Why Deficits Have Not Increased Interest Rates: Brad DeLong Makes Me Go Huh?

Brad DeLong makes an interesting observation:

it is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion--an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp

If Brad wanted to mock the standard new classical belief that we are always near full employment so any significant fiscal stimulus would drive up interest rates, this observation would be a nice rebuttal along the lines of the old fashion Keynesian notions that we are both below full employment and are in a liquidity trap. But what he writes seems to combine two very different propositions as if they were the same thing:

The standard Chicago "Ricardian equivalence" argument is that government deficits have no effect on nominal aggregate demand because private savings rise dollar-for-dollar with the government's deficit. The magnitude of the tax cuts associated with the stimulus package are running at about $25 billion per quarter--an extremely small share of the rise in Treasury borrowings. Otherwise, Chicago says, supply-and-demand are supposed to rule--and a sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending.

If all of the fiscal stimulus had been in the form of tax cuts (what the Republicans advocated), Ricardian equivalence would hold that none of it would have been consumed, which would mean no outward shift of the IS curve. Of course, interest rates did not increase as the national savings schedule was unaffected. That what the first sentence in this passage says - but then the last sentence does something else. It talks about what would happen if fiscal policy did lower the national savings schedule and hence shift out the IS curve under new classical thinking.

To be fair, much of the Obama fiscal stimulus was in the form of higher government purchases (note some of us wanted all of it in the form of higher purchases) which would shift outward the IS curve. That this occurred with no increase in interest rates strikes me as evidence that we are both below full employment and are in a liquidity trap. I suspect this is what Brad is trying to say here.