Earthquakes and spending and deficits

Brad titles his post: “I Genuinely Do Not Understand Why There Is A Question Here…” and after quoting my post from yesterday writes:

If people thought that government debt was risky, its price would be falling as well. The fact that people are willing to pay more for government debt indicates that it is increasingly valuable–and so we should make more of it.

Ryan Avent comments as well.  A few points:

1. My post and question is about spending, but Brad has shifted the discussion to borrowing.  It’s easy enough to borrow more without increasing spending, if that is needed.  It’s still an open question whether spending should go up.

2. The countervailing forces which might favor lower government spending simply aren’t mentioned.  Those include lower wealth and higher tail risk.  If those can’t, at least possibly, imply lower government spending, what could?  The Japanese will need to spend on recovery, but must the U.S., normatively speaking, now feel compelled to spend more on its domestic programs?  A priori?  No way.

3. The earthquake and related events are a negative supply shock, so on Keynesian grounds they need not increase the case for activist fiscal policy.

4. Don’t forget that Mike Jensen answered Kenneth Arrow on risk in 1972.  Even if government spreads its pecuniary losses over many taxpayers, the relevant real risk is the covariance of the value of government output with private consumption.  Given that, an increase in risk still implies at least one force operating in favor of less government spending.

5.  It is an oddly non-Keynesian or perhaps even anti-Keynesian point.  In 1936 Keynes argued that the rate of interest did not allocate investment properly, or correctly signal the proper amount of investment, because interest rates also channeled liquidity preferences.  Today this is a claim which DeLong and Krugman are arguing against.

In other words, it’s an open question, as my original post implied.

Megan McArdle had some to-the-point words:

It’s hard to argue that we should become more willing to borrow because Japan had an earthquake that will cut into global GDP.


And the bad signals aren’t just to the federal debt market–the flight to quality is ultimately going to push things like mortgage rates down too.  Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow?

Update (12:25 pm) Reader abUWS has perhaps the best, most succinct metaphor I’ve ever seen for this argument:

“When the Titanic was sinking everyone eventually rushed to the stern of the ship. That didn’t mean that that part of the ship was actually safe.”

Addendum: Arnold Kling offers relevant comments.


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