Worrying about the wrong spending will keep us from doing the right spending
In a post titled "the invisible bond market vigilantes continue their invisible attack," Paul Krugman notes that the interest rate on 10-year treasuries is 3.05 percent, which is so low that you almost feel bad for the people purchasing treasuries. "Clearly," snarks Krugman, "we must slash spending immediately to satisfy the market’s demands!"
To be fair to the other side's argument here, they'd say that our low rates are an artifact of the market being more worried about Europe right now. But eventually, that'll end, and the market, as we know, can turn on a dime. An ounce of deficit reduction is worth a pound of market panic and all that.
The problem with that perspective is that it's not falsifiable. The best evidence we have as to whether the market is worried about our ability to pay back our long-term debt is the market's willingness to buy our long-term debt. And right now, the market is begging for it. It's true, of course, that the market could be irrational and could turn on a dime. But it could do that even if we don't spend more on stimulus. And in any case, our serious debt problems are only amenable to major policy changes, and those changes are not going to happen without market pressure, so why not take advantage of this interregnum to borrow money at cheap rates and stimulate the economy and make necessary investments? Heads, we don't need to worry about the deficit right now; tails, short-term stimulus spending isn't what's behind our deficit and isn't what worries the market about our deficit.
The unknown here (when does the market get worried about our long-term deficit problems?) does not actually appear to depend, or even relate, to the policy we're talking about (short-term stimulus spending). But the discussion is pretending the two are virtually the same. I think this is because, as I wrote in my column this weekend, people aren't clear enough on what time table they're talking about when they're talking about the deficit, but in any case, it's mainly serving to confuse everyone.
June 28, 2010; 1:49 PM ET
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