Friday, June 24, 2011

" A strange time for a deficit panic"

Mathew Yglesias at "Think Progress" makes the case against Deficit Hysteria by looking at the rather starkly low interest rates on government borrowing instruments:
Deficits can impede economic growth. No borrower is safer than the government. So when the government wants to borrow a lot of money and investors start charging it a high interest rate, the borrowing costs for everyone else go up. This “crowds out” lots of potentially useful economic activity. A business expansion that’s profitable at a 5 percent interest rate may be far too risky to invest in at a 7 percent interest rate. But as you can see here on the right, the interests rates being charged by the market to lend money to the US government are low and falling...

Note that 10-year interest rates were never below 3 percent at any point during the Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, or W. Bush administrations. So why is this on the agenda now?
So why is there a "deficit panic" when the impact of deficits on federal borrowing vs. availability of low-interest investment capital is nil?  And how does cutting the deficit - especially with an emphasis on cutting spending to balance the budget  - produce economic growth and jobs ?   Of course it doesn't.
"(Attacking deficits and cutting spending) wouldn't square with the way we normally think about economic activity in a depressed economy," (according to) Andrew Samwick, a former chief economist on President Bush's Council of Economic Advisers... When the economy suffers from a lack of demand, as it does now, Samwick explained, most economists think increasing spending is the more effective way to generate that demand and get things moving again.
Why has the opposite view begun to take hold?