have a bias for things that look rigorous. We could try to educate the masses about the limitations of economic models; but it’s so hard when even the economists themselves who are creating the models don’t understand the limitations. How many of them have even read Mill’s writings on ceteris-paribus deductions? Or Kevin Hoover’s writings on micro-to-macro aggregation?

No matter how much we try to educate economists about the limitations of their work, there will still be armies of them making unequivocal assertions in the media or on blogs. To be sure, there may be many economists who do truly understand their profession’s limitations; but their voices will always be drowned out by the Paul Krugmans and Greg Mankiws of the world.

So maybe the solution is to fight fire with fire. The first person who figures out how to mathematize Rawls’ Theory of Justice may end up doing a lot of good in the world.

[1] James Buchanon and Viktor Vanberg. (1991). “The Market as a Creative Process.” Cambridge University Press. Economics and Philosophy. Volume 7. Page 167-86.

Capabilities Come Prior To Sweatshops, Always

Thursday, June 27th, 2013

I saw Justin Lin, former chief economist at the World Bank, speak the other day. He had some interesting things to say, but, like most economists, he was too one-dimensional.

Lin’s basic point was that the conventional story about China causing the global imbalances that led to the 2008 financial crisis is wrong. Lin argues that China wasn’t manipulating its exchange rate in the decade leading up to the crisis. The reason why China had so much money to invest in the US in the 2000s, Lin argues, is because the money first flowed from the US to China in the 1990s due to a shift in manufacturing.

This may be true, but let’s assume it is for the sake of argument. The question then arises: why did money first flow from the US to China? Lin didn’t really answer this question, but he mentioned that China became better at producing labor-intensive goods. So he presumably views the shift in production as something that is natural, perhaps related to technology.

The problem I have with this is that I think there were many unnatural factors at work. Even if we assume that China wasn’t manipulating its exchange rate, there are still many other potential reasons why US manufacturing companies chose to shift production to China. Perhaps labor standards are low in China? It’s much easier for companies to streamline production if they don’t have to deal with pesky unions. How about environmental regulations? There’s obviously more room to make money if a company doesn’t have to adhere to a list of rules set by the EPA.

Lin doesn’t mention any of these potential drivers of Chinese manufacturing, perhaps because they fall outside the scope of economics. If workers aren’t being treated appropriately by companies, well then that’s a humanitarian issue. And environmental ethics? Why should any economist get bogged down in discussing such mushy topics?

It’s okay for economists to be specified. But they should at least comment on philosophical issues. What has happened in China over the past 30 years has been impressive. More than 600 million people have been lifted out of extreme poverty. Nobody is denying the efficiency benefits of China’s development. I’m just saying that there are non-economic costs of development that shouldn’t be ignored.

At one point, Lin mentioned that what’s needed in Africa to lift the continent out of poverty is the same process that occurred in China. Maybe. Nobody is denying that capitalism and markets can do wonders. But capitalism and markets only operate through profit incentives, remaining are silent on whether the profits come from exploitation.

The fact is that while there are many people in Africa who are struggling, bringing them sweatshops isn’t necessarily the best way to improve their lives. A more fruitful strategy might be to bring them schools, public order, and health care. Once they are given the same basic capabilities that many in the Western world have, then it’s their choice whether they still want to work in sweatshops — maybe many of them will still choose to. But if the sweatshops come before the capabilities are satisfied, then there’s no choice for the African people.

My Anecdote on Social Mobility Doesn’t Even Count

Saturday, June 15th, 2013

Greg Mankiw writes:

[T]he educational and career opportunities available to children of the top 1 percent are, I believe, not very different from those available to the middle class. My view here is shaped by personal experience. I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age.

If anyone should hold this view, it should be me: my parents also did not go to college, I earned my associate’s degree at a community college, and now I’m getting ready to graduate from LSE with a master’s degree in economics (and philosophy). But even I know enough to never reason from an anecdote.

