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Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low
Interest Rates

Preface and
Acknowledgements
Published on: Dec 20, 2021
License: Creative Commons Attribution 4.0 International License (CC-BY 4.0)
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Preface and Acknowledgements

“When the facts change, I change my mind. What do you do, sir?” (a statement
typically attributed to Keynes, but without hard proof that he actually said it...). This
book was indeed triggered by facts changing, namely by the steady decrease in real
interest rates which started in the mid 1980s. Over time, I came to the conclusion that
this was a fundamental change, one that was likely to last, and one which forced us to
rethink the role of fiscal and monetary policy.

The purpose of this book is to focus on the implications of low rates for fiscal policy, to
review the theory and the evidence, and draw practical implications for policy in
advanced economies today.1

My target readers are primarily policy makers and their staff, who have to navigate
complex waters over the coming years. They are the ones I want and need to convince.
The main challenge in discussing fiscal policy is the widely held and nearly religious
belief that public debt is very bad. You can see this book as an attempt to take a richer
and more balanced position. Not to love debt, but to understand when and how to use
it.

The book is more of an essay than a treatise. There are still many questions to which I
do not have a full answer, and some to which I am not even sure I have the right
answer. The discussion of the issues covers a wide range of complex and often
unsettled macroeconomic issues, from dynamic inefficiency, to the source of the equity
premium, to the nature of sudden stops, to the size of multipliers. I have tried to
identify the zones of uncertainty or disagreement. I have tried to explain things simply
in the text, being more precise in boxes: some will find the treatment too difficult, and
others, too superficial. So be it.

Thanks are due to an unusually large number of people.

First, my co-authors on fiscal policy issues throughout the years, Roberto Perotti,
Francesco Giavazzi, Alvaro Leandro, Daniel Leigh, Giovanni Dell’Ariccia, Jean Pisani-
Ferry, Arvind Subramanian, Takeshi Tashiro, Jason Furman, Angel Ubide, Jeromin
Zettelmeyer. Special thanks are due to Larry Summers; our discussions over nearly
five decades have always been illuminating.

Second, to the many people who have offered suggestions and made comments on the
first draft of the book, Silvia Ardagna, Agnes Benassy-Quere, John Cochrane, Peter
Diamond, Olivier Garnier, Joe Gagnon, Vitor Gaspar, Jose de Gregorio, Patrick

2
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Preface and Acknowledgements

Honohan, Martin Hellwig, Gerhard Illing, Larry Kotlikoff, Bas Jacobs, Philippe Martin,
Atif Mian, Maury Obstfeld, Jean Pisani-Ferry, Adam Posen, Jim Poterba, Xavier Ragot,
Ricardo Reis, Klaus Regling, Chang Yong Rhee, Antonio Spilimbergo, Coen Teulings,
Angel Ubide, Etienne Wassmer, Christian von Weizsacker, Jakob von Weizsacker, Ivan
Werning, Charles Wyplosz. Special thanks to David Wilcox, who read the manuscript
line by line and made it much better.

Third, to the people who accepted to be part of a reading group, a group which
included many of my colleagues from the Peterson Institute for International
Economics, including, in addition to those already cited, Jacob Kirkegaard, Madi
Sarsenbayev, together with Kyoung Mook Lim, John Seliski and Michael Falkenheim
from the Congressional Budget Office, Daniel Leigh and Raphael Espinosa from the
International Monetary Fund.

Fourth, to an outstanding group of research assistants on this and earlier related

projects, Gonzalo Huertas, Michael Kister, Julien Maire, and Thomas Pellet.

Fifth, to Noelle, who has allowed me, once more, to obsess about the book and ignore
all other tasks.

As usual, all mistakes are mine. And all the loose ends naturally determine my future
research agenda...

