Get the kids, get the dog, and grab whatever weapons you happen to have within arms reach, zombies are coming! Now, I’m not talking about the raised dead, like we all saw on Thriller, but rather bond vigilantes, about to pull the plug on good old Uncle Sam because they perceive us as unable or unwilling to pay our debt. At the G20 summit this week, President Obama argued that more Keynesian stimulus was necessary until employment recovered. The rest of the G20 balked, opting instead of fiscal austerity, because they fear the bond vigilantes. Economist Paul Krugman, Nobel laureate, believes you can put that weapon down:
“Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.” Nonetheless, every few months we’re told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long-term interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.” Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately.”
However, advocates for austerity want to cut off unemployment benefits, when the housing market, and the larger economy, is still on life support. They want to fire teachers, firefighters, and policemen around the country by slashing state aid. In the halls of power, you can hear faint echoes of Herbert Hoover. These austerity advocates often talk about Japan’s lost decade, and the inability of government spending to lift that country out of its recession. However, no less than the Economist, Bible to the global business elite, brings up the much more pertinent examples of Canada and Sweden:
“The advocates of austerity… base their argument on cases in the 1990s, when countries such as Canada to Sweden cut their deficits and boomed. But in most of these instances interest rates fell sharply or the country’s currency weakened. Those remedies are not available now: interest rates are already low and rich-country currencies cannot all depreciate at once. Without those cushions, fiscal austerity is not likely to boost growth.”
What would be a sensible action to take right now? Well, how about finally tackling entitlement reform? Sure sure, Republicans would never undertake bipartisan work on entitlements in their Party of No posture, but stepping outside of political reality, now is the perfect time for politicians to compromise and craft a sensible reform of Social Security. If not now, when? It would send the right signals to those (imaginary) bond vigilantes that everyone worries about so much, but more to the point, it would deal with the long-term deficit, which we will have to deal with sooner or later. Politicians will always try to punt that football down the road, but who is to say that there will be a better opportunity in the future?