The fact is that social mobility has declined noticeably since when Mankiw went to college. There are perhaps many reasons for this decline, but it’s generally understood that more fruitful opportunities for those born into rich households is playing a role (Haskins and Sawhill 2009). In short, parents at the top of the income distribution in the United States are more likely to buy success for their children in the form of access to prestigious schools, safe neighborhoods, adequate nutrition, and good health care. For anyone who holds the moral view that each individual should have an equal opportunity for welfare – especially including welfare that is influenced by positional circumstances – these trends are indeed frightening.

Please Publish My Definition

Wednesday, May 29th, 2013

If I wrote an article saying that an odd number multiplied by an even number is always even, would it get published in Scientific American? Michael Heller apparently thinks it would. He tells us that the contribution Rogoff and Reinhart added to the discussion about debt is their finding that countries with debt over 90 percent of GDP tend to have slower growth than countries with debt below 90 percent of GDP – not whether there is some cliff at 90 percent, above which growth drops off sharply.

Which is kind of funny, because that there is a negative correlation between debt, measured as a percentage of GDP, and GDP growth is basically definitional. When GDP growth slows, this necessarily increases a country’s debt-to-GDP ratio – in the same way that reducing the denominator of any fraction increases the fraction.

In other words, without the claim that there is some debt threshold above which growth slows sharply, Rogoff and Reinhart aren’t saying anything at all; they’re just repeating the definition of a fraction. If that were their original finding, would their paper have gotten published in the American Economic Review?

Yes, The Assumptions Of Neoclassical Economics Are Unrealistic; And Yes, You Are Allowed To Criticize Them

Saturday, May 18th, 2013

According to popular rhetoric, there are ways to criticize neoclassical economics, and then there are ways not to criticize neoclassical economics. A big No-No, the experts say, is the argument that the profession is flawed because its assumptions are too unrealistic.

Economists recognize that their assumptions are unrealistic. Most, I hope, can see that a Walrasian general equilibrium is not something that actually exists in the real world. Nevertheless, they still think it is a useful simplification that can yield valuable insights, a perfectly reasonable position to be sure. After all, this is how science is supposed to work: simplifying assumptions need to be made in order to make models tractable. Physicists do this all the time. For example, they often need to assume “zero friction” in order to zoom in on other, perhaps more interesting, properties of motion. Anyone criticizing neoclassical economics for using simplifying assumptions is therefore usually seen as ignorant for not understanding the scientific method.

But allow me to argue the opposite in this post: namely, that one can – and indeed one should – criticize the simplifying assumptions that neoclassical economists make. Why? Well, because economics is different than physics of course!

The subjects studied in physics – e.g., atoms, planetary masses, etc. – do not change after physicists study them. The same is not true in economics. When economists model social phenomena, they’re not just describing “what is,” as they so often proclaim. On the contrary, by modeling social phenomena, economists actually end up changing what is.

This performative link is made because although economists recognize that their simplifying assumptions shouldn’t be interpreted literally, the general public does not often make the same recognition. For example, when economists arrive at a conclusion like the first fundamental theorem of welfare economics (FFTWE), which states that any Walrasian equilibrium is Pareto-efficient, they recognize that Pareto efficiency is an interesting theoretical result but not one that can be observed in reality. But people outside of the economics paradigm don’t usually proceed with the same level of caution. In particular, policymakers often see conclusions like the FFTWE as evidence that not only are Pareto improvements desirable, but also that the key to achieving them is to structure markets in such a way that mimics a Walrasian setting. Hence, we must cut taxes, deregulate, and encourage people to act more self-interestedly, the politicians argue.

Of course, after the neoliberal policies are enacted, the economist inevitably comes back defensively, saying that the FFTWE was misconstrued; that we shouldn’t blame the model, but rather that we should blame those who jumped to erroneous conclusions. The way I see it, though, that’s not a sufficient response to get the economist off the hook. Indeed, economists can’t just stand back after their models are published and claim innocence; they have a responsibility to make sure that their simplifying assumptions aren’t interpreted in the wrong way, so that politicians don’t use them to sway policy.

