The two deficits and the Rentiers

The idea of the first “two deficits” approach is predicated on not upsetting the bond markets while the administration tries to get to full employment, because upsetting the bond market could put us right back at square one. If confidence drops while increasing aggregate demand the stimulative effort will be compromised. We need to keep confidence in check.

This new idea is that making the bond market happy in-and-of-itself will produce prosperity and full employment through increasing confidence. The major drag on the economy isn’t low aggregate demand but confidence. Now the assumption isn’t that we have to keep the bond markets as happy as they were but instead make them much happier, which will then increase investments and spending through this increase in confidence. Hence long-term spending cuts, lots of gimmies to incumbents in supply-side investments and other things powerful interests love but don’t necessarily make demand-based economic sense.

I simply don’t see any evidence of why, or even how, this would work. What are the arguments that confidence is the major check on the economy? I understood the “two deficit” argument (though I disagreed with it), but this new approach is just substituting in the interests of bondholders for the entire economy. If a very-polite version of expansion austerity is guiding the administration’s thought then this is even more of a disaster than these stories convey.

And this is where the administration’s “keep the financial markets going and confident at all costs” approach to the financial crisis, ranging from PPIP to not investigating mortgage-servicing fraud, takes over for general economic policy. And that original approach was pioneered by Geithner, who is now apparently running the economic show.

What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.

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Ask for a coherent theory behind the abandonment of the unemployed and you won’t get an answer. Instead, members of the Pain Caucus seem to be making it up as they go along, inventing ever-changing rationales for their never-changing policy prescriptions.

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.