A few thoughts on debt

Pointing to low yields on treasuries is a pretty common tactic for those who claim our government's mounting pile of debt isn't a problem. A few months ago, Brad DeLong went so far as to argue that since investors were willing to pay high prices and accept low yields on government debt, the government should interpret that as a signal to make more debt. (I know, it sounds crazy, but I swear he said it; I just don't feel like digging up a link right now.)

But when yields go up, isn't it already too late? Most of our spending is already written into law; our government spending has a tremendous amount of inertia. Should rates suddenly spike, it is not as if we can react by simply balancing the budget; even making meaningful cuts is beyond the ability of our current leaders. Instead we will be stuck paying higher interest and borrowing more, driving interest up yet higher. Social Security and Medicare won't evaporate if bond yields skyrocket; the military-industrial complex won't suddenly remove itself from the government teat when we're paying interest through the nose.

Interestingly Keynes understood this, and advocated balanced budgets and even surpluses in order to give governments room to maneuver in response to emergencies. Whether or not his recommendations would have worked, politically they've been a disaster. We spend more in bad times and good, piling the debt higher and higher. I think the falsehood often repeated about communism- that it's great "in theory," but terrible in reality (it's actually terrible in theory too) is better applied to Keynesianism. In theory, it'd be great if the government ran surpluses in good times and acted countercyclically in bad times; in reality the incentives in government are such that it always spends and old programs never die. Bad times just accelerate the rate of growth in government; how many New Deal programs are still with us?