Washington DC
November 2021

Footnotes
1. Translating these conclusions to emerging markets and developing economies is
important, but would have required an extensive treatment, which I decided not to
explore in this book. For a first pass on commonalities and differences between
advanced economies and emerging markets in this respect, see Blanchard, Felman,
and Subramanian 2021 [21]. ↩

3
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low
Interest Rates

Chapter 1| Introduction
Published on: Dec 20, 2021
License: Creative Commons Attribution 4.0 International License (CC-BY 4.0)
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

It is an understatement to say that policy makers in advanced economies face an

unusual fiscal environment. The basic numbers are given in Table 1.1 for seven major
countries (as of the time of writing, October 2021). Net debt ratios are historically
high, in most countries above 100%; except for Germany, they are substantially higher
than they were in 2007, the year before the Global Financial Crisis. Deficit ratios are
also extremely high; they largely reflect the lasting effects of the Covid crisis, but they
were already fairly large in 2019, before Covid, in particular in the United States and
in Japan. At the same time, nominal interest rates are extremely low; 3-month rates on
government bonds are typically negative and even 10-year rates, with the exception of
the US, are very close to zero. In all cases, nominal rates are below expected inflation,
implying negative real rates.

Table 1.1: Debt, deficits, and interest rates

Net Debt Overall Balance Interest Ratea

(% GDP) (% GDP) (%)

Country 2021b 2007b 2021b 2019b 10Y 3Mc

US 101.9 45.5 -10.8 -5.7 1.4d 0.2

Germany 54.4 53.4 -6.8 1.5 -0.4e -0.5f

France 103.3 58.0 -8.9 -3.1 0.0e -0.5f

Italy 142.2 95.7 -10.2 -1.6 0.7e -0.5f

Spain 104.5 22.4 -8.6 -2.9 0.3e -0.5f

UK 97.2 36.5 -11.9 -2.3 0.7e 0.1

Japan 171.5 94.4 -9.0 -3.1 0.1d -0.1

This has led policy makers and academics to often reach drastically different
conclusions about what fiscal policy should do at this juncture. Some, focused on the
very high levels of debt, have argued for a need for urgent fiscal consolidation and a
steady decrease in debt. Some have argued that it is enough to stabilize the debt, and
accept these higher levels. Some, focused on the very low rates, have argued that this

2
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

is a great time for governments to borrow, especially if this is done to finance public
investment. Yet others have argued for more radical solutions, for example, the
cancellation of the debt held by central banks.1

What policy makers conclude and do will soon matter a lot. Many believe that, in the
wake of the Global Financial Crisis, the desire to decrease debt and the resulting fiscal
consolidation were too strong, leading to a slower recovery. Policy makers in Europe
now face a very concrete issue: In the face of the Covid crisis, current EU fiscal rules
have been suspended. The old rules are largely seen as in need of serious reforms and
European Union policy makers have to redesign them.

The rest of the introduction offers a guided tour of the book and its major conclusions.2

Chapter 2 introduces five notions related to interest rates, which will be useful
throughout the book:

Section 1 defines the neutral interest rate r*. It can be defined in two equivalent ways.
The first is that it is the safe real interest rate such that saving is equal to investment,
assuming output is equal to potential output. The second is that it is the safe real
interest rate such that aggregate demand is equal to potential output. The two
definitions are indeed equivalent but suggest different ways of thinking about the
factors which determine the neutral rate, ways which will turn out to be useful later.

Section 2 introduces the distinction between safe rates and risky rates such as the rate
of return on stocks. It shows how an increase in perceived risk or in risk aversion leads
to both a higher risky rate and a lower safe rate. When looking at data in the next
chapter and thinking about the factors behind low safe rates, the distinction will turn
out to be empirically important. Are current low safe rates due to shifts in saving or
investment, or instead to higher risk or risk aversion?

Section 3 looks at the role of central banks. One can think of the effective mandate of
central banks as setting the actual safe real interest rate, r, as close as they can to the
neutral interest rate, r*, and in so doing, keep output close to potential output. The
important conclusion is that, while central banks are sometimes blamed for the current
low rates, the rates set by central banks reflect mostly low neutral rates, which
themselves reflect the factors behind the movements in r*, saving, investment, risk,
and risk aversion. In other words, central banks are not to blame for low rates: they
just reflect underlying fundamental factors.

3
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

Section 4 discusses the importance of the inequality (r-g)<0, where r is the real safe
interest rate and g is the real growth rate of the economy. When r is less than g, debt,
if not repaid, accumulates at rate r, while output grows at rate g. Thus, if no new debt
is issued, the ratio of debt to output will decrease over time, making for more
favorable debt dynamics. As r is forecast to be less than g with high probability for
some time, this will play a major role in our discussion of fiscal policy later.

