13 May 2010

What IS the Nature of the Danger?

Via Crooks & Liars, Ezra Klein interviews economist James Galbraith (Washington Post online):

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It's not overstated. It's completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis. [emphasis by Bob]

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

Hmmmm, does that mean all the "Reduce The Deficit NOW!!" cries are simply a magician's flourish to distract from what the other hand is doing????

C&L has a video that goes along with this also, of another interview (link above)

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