What to Say About the Low Yields?

Michael Stephens | July 18, 2012

Correlation is not causation, of course, but I’m beginning to suspect that there might be some operational relationship between the frequency with which you hear people complaining about the crippling burden of government debt, and a fall in the cost of government borrowing.

Last week the Financial Times reported that investors had accepted “the lowest yields ever for 10-year paper in a US Treasury auction.”  Right on schedule, the Washington Post announced yesterday that a shiny new campaign, organized by former politicians and business leaders, has been put together to tackle the clear and present dangers of government debt, advocating “a far-reaching plan to raise taxes, cut popular retirement programs and tame the national debt.”

To be fair, it seems there is always a new campaign being announced for taming the national debt (this particular initiative features some plucky newcomers named Erskine Bowles and Alan Simpson).  But there are problems with the projections underlying these arguments about the long-term unsustainability of federal debt.  And in the short run, it’s becoming increasingly difficult to understand what problem is supposed to be solved by decreasing government borrowing.

Thankfully, the conventional wisdom is beginning to solidify around the belief that we need to avoid the “fiscal cliff,” but this justified fear of the huge fiscal contraction scheduled for 2013 has so far not translated into equal concern for the smaller-scale budget austerity we’re already imposing (or for what would seem like a logical extension of that fear of fiscal contraction:  namely, a push for expansionary fiscal policy).

With negative real interest rates being “paid” on 10-year government debt, one runs out of ways of explaining how foolish it is that, for example, spending by state and local governments on public infrastructure is at its lowest levels in seven years.  We’ve covered the sarcastic approach in the first sentence, so let’s set the question up in as dull and uncontroversial a manner as possible:

  • Borrowing costs are the lowest they have ever been.  They are so low that when you take account of inflation, the government can borrow a sum of money now and pay back (in inflation-adjusted terms) a smaller amount in ten years.  If we can think of something we need to spend money on later, it would be a good idea to do it now instead.
  • The United States will need to spend somewhere between $1-2 trillion just to keep its current infrastructure safe and up-to-date.  Unless there is some compelling argument for why we should abandon modern engineering, paved roads, safe drinking water, or what have you, then, to repeat, this is money that needs to be spent at some point in time.  This is not a question of “the role of government,” and let’s even put aside the positive macroeconomic effects of increasing public spending right now (on infrastructure, or whatever).  There is unquestionably more that we should (and could) be doing than repairing our roads and bridges, but let’s put all that aside and focus on the areas where ideological Venn diagrams hopefully overlap.  For now, let’s just focus on the engineering reality.  This money will need to be spent.  The only question is when:  over the next few years, or later?
  • What reason is there to spend this money later?



2 Responses to “What to Say About the Low Yields?”

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  1. Comment by Woj (@BubblesandBusts)July 19, 2012 at 12:41 am   Reply

    The US government does not need to borrow money in order to spend. Treasuries work as a means for the Fed to control interest rates and to transfer income to the private sector. Interest rates should therefore have no bearing on the govt decision to spend. There are plenty of reasons for the govt to increase spending in certain areas but low borrowing costs are not one.

    • Comment by Michael StephensJuly 19, 2012 at 10:04 am   Reply

      And there are many more things the government should be doing, as I mention, than merely maintaining existing infrastructure. The point of the post, however, is to try and make the argument on the basis of as many uncontested premises as possible (hence: “let’s even put aside the positive macroeconomic effects of increasing public spending right now”). It is intended to mark out the path of least resistance to explaining why the current fiscal policy stance is madness. One way to go about showing how ridiculous it is to let physical infrastructure languish is to try and convince a skeptical interlocutor of the functional finance/Modern Money view. The other is to say something like “even based on all of your own premises, you ought to be making these investments.” This post is an instance of the latter.

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