Section 5 discusses the nature and implications of the effective lower bound (ELB).
Because people can hold cash, which has a nominal interest rate of zero, central banks
cannot decrease the nominal policy rate much below zero. This implies that they
cannot achieve real policy rates much lower than the negative of inflation; call that
rate the ELB rate, and denote it by rmin. This potentially reduces their ability to
decrease r in line with r* when r* is very low, leading to situations where r>r*. In
other words, it potentially reduces or even eliminates the room for monetary policy to
maintain output equal to potential output. This is the situation in which many central
banks find themselves today, and again has major implications for our discussion of
fiscal policy later.

Section 6 concludes. As the neutral rate r* has declined over time, it has crossed from
above two important thresholds. First, r*, and by implication, r has become smaller
than g, with important implications for debt dynamics and welfare effects of fiscal
policy. Second, in some cases, r* has become so low as to be lower than the ELB rate,
rmin, limiting the room for monetary policy to maintain output at potential, and by
implication, increasing the need to use fiscal policy.

Chapter 3 looks at the evolution of interest rates. It is organized in five sections.

Section 1 looks at the evolution of safe real rates over time. It shows that, even
ignoring the high real rates of the mid-1980s which were largely due to disinflationary
policies followed by central banks, safe real rates have steadily declined across
advanced economies, the United States, the euro zone, and Japan, over the last 30
years. Their decline is due neither to the Global Financial Crisis of the late 2000s, nor
to the current Covid crisis, but to more persistent factors.

Section 2 shows that this decrease has led to an increasing gap between growth rates
and safe rates, an increasingly negative value of (r-g). While potential growth has
slightly declined, the decrease in interest rates has been much sharper. While there
have been periods of negative (r-g) in the past, this one looks different, neither due to
wars, nor to bursts of inflation under low nominal rates, nor to financial repression.

4
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

Section 3 looks at the potential factors behind the decline in safe rates. Different
factors have different effects on saving/investment, and on riskless/risky rates.
Saving/investment factors affect all rates roughly in the same way. Risk/liquidity
factors lead to lower safe rates and higher risky rates. The evidence is that both sets of
factors have been at play. Within each set, the list of suspects is long, but their specific
role is hard to pin down. The last two sections look more closely at two of the potential
factors, where I have found the discussion to be misleading in the first case and
confused in the second case.

Section 4 looks at the relation between growth rates and interest rates. There is a wide
belief that the two are tightly linked. Indeed, some of the research has been based on a
relation known as the “Euler equation,” a relation between individual consumption
growth and the interest rate derived from utility maximization, which implies a close
link between the two. I argue that this relation however has no implication for the
relation between aggregate consumption growth (or output growth) and the interest
rate. Indeed, the empirical relation between the two is typically weak, and often
nonexistent. Lower potential growth is not the main cause of lower rates.

Section 5 looks at the role of changing demographics. Three major demographic

evolutions have been at work in advanced economies, namely: a decrease in fertility,
an increase in life expectancy, and the passing effect of the baby boom. Some
researchers have made the argument that these evolutions are partly behind low rates
but will reverse as we look forward, leading to higher rates in the future. I argue that
the future is likely to be dominated by the increase in life expectancy, and this is likely
to further decrease interest rates rather than increase them.

Section 6 concludes. The overall evidence suggests that the long decline in safe
interest rates is due to deep underlying factors, which do not appear likely to reverse
any time soon. Investors in bond markets share this conclusion. The conclusion must
however be qualified in two ways. The first is that we do not have a precise enough
sense of the factors behind the decline to be sure, and that fiscal policy must therefore
be designed under the assumption of a small but positive probability of a reversal. The
second is that the future path of interest rates is not exogenous and depends very
much on fiscal policy itself. For example, the 2021 Biden stimulus may well increase
aggregate demand, and by implication, lead to higher r* and r for some time. As I shall
discuss in later chapters, fiscal policy should indeed be designed so as to achieve a
value of r* that allows central banks to no longer be tightly constrained by the ELB. If

5
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

such a fiscal policy were to be implemented, it would imply a floor on future values of
r*, and by implication on future values of r itself.

