Committee for a Responsible Federal Budget

Alan Blinder Joins the Announcement Effect Club, Calls for Social Security Reform

May 21, 2010 | Economics

Princeton's Alan Blinder says the bond market vigilantes are back; in Europe for now, but they'll be coming here soon. The bond vigilantes, for those unfamiliar, are bond market investors who worry about the safety of sovereign debt and begin demanding higher interest rates to compensate for the added risk. As Blinder explains:

The bond market vigilantes have landed in force in Europe. Their beachhead, of course, is Greece, which all but invited them in with—how shall we put it?—a certain lack of fiscal probity. The ensuing roller-coaster ride of ups and downs that have roiled stock, bond and currency markets around the world is apparently not over.

Blinder thinks we have a lot to be worried about. As he explains:

Once the vigilantes get riled up about, say, budget deficits, they can turn into an electronic mob that circles the globe faster than Hermes. Unfortunately, the basic economic message about deficit spending today requires some subtlety: Most countries need fiscal stimulus today but a large dose of deficit reduction in the long run. To fight the 2008-2009 recession, many countries deliberately increased their spending and/or reduced taxes, thereby swelling their budget deficits. That was the right thing to do under the circumstances.

So what is a country to do? How countries stimulate their economies when the subsequent deficits will likely spook the bond vigilantes and could damage the economy?

We've proposed on answer to this conundrum a number of times (see here, here, and here). Our solution is the same as Blinder's: "promulgate major short-run fiscal stimulus programs without spooking investors about the long-run fiscal outlook." Eventually, Blinder explains, that requires "convincing traders that you've got religion on fiscal responsibility"

Blinder has joined the rest of the Announcement Effect Club in supporting the announcement of a future consolidation plan in order to strengthen the markets. As he so eloquently writes:

St. Augustine urged the Lord to make him chaste, but not yet. Now budget and finance ministers around the world, including our own Peter Orszag and Tim Geithner, must make an analogous plea to the bond market vigilantes—and back up their words with deeds.

But Blinder goes further by suggesting a path -- Social Security reform. "Once considered the third rail of American politics," he suggests, this "is now the low-hanging fruit of deficit reduction." It's technically easy to do, everyone knows the options, and by their very nature most reforms phase-in gradually so as to do very little deficit reduction while the short-term economy is still unstable.

We couldn't agree more, and we hope policymakers act quickly to put this program into balance and begin addressing the issues surrounding our aging population.

The Senate Committee on aging just released a long report detailing many of the available options. The Social Security actuaries have many more, along with year-by-year effects. And we'll be releasing our own list in not too long. Options range from slowing the growth of initial benefits to adjusting the retirement age, to raising the payroll tax rate.

Let's put a plan together and get it done!