Conservative Alarmism About Deficits Resembles Lefty Warming Hysteria
“This is a tipping point now. If we don’t address it in this window, in this presidential debate, we’re not going to deal with it.” Those are the words of former South Carolina governor and U.S. Congressman from South Carolina, Mark Sanford. Sanford is talking about federal debt.
But if one didn’t know better, and if one weren’t familiar with the issues of importance to Sanford, it would be easy to speculate that the South Carolinian who plans to take on Donald Trump for the Republican presidential nomination was talking about global warming. The way that Sanford references a “tipping point” that will soon lead to crisis if not dealt with in the here and now sounds eerily like lefties talking about global warming.
Sanford isn’t alone. Conservative economist Dan Mitchell, though usually rather relaxed and jovial, turns alarmist when the subject is budget deficits. As he put it in a recent post, “we’re on a path to fiscal crisis.” Worse, according to Mitchell, is that “there's zero chance that today's crop of politicians will enact” what he deems sensible reform. Mitchell concludes that “We'll probably have to wait until a crisis occurs. At which point it may be too late" for the U.S. to not morph into Greece in a fiscal sense. Substitute in an unwillingness on the part of “today’s crop of politicians” to address climate change and global warming, and it’s easy to see how similar left and right are in approach. Though they have different fears, they talk about what alarms them in remarkably similar fashion.
In each instance, the extraordinarily worried ignore market signals that represent the accumulated knowledge of many, and substitute in what they believe and purport to know individually. There lies the problem. Smart as some scientists are, and smart as some economists and politicians are, they’ll never know more than incredibly deep markets that reflect information compiled feverishly, all day and every day, around the world.
Applied to the warmists, they argue with extraordinary certainty that we’ve reached a point of no return, and that our failure to see what they claim scientists see means it may be too late when crisis of the environmental variety strikes. In particular, they claim that the world’s coastal cities face ruin thanks to rising sea levels that are set to put them under water. Of course the problem with such a view is that 44% of the world’s population lives in coastal cities, and the number is rising. The migration reflects rising economic opportunity in coastal locales; the opportunity an effect of copious investment.
Warmists, and high IQ scientists, might wonder why so many people, why billions of people choose to live in locales that will soon be under water, why investors direct trillions toward those same cities that don't have much time thanks to the world's collective inaction, but they do just that. Though it’s possible that not a single one of the migrants (past and present) has an IQ that measures up to the intelligence of scientists certain about looming Armageddon, 44% of the world’s population surely knows exponentially more about where the world is going than thousands of scientists. So they go to where investment flows, and by extension where the opportunity is. Regardless of one’s view of global warming and its future implications, market signals suggest that the science crowd has aggressively overstated the eventual impact of inaction.
It’s not different with those fearful about deficits. They too deeply believe we’re at the point of no return, that our failure to recognize what they purport to see clearly means that we’re on a path to debt-driven crisis. Global warming alarmism has met its match. Much as warmists find comfort in their certitude given the hysteria expressed by scientists, deficit worriers attain similar sustenance from pessimistic economists and politicians. The pessimists say deficits have us in crisis mode, they often point to books like This Time Is Different to support their negative view of the world, so it’s a certainty that they see what we plainly don’t. The problem is that market signals tell a different story.
Lest readers forget, markets for government debt are some of the deepest in the world. And while it’s possible that individuals like Sanford and Mitchell are individually smarter than every Treasury trader and investor, the collective knowledge of those traders and investors vastly exceeds their knowledge. Both have been predicting catastrophe of the debt variety for quite some time. If only markets agreed with them.
Indeed, while economists and politicians routinely predict looming “crisis” related to debt that can’t be paid off due to allegedly insufficient federal revenues, market signals suggest something else. Specifically, they indicate that federal revenues aren’t just too high right now, but that they’ll be way too high in the future.
How we know this has to do with the fact that markets continue to price optimistically the “tomorrow” that pessimists have been telling us is very bleak. Indeed, while the yield on the 10-year Treasury was 11% in 1980 when the federal deficit was $900 billion, the yield in 2019 despite a $22 trillion deficit (one that leaves out future unfunded liabilities) is just a little over 2%. On the 30-Year? A little over 2.5%.
None of what’s written is meant to excuse federal spending. Not at all. Federal spending is the economy-sapping process whereby politicians mis-allocate precious resources that could otherwise be directed to higher, market-disciplined uses by Jeff Bezos, Phil Knight and Fred Smith. The economic loss that results from government spending is sickening to contemplate.
At the same time, it’s worth pointing out what is true: deficits don’t matter. When conservatives focus on them they’re handing the argument to the left. They’re agreeing that there’s a revenue problem, only they're agreeing to the wrong kind. Yes there is a revenue problem: federal revenues are way too high, and market signals suggest they’re going higher. Deficits run up at low interest rates are a consequence of the latter.
Markets plainly aren’t fearful of revenue shortfalls, and they’re clearly not pricing in a looming “crisis” if we fail to listen to those fearful of deficits. The only way a “crisis” might reveal itself is if, in response to all the fear mongering among deficit alarmists, politicians arrogate to themselves even more of what we produce in order to pay down what investors clearly view as easy to pay down. Translated, debt is a consequence of immense economic productivity. Not a driver of it. Crisis would be an embrace of socialism to pay down the debt, not the run-up of debt itself.
In short, the only way “crisis” of the environmental or debt variety could intrude on us is if we do what scientists, economists and politicians are telling us to do now, which is act now. Smarter we’ll be if we avoid acting on the views of very smart people possessing very limited knowledge in favor of immense market knowledge. Crucial here is that markets are telling us there’s nothing to worry about. Whom do you the reader trust?