As I have spent a good time over at Money Illusion a lately I have been pulled into a few debates with Right of Center types. This is fine, as long as the debate is substantive and sheds more light than heat. This is not the case for one of these guys who basically calls anyone who doesn't believe in his ludicrous tea party nonsense as "retards."
However I did get a message from another reader, named Bonnie who made a cogent argument for the current conservative Republican view. While I think it is wrong, she does make an articulate case for it-which is no small feat. To make a good case for the wrong answer is a skill in itself. Here is her comment to me and my response.
“Your supposition about the Wall St. crowd being willing to cough up enough for a small tax increase doesn’t really answer the question of what good would that do for the OWS crowd. With the current state of financial affairs, ~$15T in public debt and ~$65T in unfunded liabilities over the next 20 years, it is pretty safe to assume that any new revenue has already been spent; a few billion in extra revenue will make very little difference in the face of a European style debt crisis happening here. Any new kinds of transfers would be simply taking from one transfer program to give to another, rearranging the deck chairs on the Titanic."
That was her comment to me. This is my response"
"You misstate the real problems facing the country. It is not debt and no we do not have a European style debt crisis here. If you notice our interest rates have not gone up as the deficit hawks(I notice they are only hawks during Democratic Administrations during Republican Administrations they declare “Reagan showed deficits don’t matter”) have warned with their Cassandra scenario.
"Indeed the worse things get in Europe the better our debt rating gets. If you noticed S&P’s downgrade did not make our treasury yields jump as they did after downgrades in Europe."
"Right now would actually be a time for us to borrow more-creditors are effectively willing to pay us for our debt, it’s as if a credit card company says it will pay you about 5 percent per month on your outstanding balance."
"There is not debt crisis. The scare talk then that our deficits will drive up the interest rates on U.S. Treasuries is not happening. The opposite is the case."
"If you look at Europe, the ideology that tries to claim that what is happening there is all about out of control welfare states in the EU is also wrong."
"What we are seeing in fact is that not only countries with budget deficits and high debt ratios but countries that are very credit worthy like France, now or even Austria-Hayek country. It should be noted that countries like Ireland and Spain had budget surpluses in 2008 before the financial crisis hit. In truth a Euro country is hit regardless of whether it has a deficit or surplus and whatever its debt ratio."
"This is why the austerity that they want to impose on Europe is so self-defeating. With Italian bond yields as high as they are, no austerity package no matter how bloody will solve it. Their bond yields have to go down it’s that simple."
"Here in the U.S. there is no debt crisis. So your claim that raising taxes on the rich would be ” rearranging the deck chairs on the Titanic” is wrong."
Her claim that we are facing a European style debt crisis was like a light bulb going off for me. For this is exactly wrong. Here in America, there is no debt crisis. If you think there is simply check out the market rate of Treasury yields.
This constant warning of rising borrowing costs is a misnomer. The bond markets make clear that investors could not be more sanguine about our budget deficit or our alleged need for "entitlement reform." This is no concern at all about any such thing in the market. To the contrary now is actually the time we should be borrowing. Every time the debt of various Euro countries go up that makes our debt even more attractive.
As I pointed out to Bonnie, this concern about rising borrowing costs only comes up during Democratic Administrations. During the Clinton years Greenspan counseled fiscal discipline. When Bush came to the White House he forgot all that and testified in favor of Bush's tax cuts which caused surpluses to become "deficits as far as the eye can see." Neither did Greenspan blink when Cheney declared that "Reagan showed deficits don't matter." He did not even squeak the phrase bond vigilantes in answer to Cheney.
Now with a Democrat back in the WH Greenspan and the other budget hawks have found their voice again. It's a neat two step that the Democrats have fallen for as Clinton's success at achieving a surplus in the 90s has given the Democrats a new self-image where they have allowed themselves too much vanity over that not seeing that it is the Republicans who have really won the war.
Also as I further pointed out to Bonnie:
"By the way, Bonnie, the British too were stupid in imposing Euro style austerity on themselves when they have their own currency, printing press, and central bank."
I spoke of this more fully here.
"On the differnce it makes-it makes all the difference in the world when a country like Britain maintain’s its own monetary frameworw-what Krugman callss the Rubcion Effect-please see here."
"What changed between this last post and the one I wrote the next day above, is that in the first one I said the Euro crisis makes the British look smart for never getting into the Euro."
"What I later realized though is that they makes them just the same doubly stupid for imposing “strcutural reforms” when they suffer from no debt crisis-there is no run on British debt."
The British are lucky not to be in the Euro but yet they force the same medicine on themselves without the Euro disease of not having one's one currency and central bank.
Further I should point out that even in the Euro Zone where they truly do have a debt crisis the preferred cure of the austerity crowd is not working. While the disease here is real, its causes are misunderstood. There's an attempt to try to blame it on the generous welfare states of the Euro countries even though that's got nothing to do with what got us here. The proof is that the "virtuous" countries have seen runs on their debt as well as the "irresponsible" ones. Greece fits nicely into this ideology but how to explain Spain and Ireland who had surpluses prior to the financial crisis hit in 2008?
Now we are even seeing the borrowing costs of core, credit worthy countries like France and even Austria go up-home of austerity itself, Hayek country. Austria was one of the loudest advocates of "structural reform" in exchange for any help prior to seeing its own borrowing costs. What may start to happen is you will see Germany more and more out on a limb as even France now is asking that the ECB do more.
Meanwhile it's ignored that today, some of the soundest Euro nations-Germany itself, as well as Sweden-have some of the most generous welfare states in the world.
Ultimately the imposition of austerity is self-defeating. It makes things worse-for one thing it makes it less likely that bondholders will get anything back, because it pushes these countries into recession.