In my opinion, it seems that there’s a cost-benefit calculation that needs to be done here. On the one hand, there are benefits from making simple and tractable models. Although Walrasian equilibriums don’t exist, thinking about them still helps to clarify some things – perhaps making them a good “scratchpad,” as Paul Krugman would say. On the other hand, there are (potentially huge) costs if policymakers misinterpret economic models.

My guess is that most economists would be unhappy with this sort of cost-benefit analysis, as it would likely significantly restrict their modeling efforts. Fortunately, there is a way forward: economists could drop the questionable declaration that their work is positive and admit that their profession is a fundamentally normative endeavor.

In other words, economists could stop offering allegedly value-free statements, such as: “These are the conditions that will lead to Pareto efficiency.” They could, on the other hand, make it clear that Pareto efficiency is something that they find normatively attractive, and that they have a step-by-step blueprint for getting us there. If they make this admission, then there are no modeling restrictions; economists will be able to model whatever they want, whenever they want. And they won’t need to worry about their results being (mis)interpreted by policymakers, because that’s precisely the point of any normative endeavor.

But – and this is a big BUT – once economists step into the normative playing field their models are fair game for political philosophers to scrutinize. For example, if an economist normatively defends the FFTWE, the political philosopher can respond by saying, “That’s an interesting result, but are you aware that you’re measuring welfare by looking at revealed preferences? And are you aware of the problems of measuring welfare by looking at revealed preferences? Have you read Martha Nussbaum’s criticisms of subjective welfarism? What happens if preferences are adaptive? Is it really possible to “purify” preferences à la Dan Hausman?”

At this point, most economists will likely have no idea what the political philosopher is even talking about. In fact, many may see the political philosopher’s comments as merely sloppy thinking and hand-waving theorizing, without acknowledging the obvious reality that the world is too complex to be modeled by simply observing buying-and-selling decisions in the marketplace.

The political philosophers have been desperately awaiting the day when economists admit that they’re doing normative philosophy and not positive science – when they stop running from normative questions, and stop citing Milton Friedman ranting about leaves growing on a tree or something. If economists are unwilling to make this admission, then holding them responsible when their models are misinterpreted by the general public is fair game. And if their simplifying assumptions are the cause of the misinterpretation, then it is perfectly acceptable to criticize them.

Ur by Education

Friday, May 3rd, 2013

CEPR has a good chart: unemployment rates by education, indexed to just before the crisis. We can dig deeper into the data to see if skill mismatches are keeping the unemployment rate elevated – and some have! – but this chart shows that, on its face, the idea that the labor market is plagued by structural problems is absurd.


The United States Is Exceptional, Too

Friday, April 26th, 2013

Rogoff and Reinhart have a response to their critics in the NYT. They note that even after correcting for their infamous Excel error, there is still a negative historical relationship between public debt and economic growth.

They then go on to cite some statistics:

In 2012, the ratio of debt to gross domestic product was 106 percent in the United States, 82 percent in Germany and 90 percent in Britain — in Japan, the figure is 238 percent, but Japan is somewhat exceptional because its debt is held almost entirely by domestic residents and it is a creditor to the rest of the world.

RR should have mentioned here that the United States is somewhat exceptional, too, in that its currency is the world’s principle reserve currency. This gives the United States much more flexibility in terms of its ability to accumulate debt; because in a world that is awash in excess savings – which has been the state of the world since 2008 – investors will be more prone to hold dollar-denominated assets, such as US Treasury securities. In fact, this is an important reason why yields on Treasuries remain at ultra-depressed levels.

(And, no: Yields aren’t low because the Fed is keeping them low. This conspiracy theory was proved wrong in mid-2011, when yields continued to fall even after the Fed ended QE2.)

This matters enormously because it’s related to the problem of causation, which RR allude to. They say:

Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places.

The problem is that there’s really only one mechanism through which high debt could cause weaker economic growth: if the high debt crowds out private-sector investment by raising interest rates. However, so long as the world remains awash in excess savings, this risk is essentially a non-risk for the United States because of its reserve-currency status.

This point should have been mentioned in the article.

