There's no soaring, Scott, and no four percent

Sumner sides with Beckworth and Ponnuru:

Read the whole article, it's great.

I find it very odd that Krugman would claim that real interest rates are a good indicator of whether Fed policy is effectively getting tighter. After all, real interest rates soared right after Lehman failed, to over 4%. And yet that dramatic increase is strangely missing from the Krugman post they link to:

I'd just add that if there were anything to this story, we should have seen a sharp increase in long-term real interest rates, as investors saw the Fed getting behind the disinflationary curve. Here's the real 10-year rate in the months leading up to Lehman:

Why did Krugman leave off that surge in real interest rates?

Wow, did Sumner catch Krugman pulling the wool? Did Krugman stop his graph short, just before interest rates soared? Ya gotta watch these guys all the time. Political hacks in sheep's clothing, every last one of 'm. Here, here's the whole data series:

Graph #2: Same Data Shown by Krugman and Sumner, Showing All the Years

No.

No, Krugman didn't leave out soaring interest rates. There's no "soaring" after Lehman. There is a very brief spike that reaches 3% and immediately drops back to where it was before Lehman, then continues to drop at a slower pace.

And the high point of that brief spike, the 4%, or rather, the 3% peak, that high point looks to be pretty much right in line with the path of interest rates during 2006 and the first nine months of 2007. The spike did not reach an extraordinary level, and had no duration.

It was a one-percentage-point increase, for crying out loud.


Sumner wants us to see the "soaring" real rate as evidence money was tight:

Why did Krugman leave off that surge in real interest rates? Perhaps because it would imply that money got really tight in late 2008 ...

Clearly, however, the spike created by the Lehman event was a reaction to the "shock" of that event. Clearly, the spike occurred after the Lehman event of September 15th.

Beckworth and Ponnuru write

Between late April and early October, the Fed kept the interest rate over which it has most direct control, the federal funds rate, at 2 percent... Market indicators of expected inflation fell sharply that summer, a sign that the economy was getting weaker and monetary policy tighter.

Scott Sumner wants us to believe that a brief, temporary spike that occurred after mid-September is evidence money was getting tight between late April and early October. I don't see it.


"After all," Sumner says, "real interest rates soared right after Lehman failed, to over 4%."

Soaring is like this:

What the full graph shows is more like this

followed immediately by this

Pretty obvious on the graph, when you actually get to see it. No, you're right, Krugman didn't show it. But Sumner is the one who pointed it out. And Sumner didn't show it either. That's sloppy work.

Or maybe not so sloppy. If it's not on the graph and you claim that it is, then it's pretty smart to not show that graph. Smart fellow, Sumner.

Sloppy work or purposeful omission? I'm sure I don't know. I do know this: When you write about a graph you have to stop writing and get the graph and put it there in front of you and look at it while you write. Otherwise imagination takes over. Stories get invented. Wool gets pulled.