The Bad Logic Of Fiscal Austerity: So, one more time: here’s an attempt to put together some key arguments about why the rush to fiscal austerity is deeply misguided.... [T]he US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.... Almost surely, the true budget cost of $1 trillion in stimulus would be less than one-tenth of one percent of GDP – not much cost to pay for generating jobs when they’re badly needed and avoiding disastrous cuts in government services. But we can’t afford it, say the advocates of austerity. Why? Because we must impose pain to appease the markets.
There are three problems with this claim. First, it assumes that markets... will be spooked by stimulus spending... even though the long-run budget implications... are trivial. Second, we’re talking about punishing the real economy to satisfy demands that markets are not, in fact, making. It’s truly amazing to see so many people urging immediate infliction of pain when the US government remains able to borrow at remarkably low interest rates, simply because Very Serious People believe, in their wisdom, that the markets might change their mind any day now. Third, all this presumes that if the markets were to lose faith in the US government, they would be reassured by short-term fiscal austerity. The available facts suggest otherwise: markets continue to treat Ireland, which has accepted savage austerity with little resistance, as being somewhat riskier than Spain, which has accepted austerity slowly and reluctantly.
In short: the demand for immediate austerity is based on the assertion that markets will demand such austerity in the future, even though they shouldn’t, and show no sign of making any such demand now; and that if markets do lose faith in us, self-flagellation would restore that faith, even though that hasn’t actually worked anywhere else.
And this, ladies and gentlemen, is what passes for respectable policy analysis.