What’s Dismal Is the Lack of Political Philosophy

Tuesday, April 23rd, 2013

Dean Baker has a few comments about the BEA’s recent changes to its GDP calculations. Toward the end of the post, Dean comments generally on GDP and its usefulness. He writes:

GDP is not a comprehensive measure of well-being and no one should ever use it as such.

I left Dean a comment, which I’ve pasted here in full.

But most economists do. This is the whole notion of Kaldor-Hicks efficiency, which is central to the cost-benefit approaches employed in welfare economics. The idea is that if we pursue projects that yield net overall gains, then we will be roughly approximating utilitarianism, which means that well-being will be maximized. In fact, this is one of the key justifications that economists have put forward for pursuing KH efficiencies.

GDP is central in this story. When we pursue policies that yield net gains in GDP, we will be approximately maximizing social welfare, according to the economist. However, this says nothing about rights or about egalitarian considerations; or about non-anthropocentric things like intrinsic value. When economists talk about GDP per capita being the relevant measure for living standards, they’re implicitly ignoring many other moral factors that may be worthy of consideration. And importantly, there may be cases where people would actually be better off with a policy that leads to a lower level of GDP if the policy, say, yields better results in terms of rights and distributive justice.

Economists may respond by saying that they’re field is very specialized – that while non-utilitarian considerations may be important, they’re beyond the scope of economics and for the philosophers to ponder. But this ignores the performative aspects of what economists do. Economists see themselves as describers, putting forth theories about how individuals make choices. But economists are not just describers; they are also prescribers. Because of the influence of their research – Rogoff-Reinhart being just one obvious example – the ideas that economists come up with end up changing the way societies function, because social institutions are erected in line with the conclusions that economists derive from their models. This would all be fine and dandy if “approximate utilitarianism” were superior among the various schools of moral theory. But it’s not. Not even close.

What’s the solution? Economists need a better understanding of political philosophy. Some do – e.g., Amartya Sen – but nowhere near enough. The whole Rawlsian movement should have changed this. Rawls wrote his masterpiece in a language that most economists could understand, but they didn’t listen. They said, “We’re doing science here, and we can’t be bothered by this mushy philosophy stuff.” So they continued to maximize, and the world continues to change to better fit their implicit conception of the good. It’s appalling.

If it were up to me, I’d abolish all formal studies of economics in higher education. There would be no more stand-alone economics degrees – no more utility-maximizing drones funneled into central banks, governments, and development agencies. Every econ topic would be taught alongside rigorous criticisms from political philosophy. Students would always get both sides of every story. And the media would stop treating the modern-day economist as if he is some sort of god, who has all the answers.

The reality is that the modern-day economist is basically a wannabe mathematician, who isn’t even that good at math and who is utterly incapable of thinking outside of his preferred comfort zone.

Addendum: This comment was in no way meant to implicate Dean. He obviously cares a great deal about more than just maximizing the pie – which is why he writes repeatedly on things like climate change and workers’ rights. My comments are more general and are directed toward the economics profession as a whole, based on my experiences.

The R-R Ratio Mattered For Countries Unlike Greece

Thursday, April 18th, 2013

Annie Lowrey has a deeply misleading blogpost in the New York Times. She writes that the Rogoff-Reinhart ratio probably hasn’t had that much of an influence on budget policy in Europe. According to her commentary, “countries like Greece were boxed in.” In fact, she uses the phrasing “countries like Greece” several times in the blogpost.

This is misleading because Greece is perhaps the only country that was boxed in and had to implement austerity. (And maybe Portugal.) The reason countries like Spain, Italy, and Ireland faced funding problems in 2011 and 2012 is because the ECB refused to take its role of lender of last resort seriously, not because these countries had profligate governments. In fact, prior to the crisis, Spain and Ireland were posterchilds for fiscal responsibility, carrying debt-to-GDP ratios that were lower than that of Germany; and Italy was running only modest budget deficits that could have been sustained indefinitely had growth not collapsed.

