WASHINGTON — Back in the 1990s, we knew why we feared deficits. They raised interest rates and "crowded out" private borrowing. This wasn't an abstract concern. In 1991, the interest rate on 10-year treasuries was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth.
Enter Clintonomics. The theory was simple: Bring down deficits and you'd bring down interest rates. Bring down interest rates and you'd make it easier for the private sector to invest and grow. Make it easier for the private sector to invest and grow and the economy would boom.
The theory was correct. By the end of Clinton's term, the interest rate on 10-year treasuries had fallen to 5.26 percent, lower than it had been in 30 years. And the economy was, indeed, booming. "The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further," Treasury Secretary Robert Rubin said in 1998.
We fear deficits today, too. But we're not sure exactly why. In 2012, the interest rate on a 10-year treasury was a rock-bottom 1.8 percent. Whatever is holding the private sector back, it's not the cost of borrowing.
In the absence of high interest rates now, some deficit hawks have moved on to warning that we'll be crushed by high interest rates soon. In March 2011, Erskine Bowles predicted that we'd see a fiscal crisis in which foreign creditors would stop buying our debt in "two years, you know, maybe a little less, maybe a little more." Alan Simpson said it would be less than two years.
The two years is almost up, and the fiscal crisis is nowhere to be seen. Similarly, Japan has sustained low interest rates for more than a decade despite a more crushing debt load than ours. "Bellowing about a disaster that never comes," warned John Makin, a resident scholar at the American Enterprise Institute, "saps the momentum from sound fiscal policy."