This conventional wisdom isn t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite s imagination specifically, on belief in what I ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.

From Myths of Austerity

If Krugman is right about the invisible bond vigilantes, then rates should be going down. And they are. If he is right about the confidence fairy, then there should be no (or week) correlation between economies in Austerity and growth. Right again.

I can’t help but think that the advocates of austerity would be in favor of all the same policies under a different name if the austerity argument wasn’t available. Notice how they focused on social spending and not corporate subsidies. Are any of the austerity advocates calling for an end to oil or farm subsidies? An end to the Bush tax cuts? Any tax increases at all?