Let He Who Is Without National Debt Sin Cast The First Stone
Here's my column from today's Roll Call.
Let He Who Is Without National Debt Sin Cast the First Stone
A small part of me is glad that bond market vigilantes are focused on the federal budget, the deficit and the national debt. Not caring about the amount that the government is borrowing would make bond traders far too much like the mortgage market that was willing to look the other way as no-doc, ninja (no income, no job or assets) and payment-option adjustable rate mortgage loans helped lead to the economic problems that we’re suffering through today.
But most of the bond market’s concerns are remarkably misplaced or misstated, and they are clearly being hyped for political purposes. Those in Washington, D.C., who are using these concerns to attract attention are not just incorrect but almost laughably wrong. They are also at least partly to blame for what they are now so willing to blame on others.
The problem is not, as some inside the Beltway have been insisting with increased vehemence in recent days, that the federal government is currently running big deficits and borrowing. With businesses and consumers still not spending very much and the Federal Reserve not able to stimulate economic activity by lowering interest rates, fiscal policy — tax cuts and spending increases and, therefore, increased government borrowing — has been the only tool available to policymakers. Using it now makes sense.
The increased national debt that has resulted from use of fiscal policy to deal with the economy was completely expected and absolutely desirable unless you believe the government should be doing nothing. The Bush administration (remember the $150 billion stimulus and Troubled Asset Relief Program?) and the Obama White House were applauded when they rejected that option. In fact, President George W. Bush was widely castigated toward the end of his presidency for not doing more. And with the monetary and fiscal policy measures taken to that point not having the desired effect, Wall Street and Main Street alike insisted that Barack Obama get involved in economic policymaking before he actually took the oath of office. Doing something rather than nothing in response to the economic emergency — that is, increasing the national debt — literally was demanded.
Historically, increasing the national debt to deal with economic and military emergencies has been such a typical response that it really should be considered nonpartisan rather bipartisan. In his blog Thursday, University of California, Berkeley, (my alma mater) economics professor Brad DeLong posted a series of graphs showing federal borrowing has always increased substantially in these circumstances. In other words, that the debt is currently growing is anything but surprising and should not be disturbing.
No budget sin (and I’m using that word very intentionally) is being committed because the government is borrowing now. Given the state of the economy and the tools available to policymakers, increased federal deficits and debt are necessary and were completely predictable.
The real issue is what Washington will be borrowing when the emergency is over and businesses and consumers are again economically active. That’s when fiscal and monetary policy will need to shift gears and the moment on which the bond market vigilantes and those who cite them should be focusing.
The real crime is that more wasn’t done over the past decade to reduce the national debt when the economy was doing well. President Bill Clinton left and Bush entered the White House pledging to eliminate almost all of the debt by the end of this decade — just about six months from now. But instead of continuing the budget surpluses in the good economic times and paying down the debt as promised, the government ran deficits that increased the borrowing further.
This is almost precisely what the bond market vigilantes say they are concerned about now: deficits and borrowing in good times.
If the federal debt had been eliminated over the past decade as we were promised, the current borrowing that we’re being told the bond market finds so troubling would have been of very little concern. Indeed, after years of little or no Treasuries coming on the market, the new supply might have been welcomed with a ticker-tape parade through the canyons of Wall Street at least equal to what is typically done whenever the Yankees or Mets win the World Series.
This is why you can’t help but be at least a little skeptical about what is being said regarding current government borrowing and who is saying it.
The fact that the bond market wasn’t as vigilant and didn’t express as much concern about federal borrowing when it should have over the past decade doesn’t take away its ability to express concern the next time it’s warranted. But it does create more than a little doubt about the vigilantes’ willingness to read the tea leaves. Many of the inside-the-Beltway types who supposedly are outraged about the current level of borrowing should understand that they bear some of the blame if they didn’t insist on debt reduction several years ago when the economic planets were aligned properly.
If the current forecasts are correct, we should be able to start implementing a post-recession deficit reduction plan next year. Some of the budget changes needed to deal with that are already in place, and the deficit and federal debt held by the public are already projected to fall by substantial (and maybe record-breaking) nominal amounts from fiscal 2009 to 2010.
The real concern and focus about government borrowing should be on what happens after 2010. Those trying to make a big deal over the amount being borrowed now are too conveniently denying that this is what’s needed to get through the recession and forgetting that their own actions played a substantial role in getting us to this point. Those are sins of commission and omission.
Update: Here's Paul Krugman's most recent take on the same subject from today's New York Times. Among many possibilities, here's the money quote:
Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.