Sunday, May 9, 2010

Liberalism and the Bond Market

Those who remember Bill Clinton’s presidency for its ideological timidity tend to forget that he came to Washington with big ideas about promoting socio-economic equality through the combination of a middle class tax cut and financing substantial public investments in human capital by increasing tax rates in the upper brackets. He’d soon have to shelve the most egalitarian features of his agenda to keep interests rates, and thus the cost of servicing the public debt, from going through the roof. That moved James Carville to remark: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

At the time, liberals liked to think that Clinton’s troubles were more proof that life is unfair. Republican administrations had been piling up public debt relentlessly for twelve years.  Now that the bond market was good and spooked, liberals complained, it was Clinton who had to suck up to a bunch of cutthroat bond traders.

There was surely something to that, but it was probably also true that Clinton’s egalitarian agenda was driving up interests rates. Even though they both promoted public insolvency, the bond market charged a higher premium for liberal public spending than it charged for Republican tax cuts. That’s something a Democratic president just has to live with. Clinton succeeded admirably in that respect, partly because, under the pressure of events, he thought up more efficient ways to promote equality, and partly because he had the good fortune to take office just after one recession ended and leave office just before the collapse of the tech bubble precipitated, and 9/11 exacerbated, the next one.

Fifteen years later, in the wake of the collapse of the world financial system, the auto company bailouts, ObamaCare and the EU bailout of Greece, it’s all happening again. Here’s John Steele Gordon, surveying the situation from the right (my emphasis):

“In short, the market has suddenly become aware that the emperor known as the welfare state is, financially speaking, buck naked. The cost of insuring against bank default in Europe, according to Bloomberg, is now more than it was when Lehman Brothers collapsed. Other rates are nowhere near those levels, but it would not take much to set off a global panic. Markets have been down all week, and the Dow was down today by 1.34 percent, down 7 percent since Monday.

“Great Britain and the United States, insulated from the crisis in Europe because they do not use the euro, have big financial promises they can’t pay for, either. President Obama, of course, wants to make more promises.

"If Greece stands up to its unions and its outraged bureaucrats and reforms its ways, I suspect the current crisis will pass. But unless the rest of the democratic world reforms its ways — and soon — then, as Bette Davis famously said in All About Eve: “Fasten your seat belts. It’s going to be a bumpy night.”
The fact that the conditions Gordon describes are unfair, doesn’t make them any less real. Once again, the bond market holds the future of liberalism in its hands. Too bad that, compared to the Clinton administration, center/left governments now have so many fewer resources at their disposal to reassure it.

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