Deficit Politics Then and Now
by digby
Here’s is something you almost never see, an informative article about a contentious issue that doesn’t resort to he said/she said:
1. For almost two decades we’ve been told that when you’re looking for signs of what Wall Street wants Washington to do about the federal budget, the bond market is the place to watch. What’s the bond market saying today?
The bond market is being as unequivocal today as it was when Bob Rubin used what it was saying in 1993 to convince Bill Clinton that he had to push to reduce the deficit. The only difference is that, instead of demanding deficit reduction, the bond market today is exhibiting no worries about the deficit or federal borrowing at all In fact it’s indicating that Washington should do more to stimulate the economy.
Although there are also a number of technical reasons why the demand for federal debt is strong and interest rates have remained low, the bond market’s interest in Treasury securities has been high no matter what the maturity. This demonstrates that, contrary to what deficit hawks and demagogues have been insisting, there is little or no concern on Wall Street about the government’s borrowing, either short- or long-term.
2. Why are Congress and the White House ignoring the bond market now after feeling the need to follow it so closely before?
In 1993, the bond market was threatening higher interest rates if the deficit wasn’t reduced, something elected officials could ignore at their own political peril. By contrast, the only threat the bond market can make now is to lower interest rates further, and that isn’t as fearsome to politicians.
In addition, the bond market in 1993 had a former bond trader — Bob Rubin — as a high-level advisor to the president and, therefore, in a position to communicate and validate what it was saying to Washington.
Most important, however, what the bond market is saying today is different from what deficit hawks and GOP critics of the Obama White House want to hear. As a result, the echo chamber that amplified and repeated the bond market’s message almost two decades ago doesn’t exist today.
3. What makes 2010 so different from 1993 for the bond market when it comes to the deficit?
It’s simple: The economic situation today is the opposite of what existed at the start of the Clinton administration. In 1993, the bond market was worried about excess demand and soaring inflation, which would have eroded the value of bonds. Having the federal government spend less and tax more — that is, do things that would reduce the deficit — meant that the economy would cool rather than overheat, and therefore that the demand for goods, services, and workers would be reduced. This would keep inflation in check and allow federal bonds to maintain their value.
The big concern today is about deflation and slow growth rather than inflation and overheating. With unemployment high and capacity utilization low, the bond market not only isn’t worried about the excessive economic growth, it actually would welcome the additional activity that would be generated by higher spending and lower taxes.
There are three more questions and answers at the link addressing the politics of this. (The short answer is that regardless of the merits, deficits are used as a weapon by politicians on behalf of wealthy people who don’t want to have to pay even a minimally decent amount of taxes to support the country that has made them so wealthy in the first place.)
Even many smart people don’t understand the politics of deficits. And almost nobody seems to grasp that deficits automatically go down when everyone’s working. If you are really concerned about debt, then, you should be doing everything possible to put people back to work at good wages as soon as possible.
Oddly enough, the bond market actually does seem to get this. Go figure.
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