Paul Krugman - New York Times Blog
July 10, 2011, 9:46 am
Feel The Pressure
Regular readers of this blog know that I make a big deal of the failure of interest rates to rise despite massive government borrowing. There’s a reason for that: what happens to interest rates is a key indicator of which economic model, and hence which economic policies, are right.
The Very Serious position has been that government borrowing will drive up rates, crowd out private investment, and impede recovery. A Keynes-Hicks analysis, by contrast, says that when you’re in a liquidity trap, even large government borrowing won’t drive up rates — and hence won’t crowd out private investment. In fact, it will promote private investment by raising capacity utilization and giving firms more reason to expand.
You know what has actually happened:
The chart which goes here won't work. If you wish to see it, you'll need to click on the link at the bottom of the post.
What we usually get in response to this seemingly decisive data are a series of excuses — most recently, that rates were low because the Fed was buying all the bonds. Well, that program has ended, and interest rates are still low.
But wait: the crowding out types have another answer, namely, to just ignore the facts. Joe Wiesenthal sends us to Paul Ryan on CNBC:
MS. BARTIROMO: What about job creation right now? We’ve got the jobs report coming out this week. What do you believe needs to be done to actually see real creation of jobs?
REP. RYAN: Stop corny crony capitalism in the regulatory state, get spending under control to show that we’re getting our borrowing under control so we take pressure off the interest rates, reform the taxes. And our budget says, through base boarding, getting rid of loopholes in exchange for lowering rates, have a top tax rate of 25 percent so we’re more globally competitive, a tutorial system on corporations and sound money, sound monetary policy so our dollar maintains its reliable store of value. Those four foundations, real sensible regulatory system, spending cuts and controls to get our debt under control, sound money and tax reform, those are the things I think we need to do, the foundations for economic growth. There’s no excuse to do something else or there’s no substitute for it. This Keynesian borrow, spend and tax isn’t working and it won’t work.
It’s supposed to be happening, so let’s just say it is, even though it isn’t.
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