Conservatives are supposedly all about markets. Markets should decide, not voters. But when it comes to the law of supply and demand for government debt, they go blind.
Greg Ip in the Wall Street Journal poses this surprising question: “Is Government Debt Too Low?”
The interest rate that rich countries with super-safe debt (in the case of the eurozone, that means Germany but not Spain) pay is astonishingly low: lower than the growth rate of nominal gross domestic product (that is, GDP before subtracting inflation). In the U.S., the Treasury yield has gone from roughly equal to growth in nominal GDP in 2005 to 3 percentage points lower today.
By Mr. [Brad] DeLong’s reckoning, this means those countries are borrowing too little. Bond yields and prices move in opposite directions, so low government bond yields equate to very valuable government bonds. Mr. DeLong asks, “Isn’t the point of the market economy to make things that are valuable?” Since the debt of rich countries is “very cheap to make… shouldn’t we be making more of it?”
Here is the argument. There is a huge demand for U.S. government bonds. There is so much demand that interest rates are exceptionally low. You almost have to pay the government to hold your money.
Remember the “law of supply and demand”? When there is a huge market demand for something, isn’t that supposed to mean that more of that thing should be produced?
Shouldn’t government be supplying more bonds? Saying that the government should be producing more government bonds is another way of saying the government should borrow more. This is what it means when the government “makes” bonds to sell.
If the government borrowed more, it could use the proceeds to maintain and modernize our infrastructure (which has to be done at some point, no?) We could build out a modern energy grid, high-speed rail across the country, double the number of community colleges, expand scientific and health research… And of course doing those things would end up employing millions, and making wages go up.
And if everyone had the job they wanted and wages went up, wouldn’t that boost market demand, which would trigger business investment?
And if we did all of those things – high-speed rail, smart energy grid, modern infrastructure, expanded scientific research, expanded educational opportunity, wouldn’t it mean that our economy was positioned to prosper, and everyone’s lives would be better?
And wouldn’t a revitalized private economy mean that people didn’t need to park their money in government bonds, so the supply wouldn’t have to go up any more to meet demand? And wouldn’t all the tax revenue from that revitalized private economy and full employment pay off those bonds over time?
But no, we can’t maintain, never mind modernize our infrastructure. We can’t expand educational opportunity. We can’t increase scientific and heath research. We can’t do any of those things. Because government spending. We have to cut back, cut back, cut back.
Conservatives say they are about the belief that markets are better than government (and, by implication, better than democracy). But when it comes down to it, they really are about one and only one thing: They hate government and want to strangle it, period – no matter the cost to our economy and our people.