What to Say About the Low Yields?

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?