Another splendid column today by Paul Krugman about the Bush tax cut in the NYT. By all means read it. By two grafs are so important that I'm going to reproduce them here:
On the other hand, there are some people who think very hard about the future budget picture, like bond traders â which brings us to Alan Greenspan. On Tuesday Mr. Greenspan was trying to explain to a Senate hearing why repeated interest- rate cuts have not yet turned the economy around. An important part of the explanation, as he noted, is that while the Fed has reduced short-term rates, long-term rates have stayed stubbornly high. Why?This could scarcely be more important. And we'll be saying more about why. But suffice it to say it not only relates to our current predicament but also touches directly upon Bill Clinton's 1993 deficit reduction/tax increase bill, and why folks on the right and the left have been wrong to ignore the role it played in spurring and sustaining the boom economy of the 1990s.
An obvious answer is that bond traders, who not long ago expected the government to rapidly pay down its debt, now see the projected surplus dwindling rapidly because of the tax cut. So it's just supply and demand: estimates of the future supply of bonds are rising, so bond prices are falling â and that means higher long-term interest rates (including mortgage rates). When asked by Senator Charles Schumer whether this was a factor in the economy's sluggish response to Fed policy, Mr. Greenspan replied, "Oh yes, no question."