The easiest (and arguably laziest) retort to the deficit fear-mongers is to point to uber-low yields on US debt.In his latest column for FT, Niall Ferguson is having none of it.
The Keynesians retort by pointing at 10-year bond yields of around 3 per cent: not much sign of inflation fears there! The anti-Keynesians point out that bond market sell-offs are seldom gradual. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off. And it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of federal debt in public hands – worry about some kind of future default.
The Keynesians say the bond vigilantes are a myth. The anti-Keynesians (notably Harvard economics professor Robert Barro) say the real myth is the Keynesian multiplier, which is supposed to convert a fiscal stimulus into a significantly larger boost to aggregate demand. On the contrary, supersized deficits are denting business confidence, not least by implying higher future taxes. And so the argument goes round and around, to the great delight of the financial media as the dog days of summer set in.
As we’ve argued, this Keynesian vs. Anti-Keynesian debate is getting a tad boring, though Ferguson adds a twist, suggesting this isn’t really about stimulus vs. austerity about about policies that promote growth vs. those that stifle it.
And in Ferguson’s view, it was the lean, pro-market governments of Thatcher and Reagan that out to win out, rather than the bloated version advocated by the Krugmanites.