Given these facts, policymakers could have recognized that Spain, Italy, and Ireland were not boxed in and that, rather than austerity, what they really needed was full funding support from the ECB and expansionary policies in northern Europe to help restore competitiveness. Instead, the eurocrats decided to implement harsh austerity in these countries, often times relying on fictitious measures like the Rogoff-Reinhart ratio.

Readers of the New York Times are unlikely to know the full story about the European crisis. They are more likely to see a phrase like “countries like Greece” and conclude that every country in Europe resembles Greece. To avoid this problem, New York Times reporters should become more knowledgable about macroeconomics and international trade.

Fiscal Policy 101: Trivial For Most, Difficult For Bankers

Tuesday, April 16th, 2013

Wells Fargo showed us again why it is known as, “The Fox News of Wall Street.” The company released a long report on US fiscal policy that managed to get just about everything wrong.

What is the problem with fiscal policy, according to Wells Fargo? The problem is that the government is not managing its budget like a responsible household would:

[T]he systematic tendency on the part of policymakers to produce excessive deficits over the long run, not the countercyclical fiscal policy that was the basis of Keynes’ proposals, suggests that counter to much of the rhetoric, it is not true that government currently or in the future will operate its budget in the same way as the average middle-income household in America.

There are at least three problems with this analogy. The first is that the government is expecting to be around in perpetuity, whereas a household will die off. This means that the government never has to pay off its debt; it just needs to be able to fund itself at reasonable interest rates.

The second problem is that the government prints dollars, whereas a household does not. This means that the government’s ability to fund itself is very flexible; if the government does run into funding problems, then it can always just print more money to pay off its debts. This sounds reckless, but what you need to understand is that just the mere ability of the government to print money actually lowers its borrowing rate in the credit markets. We’ve seen this over and over again. The reason why there were bond runs recently on Spanish, Italian, and Portuguese debt is because the Spanish, Italian, and Portuguese governments can’t print money to fund themselves. Since bond investors know this, they chose to sell Spanish, Italian, and Portuguese debt in hopes of earning a profit when yields rise; and they know that it’s a worthwhile strategy to pursue because they won’t be competing in their short-sale efforts against a central bank. (This is obviously no longer the case since the ECB finally decided to take its role as lender of last resort seriously. But the point still stands for illustration.)

The last reason why a government is different from a household is that a government is responsible for supporting the entire economy when times are bad, whereas a household is not. The government runs the social safety net. This means that it needs to spend more money when the economy falters, so that unemployed workers don’t die out on the street. Some may have the view that unemployed workers “should” die out on the street when times are bad; but if that’s the view, then anyone making the government-household comparison should make this assumption clear, so that readers can know where commentators stand ideologically. Such an extreme right-libertarian (non-Lockean-Proviso-adhering) view may not be very popular with most readers.

The point is, if you can’t tell the difference between a government’s budget and a household’s budget, then you probably shouldn’t be writing on fiscal-policy issues. Nevertheless, that hasn’t stopped Wells Fargo, which goes on to write:

Only in recent years have taxpayers learned the true state of fiscal deficits as the retirement and healthcare bills begin to accumulate.

Of course, those who follow the government’s budget position regularly know that the fiscal deficits we have seen in recent years are entirely due to the collapse of the housing bubble and subsequent recession, and not due to retirement and healthcare bills. This point is easy to show with the CBO’s projections. The deficit in 2007 was just 1.2 percent of GDP. A deficit of this size can be sustained forever, since it implies a falling debt-to-GDP ratio. That same year, the CBO predicted that deficits would continue to fall over the next five years and that the government’s budget position would actually turn into a surplus by 2012. However, instead of a surplus in 2012, we got a deficit of around 7 percent of GDP. What happened? The government didn’t implement any long-term spending increases or tax cuts over this period that would account for the swing in the budget. The answer is that the economy collapsed. As tax revenues shrunk and spending increased through temporary stimulus efforts, the deficit exploded. This is entirely a story of a collapsed economy and has nothing to do with retirement and healthcare bills.

