Must-Read: Duncan Weldon: Negative Yields, the Euthanasia of the Rentier & Political Economy

Must-Read: Very good thoughts in a Kaleckian mode…

It is very odd. Back in 1988-1994, when I was a deficit hawk, there was reason to be: interest rates were relatively high, bad news about future deficits appeared to no longer strengthen but to slightly weaken the dollar–suggesting that the hot-money Unconfidence Fairy and the Bond Vigilantes were near if not at hand–and there was a large disconnect between the revenues and the spending that the laws in place would generate.

And now?

Not.

Interest rates are lower than anyone thought they would see in many lifetimes. The dollar’s value is not in any sense threatened by deficit news. And the thirty year fiscal gap is 1.7% of GDP–a number that normal politics can deal with–and in a world of safe asset shortage many not be too high but rather, too low (and improperly backloaded).

but none of the non-Keynesian economist professional deficit hawks have shifted sides since 1992, and a new generation has grown up and started getting their deficit-panic welfare…

Duncan Weldon: Negative Yields, the Euthanasia of the Rentier & Political Economy:

I don’t understand the political economy that has brought us tight fiscal & easy money–it simply isn’t creating enough winners to be sustainable…

Rising asset values certainly have created a block of beneficiaries…. But… with gilt yields at around 0.5%… years of saving isn’t worth as much as they hoped… [and] owning a more valuable house will [not] be seen as adequate…. This cohort will get bigger each year….

Whilst the macroeconomic argument for more active fiscal policy has always been strong, the political economy conditions that may drive it are becoming clearer. Aggressive deficit-financed state spending may (unusually) create two sets of winners–the workforce who benefit from faster growth, tighter labour markets and stronger real income growth and the mass of (relatively) small scale rentiers who would benefit from higher rates…. [But the] voting public don’t seem particularly keen on deficits. I’ve wondered myself recently–whatever happened to deficit bias? It may be that, as Eric Longeran has argued, this is the best argument for helicopter money. If fiscal policy makers won’t do what is required, then perhaps monetary policymakers can.

And Paul Krugman:

Paul Krugman: The Gridlock Economy:

it’s a very good question, but not, I think, all that puzzling…. Weldon is presuming that older voters understand something about macroeconomic policies and what they do…. My impression–from watching CNBC now and then, looking at pop-up ads on web sites, overhearing conversations in barber shops, and other scientific methods–is that older people who do pay attention to economic debates are far more likely to say “Hyperinflation is coming! Ron Paul says so!” than they are to say, “I wish the government would increase the supply of safe assets.”

There’s also the role of Very Serious People, for whom deficit posturing is a signifier of identity…. The US and the eurozone… have fiscal policy paralyzed by political gridlock, leaving the central banks as the only game in town… House Republicans who block spending on anything except weapons… nothing fiscal can happen without action by Germany, which is both self-satisfied with its situation and living in its own intellectual universe…. The UK has some room for maneuver, yet under Cameron/Osborne it went all in for austerity, at least in rhetoric…. The problem now is that while advocates of more fiscal push seem to be winning the intellectual battle, the institutional arrangements that produce macro gridlock are likely to persist. It would take a yuuuge Democratic wave to break the gridlock here, and I have no idea what will unlock Europe.