Paul Krugman points out the absurdity of current hand-wringing about the deficit:
And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)
The very same people who claim that market’s always establish correct prices are now arguing that the financial markets are wrong about the direction of the economy.
If the budget deficit were currently a drag on our economy, interest rates and inflation would be skyrocketing. But they aren’t. That strongly suggests that markets aren’t worried about the deficit.
The economy is in the tank and budget deficits are heading up. But the poor economy is not the result of the budget deficit—journalists who write about the economy ought to know better.
The problem is that this is dangerous talk. If worries about budgets cause the Administration to rein in spending, then we really will be in trouble.
