It's the season of deficit reduction proposals and the fragrance of austerity is in the air. No, austerity isn't the latest new fragrance by Calvin Klein. If it were, it would probably smell like a cross between a dusty coupon drawer and the witch hazel aftershave your frugal uncle used to wear -- the one who always gave you a $5 gift certificate for your birthday. Just like that cologne, fiscal austerity sounds a lot better than it would smell, or taste. Unfortunately, the U.S. must endure deficit reduction -- it's just a question of when.

As my colleague Derek Thompson noted earlier a new proposal (.pdf) is out today by a partnership called Our Fiscal Security, which consists of progressive think tanks Demos, the Economic Policy Institute, and The Century Foundation. As you might expect, it relies more on raising taxes than cutting spending. That, of course, contrasts with more conservative plans that wish to do the opposite. For more explanation on the new proposal, see Derek's post.

But how you reduce the deficit is just a matter of accounting and opinion. The question with a more clearly objective answer isn't how to reduce the deficit, but when. And the Our Fiscal Security proposal has a very prudent approach when it comes to timing -- something that many proposals by deficit alarmists lack. It would not seek to reduce the deficit much immediately, but instead would prefer to wait several years, until as late as 2015 -- when unemployment back to 6% or lower.

Why wait? There are two reasons. The first is the one that today's proposal mostly points to: the current U.S. economy is too fragile to endure significant austerity measures. Republicans are right to worry that raising taxes could stifle the recovery, but Democrats are also right to worry that deep spending cuts could do the same thing. Neither deficit reduction tactic is safe at a time when a nation is struggling with very high unemployment and widespread consumer nervousness. Progress in bringing down the deficit must wait until the economy can safely shrug off the consequences.

The second reason to delay austerity is that we can. For the past several years, as the deficit has grown astronomically, Treasury bond rates have actually been fairly steady or declined. Check out the following chart, which shows the yield curves after Thanksgiving for the past five years:

treasury yield curves 2006-2010.png

The red one for 2010 is the lowest shown (or right around the lowest) for most maturities. But the point here is obviously not that more government borrowing makes debt cheaper: it's that despite the borrowing, the cost of U.S. debt hasn't increased -- yet. Almost no one fears a U.S. default.

If nothing ever changes, investors' eye-squinting to make sense of the massive government borrowing will eventually turn into a frown. The current path of out-of-control government spending and insufficient tax revenue is unsustainable; no one with any sense doubts that. But satisfying those investors doesn't necessarily mean immediate austerity. Indeed, that could scare them even more, if they worry that it jeopardizes the U.S. recovery.

Instead, a strong deficit reduction plan must be developed and approved -- but not implemented until the economy can handle it. That will be enough to pacify investors for several more years, as the U.S. economy is allowed time to fully recover. Of course, if politicians do anything to disturb the inevitable path of austerity that a proposal passing Congress sets the U.S. on during the years before or after it takes effect, then investors will be right to complain and shun U.S. debt as a bad bet. But in the near-term, they would likely be content enough to know the U.S. is getting on the right track.

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