A week ago, I wrote of “the developing attitude of the Republican establishment towards government debt, which is essentially that of banana republic populism”. Now I’m seeing the analogy everywhere. On reasoning identical to that I put forward a few days ago, Paul Krugman says

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that “a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.

It would be nice to imagine that Krugman reads my blog, but I will content myself with the more modest claim that I’m attuned to the Zeitgeist.

Update Google reveals that on Feb 8, Krugman used the phrase “sheer banana-republic irresponsibility” to describe Bush’s fiscal policy. So I probably picked it up from him, then forgot about it. The Zeitgeist works in mysterious ways.

Further update Max Sawicky responds with two arguments against Krugman. One is based on the efficient markets hypothesis which, as I observe in the preceding post has been conclusively refuted by the experience of the NASDAQ boom. Max says

Krugman says the bond market hasn’t figured out what’s going on yet. Excuse me? P Krugman is a keener judge of interest rate movements than the bond market? I don’t think so.

I disagree. If I can be a better judge of the value of dotcom shares than the whole of Wall Street (and I clearly was, as noted below) what’s implausible about Krugman (who’s a good deal smarter than I am) being a keener judge than the bond market.

Max’s second point is a restatement of the old left line in favour of deficits. He says

Deficit delirium in the end is a conservative political stance. It precludes the necessary growth of the welfare state. What became a tactical gambit under the Clinton Administration — the use of deficit scares to fend off tax cuts — has become a civic religion. It’s bad religion.

Again I disagree. I accept the Keynesian case for temporary deficits in periods of recession, but a sustained budget deficit must be financed either by inflation (a tax on money holdings, and not a particularly good one) or debt (deferring tax from the present to the future). I don’t have a religious objection to either option, and sometimes they are necessary but, they are rarely the best option. In my opinion, the most economically and politically sustainable way to finance public expenditure is through broad-based taxes on income, wealth and consumption, including hypothecated levies that bring home the link between tax and expenditure.