plans for stanching the cash hemorrhage.
Obama promised to extend most of the Bush
tax cuts and to enact a host of other populist
tax breaks and spending programs. McCain,
for his part, was more restrained on spending,
but the enormous tax cuts he proposed would
have blown an even bigger hole in the budget.
they would manage ongoing deficits.
long-run fiscal problem, and he did make the
gesture of supporting a freeze on some forms
of spending in his 2010 budget. But there are
good economic reasons for staying deep in
the red in the near term big deficits are
needed to recover from the recession and
even more potent political reasons to tread
cautiously in this arena.
ine a discussion among Obama's advisers
be defeated in the polls and the bad guys will
take over. The bad guys do not share your pri-
orities and they do not care about the deficit.
icit are hearing a similar message. Certainly
McCain, whose program was fiscally respon-
sible when he ran in the Republican presiden-
tial primaries in 2000, became convinced that
prudence had no political traction in 2008.
about the financial markets? Shouldn't they
start pricing the risk of fiscally driven infla-
tion into interest rates in their bids for freshly
minted Treasury bonds? Probably, but I'm
not certain they will. Remember, the markets
are led by the same geniuses who staked the
future of their firms on the premise that
housing prices could only go up.
gage-backed securities. Specifically, it is tempt-
ing to assume that the U.S. government will
always be able to roll over its debt when the
debt comes due. And while endless deficits
imply growth in the amount of interest that
must be paid out as a portion of tax revenues
and GDP, the payments will remain manage-
able for decades at a real interest rate of 3 or
someday stop, there's still time to profit from
long as interest rates remain low, the bonds
are safe which seemingly justifies the low
rates. The bubble bursts when something
causes investors to worry about the risk of de-
fault, and the prospect becomes self-fulfilling.
would cause investors to demand higher inter-
est rates on new bond issues. But higher inter-
est payments mean higher deficits and a
to default on its obligations which in turn
decide overnight that the government couldn't
possibly repay its debts and lending would
skid to a halt. (The subprime mortgage mar-
ket in 2008, flourishing one day and dead the