March 3, 2004

#147: So what happened to Rubinomics?

P. Krugman

It must be winter again. Once a year about this time Paul Krugman loads his bazooka and fires one at Fed Chairman Alan Greenspan. There was The Quite Man (01/08/02) and the Maestro is a Hack (02/07/03) and now, right on cue, we have Maestro of Chutzpah (03/02/04). These columns are so close in content you could lay a dime over them and not see the difference. We have often marveled that Krugman's lazy recycling habits seem lost on the NY Times editors. Even Hip-Hop recording studios demand new material occasionally.

However, we keep trying to think of original ways to respond to Krugman's shopworn tirades. But it's tough. His principal beef with Greenspan is that he supported the Bush tax cuts. Krugman has written at least 50 columns centered on "tax cuts for the rich" as the root of all fiscal evil. In fact, he attributes most of the "unraveling" in his book The Great Unraveling to these tax cuts. The result, he says in various colorful ways, will be exploding deficits and fiscal ruin and eventual banana republic-hood. The only hope is a Democrat in the White House.

But wait a minute. What about Rubinomics (named for Clinton Treasury Secretary Robert Rubin)? We haven't heard that term in a while, have we? That's probably because the bell-weather indicator of Rubinomics, the long-term Treasury bond, currently is not following the Krugman playbook. Let's review:

According to Rubinomics, bond investors are among the most financially savvy folks on earth. They don't tie up money in a fixed-income instrument for ten years or more without demanding a yield that will cover the foreseeable contingencies resulting from fiscal irresponsibility. Prospective deficits are problems only if excessive government borrowing in the future might drive up future interest rates. But the savvy old bond market doesn't have to wait around until the future to reflect a looming problem. The ten-year Treasury note is trading right now on the Chicago Board of Trade. If the bond market sees a fiscal crisis coming down the road it bids up long-term rates NOW.

Another tenet of Rubinomics is that the bond market is omniscient. It's all-seeing and all-knowing. You can't fool it; you can't argue with it; and you can't shut it down. There were reports that Bill Clinton would pound his desk in frustration when Rubin told him he couldn't promote some spending program or other because it would raise yields in the bond market.

So, if all of the neofiscs from Krugman to Andrew Sullivan are right, then the yield on the ten-year Treasury note must be exploding, right? Well, perhaps it should be, but as shown in the chart, it's not. The yield is near a 40 year low and shows no signs of concern. Either they are wrong, or Rubinomics is wrong. We think they are wrong. As we have pointed out before, the projected deficit over the next ten years, under reasonable assumptions, is around 2.5 percent of projected GDP. That's good enough to qualify the US for the Euro zone (joke) and explains why the bond market isn't worried by the Krugman hyperbolics.

10 Year Bond Maturity Chart

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at March 3, 2004 11:04 AM
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