Missing the deficit opportunity

"Spend now, while the economy remains depressed; save later, once it has recovered," writes Paul Krugman. "How hard is that to understand?"

I think we can be even more specific than that. The rate on 10-year treasuries is about 3.42 percent right now, which is extremely low. That means two things: First, it's uncommonly cheap for the government to borrow money right now. Second, the market is not that concerned about our deficit right now. We're in this enviable situation because America is considered stable and other economies and investments are considered less stable

The rate on our treasuries will rise at some point. It might even change "on a dime," as people like to say. It'll be that change that forces us to do long-term deficit reduction. In the absence of that external pressure, we're not going to do any serious deficit reduction (at least, not outside what we passed in health-care reform). Let's be honest about that with ourselves.

So what we're left with is a space between now and when interest rates begin to rise. That space is defined by a weak economy with low growth, high unemployment and cheap rates for the government to borrow money. We should use this period before the markets turn on us to borrow money at low rates in order to get our economy back on its feet and make what long-term investments we feel like we want to make (retrofitting schools, for example). When the global economy begins to recover and interest rates rise to, say, a still-low 5 percent, we can pull back on the stimulus and begin deficit reduction.

This is the benefit of being the superpower: America's economic status drives our borrowing costs down when the rest of the world faces an unstable economy. The pity is that we're likely to squander it, and for nothing. If we do too little now to deal with unemployment and anemic growth, we'll have to do more later when borrowing is expensive and when we need to be doing deficit reduction. I'd imagine that lots of businesses would love the chance to borrow at a rate much lower than their competitors at a moment when they really needed to spend, but we seem to prefer to argue about how aggressive we should be in not taking the opportunity.