Now, there is a problem of retirement and healthcare bills beginning in the 2020s, and then increasing thereafter. However, this is not a problem of retirement and healthcare bills in the way that Wells Fargo believes. Rather than a story about reckless spending in Washington, the story is overwhelmingly about soaring private-sector healthcare costs, which are specific to the United States due to its corrupt provider-payment and drug-patent system. If consumers in the US paid the same prices for healthcare that consumers in Canada, Germany, or France pay, then the longer-term budget projections would show surpluses rather than huge deficits.

But if you don’t know the story about soaring healthcare costs, you might tend to think that rising retirement bills are due to increasing life expectancies, as Well Fargo apparently believes:

[L]ife expectancies currently exceed the expectations that existed when the structure of these entitlement programs were established. These forces are large and persistent thereby suggesting a widening gap between spending and revenues in the future, which, in turn, will require investors and business decision makers to reevaluate their expectations on growth, inflation and interest rates in an environment where there is little likelihood that the federal budget will be balanced over the economic cycle.

It is a well-known fact to those who follow data that life expectancies have risen only for the top half of the income distribution. Since retirement programs like Social Security primarily serve to benefit those in the bottom half of the income distribution, claiming that we should cut Social-Security benefits because average life expectancies have risen is like claiming that we don’t need to worry about global warming because the past winter was colder than usual. Once you dig deeper into the data, both claims can be easily debunked.

The Wells-Fargo report then goes on to talk about rational consumers and investors, and about how high deficits can lead to lower economic activity if consumers and investors expect them to be financed by higher taxes in the future. This is evidently some sort of Ricardian-Equivalence argument. (Though traditional Ricardian Equivalence doesn’t say anything about whether agents will expect higher taxes from increased deficit spending; it only says that for a fixed level of government spending, the timing of taxes doesn’t matter.) But this logic doesn’t hold in a liquidity trap. As Summers and DeLong showed us last year, once you take into account problems like hysteresis, deficit spending in a liquidity trap can actually be self financing.

The most serious error from Wells Fargo, however, comes when it discusses the crisis in Europe. It writes:

The euro experience follows a long history of financial crises that illustrate that transitions from an unsustainable fiscal deficit position are rarely smooth, especially when the markets recognize that such a debt position is really unsustainable. For example, we have witnessed a default, sharply lower real exchange rates, increased inflation and recessions, such as the case in Mexico. These crises disrupt capital markets, lower real investment and reduce real economic growth.

This rhetoric is presumably used to make the point that, any day, the credit markets could turn on the US, sending Treasury yields through the roof. But if you don’t understand why government borrowing costs soared in Europe – they soared because of balance-of-payments problems and because of the gold-standard-like aspects of the euro currency – then you’re likely to misforecast the direction of Treasury yields, as Wells Fargo has done repeatedly for the past three years. For example, back in 2010, before Treasury yields fell through the floor, Wells Fargo was pushing the same story about rising deficits leading to higher interest rates:

The 2009 deficit broke the scales at $1.4 trillion and swelled to more than 10 percent of GDP in the fourth quarter. Another equally large deficit is expected for fiscal year 2010. Treasury securities are generally considered risk-free in terms of default risk, because the full faith and credit of the U.S. government supports their repayment. Still, if the flood of U.S. debt to the marketplace exceeds the market’s appetite for those securities, interest rates could ratchet up quickly … Higher Treasury rates and, consequently, higher private borrowing rates could have a chilling effect on the economic recovery if they come too soon or are too large.

Of course, we know what happened: Treasury yields fell to a 60-year low in 2011 and remain at ultra-depressed levels. The history of other advanced economies (e.g., Japan) suggests that Treasury yields could remain low for a very long time, and that they will probably only rise gradually as economic growth picks up. That’s not to say that there’s no risk of the sort of doomsday scenario that Wells Fargo has been warning about for years. There is. But the risk is so small that it doesn’t justify doing nothing in the way of fiscal policy to help the millions of Americans who saw their lives ruined from the collapse of the housing bubble – a bubble that, mind you, was driven in part by epic incompetence (and, in many cases, fraud) at banks like Wells Fargo.