The Invisible Bond Market Vigilantes Are Here

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 |  Includes: TBT, TIP, TLT
by: Brad DeLong

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If fear of large future government deficits is undermining market confidence--as it is in Greece right now--interest rates on government debt are high and rising. That is not the case right now. If there are massive amounts of unemployed resources and if expected deficits are not undermining confidence, then there is a very strong case for making today's spending level higher and today's tax levels lower in order to create jobs and put the unemployed to work.

So I don't think Bob Rubin is making a coherent case when he says that fiscal policy right now is neither too tight nor too loose but just right: I think that there is a very strong case for (a) reducing the long-run deficit while (b) pulling spending forward from the future into the present when there are so many unemployed resources and also (c) pushing taxes backward into the future.

Fareed Zakaria interviews Robert Rubin (CNN.com - Transcripts):

ZAKARIA: Bob, if you had a magic wand, what would you do to get this economy moving? People look at your tenure as secretary of Treasury, where with all the controversy, you created 22 million jobs. Now, maybe you would say that government doesn't create those jobs, and I agree. But those jobs were created on your watch. So do you want to share the magic sauce with us?

RUBIN: Well, I'll respond to your question in the current context, but I will say this -- it was a remarkable period in the '90s, and I think President Clinton was terrific on economic policy. And I think that made a real contribution. But let's now talk about the current context, which is quite different. Here's what I would do, Fareed. And it's been this debate that's going on right now. I think what you I would do is I would stay on, roughly speaking, the current fiscal track, because we still have large fiscal deficits, and that does create demand, although those deficits are coming down, so you're actually reducing the demand.

ZAKARIA: So you mean you won't spend more on a second stimulus right now?

RUBIN: I wouldn't do a major second stimulus because I think -- and I think Paul said the same thing. I wouldn't do a major second stimulus because I think we run a risk that it could be counterproductive in creating a lot of additional uncertainty and undermining confidence. But at the same time -- and what I'm about to say is easy to say and very hard to do -- at the same time, I would try over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future. And I would guess something like two years. So it wouldn't take effect right now, when the economy is still so vulnerable, but if you could do it and it was credible, and people believed it, and it was real, I think that could do a lot for confidence. The problem is that's very easy to say and very hard to do.