The socialists editors at the Financial Times are calling on the US to execute a large fiscal stimulus program.
Pessimists have been forecasting runaway inflation since the start of the financial crisis in 2008. Clearly the markets do not agree. US Treasury yields continue to plummet – last week the 10-year bond hit a record low of 1.45 per cent. It is obviously impossible for the Fed to cut its discount rate to below zero. But if things deteriorate further, it could double its inflation target to 4 per cent.
Second, fiscal policy is turning into a drag on what little growth the US is generating. This is unnecessary and destructive. At these low yields, the US government is essentially being offered free money to invest in America’s future productive capacity. Indeed, as Brad DeLong and Lawrence Summers have recently argued, whatever is invested at these rates is likely to pay for itself in higher growth and revenues. The size and nature of the market for US sovereign debt means that bond buyers are no flight risk, unlike in many smaller economies. The US can and should, therefore, choose a more expansive fiscal policy. Budgets should ideally balance over the cycle. But they should also be counter-cyclical. One possible remedy would be to link the duration of another stimulus to the return to trend growth. That in turn would trigger a medium-term plan to reduce the US deficit along the lines set out by the Simpson-Bowles plan. In theory this should not be difficult.
That drag is being exacerbated by contractionary fiscal policies put in place by governors like Scott Walker who insist on balancing the budget in a time of fiscal crisis rather than borrowing at low rates to support the economy of the state.
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