I’ve been talking a fair amount about the negative real interest rates on five-year and seven-year treasury bonds. I see that as of Friday, then ten-year bond has declined to a real yield of zero.
I don’t expect these facts to persuade people who view almost all government spending as consisting of low-return boondoggles to suddenly start loving it. But the fact remains that when it’s cheaper to pay for things by borrowing money than by taxing productive activity, it’s pretty foolish not to step up your borrowing. The issue we ought to be debating is whether we should increase borrowing by cutting taxes or increase borrowing by hiking spending. With the House controlled by Republicans and the White House controlled by Democrats, we’d end up compromising on a mix of the two. Instead we’re talking deficit reduction. Why?