Premature Virtue

NEW YORK – The Obama administration’s insistence on fiscal rectitude is dictated not by financial necessity, but by political considerations. The United States is not one of Europe’s heavily indebted countries, which must pay hefty premiums over the price at which Germany can borrow. Interest rates on US government bonds have been falling and are near record lows, which means that financial markets anticipate deflation, not inflation.

Nevertheless, Obama is under political pressure. The US public is deeply troubled by the accumulation of public debt, and the Republican opposition has been extremely successful in blaming the Crash of 2008 – and the subsequent recession and high unemployment – on government ineptitude, as well as in claiming that the stimulus package was largely wasted.

There is an element of truth in this, but it is one-sided. The Crash of 2008 was primarily a market failure, for which US (and other) regulators should be faulted for failing to regulate.

But, without a bailout, the financial system would have remained paralyzed, making the subsequent recession much deeper and longer. True, the US stimulus package was largely wasted, but that was because most of it went to sustaining consumption rather than to correcting the underlying imbalances.