Economic consequences of the putsch

January 12, 2021

By Paul Krugman

Opinion Columnist

“The center did not hold. However, the Gross National Product continued to rise.” Last week I found myself remembering that line, from Walker Percy’s 1971 dystopian novel “Love in the Ruins” — a book I read in college, but which has evidently stuck with me all these years.

Of course, we don’t know whether G.D.P. — for annoyingly technical reasons we usually talk about gross domestic product these days — will in fact continue to rise. But as America went through a week from hell, with the prospect of fresh hells yet to come, financial markets signaled … growing optimism.

I’m not mostly talking about the stock market, which even aside from its mood swings is a poor guide to the economic outlook. I’m talking, instead, about the bond market. Long term interest rates are, it turns out, a pretty good indicator of economic optimism among sophisticated investors, because they in effect reflect a judgment about how quickly the economy will recover to the point at which the Federal Reserve will start to worry about overheating and tighten monetary policy.

That prospect is still a long way off; long rates are still extremely low by historical standards. But there was a notable bump in those rates over the course of Putsch Week:

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A week of good news?Federal Reserve of St. Louis

Does economic optimism in the face of political nightmare make any sense? Actually, yes.

Clearly, the assault on the Capitol wasn’t the end of our ordeal. The F.B.I. has warned state governments across the nation about potential armed attacks in the days leading up to Joe Biden’s inauguration. Inauguration Day itself will be extremely tense. And while it’s possible that the fever will break — to a remarkable extent, the insurrectionists still seem to believe that they can keep Donald Trump in the White House, and will be shocked when it turns out that they can’t — it’s more likely that sporadic violence will continue for a long time.

So why should anyone be optimistic?

Part of the answer is that the putsch wasn’t the only thing that happened last week: Democrats achieved a remarkable political upset in Georgia, winning two Senate seats and with them control of the Senate as a whole. That makes a huge difference for economic policy, making it almost certain that we’ll have an additional large relief package, and fairly likely that we’ll get some much needed investment in infrastructure.

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The Georgia runoffs explain why long rates rose on Wednesday. But why did they keep rising even after the attack on the Capitol? That’s a bit less clear.

One possible answer is that Biden himself has been sending signals that he intends to use that Senate victory to engage in higher spending without worrying about deficits — that he won’t fall into the Obama administration’s austerity trap. Progressives cheered, and so did markets.

Another possible answer is that the backlash against Republicans over Wednesday’s violence may at least slightly inhibit their efforts to undermine Biden’s policies. At the very least, I expect the news media to show more skepticism about their pious warnings about the evils of government debt now that we’ve seen their bad faith about democracy.

One final point: The truth is that the direct economic effects of political violence tend to be small unless it reaches the point of all-out civil war. Percy wrote his memorable line during a time of soaring crime, destructive riots, sometimes deadly confrontations over the Vietnam War — and a booming economy. It could happen again.

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Quick Hits

Right-wing violence against government officials is actually common in rural America — and often goes unpunished.

Japan in the 1930s offers an unsettling template for right-wing violence in America.

It also experienced a rapid economic recovery from the Depression, thanks to expansionary monetary and fiscal policies.

Remember the pandemic? It’s getting worse. Why doesn’t anyone seem to care?

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