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Friday, August 20, 2010

Paul Krugman: Appeasing the Bond Gods

Can "the minds of the policy elite" be deprogrammed? Let's hope so:

Appeasing the Bond Gods, by Paul Krugman, Commentary, NY Times: As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.
Hey, I told you it was over the top. But bear with me for a minute.
Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover,... creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits.
Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math...: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments,... precipitating a crisis. Look at Greece, they said.
The skeptics countered that Greece is a special case, trapped by its use of the euro... The interest rates paid by major nations with their own currencies ... showed no sign that the bond vigilantes were about to attack, or even that they existed.
Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.
This was a strange argument even a few months ago, when the U.S. government could borrow for 10 years at less than 4 percent interest. We were being told that it was necessary to give up on job creation, to inflict suffering on millions of workers, in order to satisfy demands that investors were not, in fact, actually making, but which austerians claimed they would make in the future.
But ... recently ... it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt ... lower, not higher. ...
So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused.
You see, then, why I find myself thinking in terms of strange and savage cults, demanding human sacrifices to appease unseen forces. ...
It seems almost superfluous, given all that, to mention the final insult: many of the most vocal austerians are, of course, hypocrites. Notice, in particular, how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy. But that won’t stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed.
So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?

    Posted by on Friday, August 20, 2010 at 12:23 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (83)


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