Return of The Shrill
Yesterday, I pointed out how this march toward Painful Austerity reminds me of the run up to Iraq and I realized at lest some of that feeling comes from the fact that The Shrill One is one of the only people in the mainstream media to sound the alarm. Again. This time, of course, he has the added gravitas of being a Nobel Prize winner in economics, which makes the shrillness all the more compelling.
He wrote this today:
Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.
That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.
And bear in mind that additional stimulus would lead to at least a somewhat stronger economy, and hence higher revenues. Almost surely, the true budget cost of $1 trillion in stimulus would be less than one-tenth of one percent of GDP – not much cost to pay for generating jobs when they’re badly needed and avoiding disastrous cuts in government services.
But we can’t afford it, say the advocates of austerity. Why? Because we must impose pain to appease the markets.
There are three problems with this claim.
First, it assumes that markets are irrational – that they will be spooked by stimulus spending and/or encouraged by austerity even though the long-run budget implications of such spending and/or austerity are trivial.
Second, we’re talking about punishing the real economy to satisfy demands that markets are not, in fact, making. It’s truly amazing to see so many people urging immediate infliction of pain when the US government remains able to borrow at remarkably low interest rates, simply because Very Serious People believe, in their wisdom, that the markets might change their mind any day now.
Third, all this presumes that if the markets were to lose faith in the US government, they would be reassured by short-term fiscal austerity. The available facts suggest otherwise: markets continue to treat Ireland, which has accepted savage austerity with little resistance, as being somewhat riskier than Spain, which has accepted austerity slowly and reluctantly.
In short: the demand for immediate austerity is based on the assertion that markets will demand such austerity in the future, even though they shouldn’t, and show no sign of making any such demand now; and that if markets do lose faith in us, self-flagellation would restore that faith, even though that hasn’t actually worked anywhere else.
And this, ladies and gentlemen, is what passes for respectable policy analysis.
Again, this is reminiscent of the kind of logical arguments that few were making in the run up to the war because the political class was steamrolling the concept for a variety of reasons and the Very Serious People all went along. This is what's happening now. And Krugman is once again the lone voice of reason in the major papers, issuing the warning while everyone else falls into line.