A Strange Time For A Deficit Panic

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. The smart deficit hawks out there are happy to concede that there’s no reason fiscal consolidation should be implemented quickly at a time of economic weakness. But what they don’t seem to understand is that there’s no reason for this to even be on the agenda. What is the present-day problem to which long-term fiscal consolidation is supposed to be the problem?

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?