With the ground having been prepared, the remaining three chapters turn to the
implications of low interest rates for fiscal policy. There are two separate questions to
be answered, which are sometimes mixed up:

How much “fiscal space” does a country have? Or more precisely, how much room
does the country have to increase its debt until this raises issues of debt
sustainability?
How should this fiscal space be used? The fact that there is space does not mean
that it should be used. Fiscal policy is about whether, when, and how to use that
space.

Chapter 4 is about the first question. It has seven sections.

Section 1 starts with the arithmetic of debt dynamics under certainty, focusing on the
role of (r-g). It shows the respective roles of (r-g), debt, and primary balances. It shows
some of the dramatic implications of (r-g)<0 : Governments can run primary deficits
and keep their debt ratios stable. Formally, there is no issue of debt sustainability:
Whatever primary deficits governments run, debt may increase but it will not explode.
Put another way, governments appear to have infinite fiscal space...

Section 2 shows however that this conclusion is too strong, for two reasons. First,
fiscal policy, in the form of higher debt or deficits, increases aggregate demand, and
thus increases the neutral rate r*. To the extent that the monetary authority adjusts
the actual rate r in response to r*, this increases (r-g) and thus reduces fiscal space.
Second, uncertainty is of the essence. Debt sustainability is fundamentally a
probabilistic concept: A tentative operational definition might go as follows: Debt is
sustainable if the probability of a debt explosion is small (one still must define
“explosion,” and “small,” but this can be done). With this in mind, the section discusses
the various sources of uncertainty and their potential effects on debt sustainability. It
shows the respective roles of the debt ratio, the maturity of the debt, the distribution
of current and future primary balances, and the distribution of current and future (r-g).
It shows how “stochastic debt sustainability analysis” (SDSA) can be used by
governments, investors and rating agencies. It shows how realistic reductions in debt
from current levels have little effect on the probability that debt is sustainable; in
contrast, it shows the importance of contingent plans in case (r-g) increases and
reverses sign.

6
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

Section 3 looks at the case for fiscal rules to ensure debt sustainability. SDSAs can only
be done in situ, for each year, for each country. The assumptions they require, for
example about the future evolution of (r-g), leave room for disagreement. Can one
design second best, more mechanistic, rules as guard rails, and still leave enough
room for fiscal policy to perform its macroeconomic role? This is the question for
example currently under discussion in the European Union. I express skepticism that a
mechanistic rule can work well, but, if a rule is nevertheless going to be adopted, I
suggest the direction it should explore. I argue that the analysis in Section 2 suggests
a rule that adjusts the primary balance in response to debt service—rather than debt—
over time.

Section 4 discusses the relation between public investment and debt sustainability. For
political reasons, fiscal austerity has often led to a decrease in public investment
rather than in other forms of spending. The transparency case for separating the
current account and the capital account (known as “capital budgeting” ) is a strong
one. The case for full debt financing of public investment, which is sometimes made, is
however weaker: To the extent that public investment generates direct financial
returns to the government, it can indeed be at least partially financed by debt without
affecting debt sustainability. One may also argue that, by increasing growth, it
increases future fiscal revenues. But much of public investment, even if it increases
social welfare, does not generate financial returns for the state, and has uncertain
effects on growth. Thus, it can affect debt sustainability, and this must be taken into
account in the way it is financed. The section shows how this can be integrated in an
analysis of debt sustainability.

Section 5 looks at the risk of sudden stops, and the potential role of central banks in
this context. Sovereign debt markets (and many other markets as well) are subject to
sudden stops in which investors either drop out or ask for large spreads even in the
absence of large changes in fundamentals. This has been more of an issue in emerging
economies’ markets, but, as the Euro crisis has shown, is also relevant for advanced
economies. Even if fundamentals suggest little debt sustainability risk and justify low
rates, another equilibrium may arise, where investors worry and ask for a spread over
safe rates, increasing debt service and increasing the probability that debt is
unsustainable, and thus justifying their worries in the first place. Given their nature,
these equilibria are often referred to as “sunspot equilibria.” I argue that the issue is
relevant, but that it takes extremely low levels of debt to eliminate the scope for
multiple equilibria, levels far below current debt levels. Realistic reductions of debt
over the next decades will not eliminate this risk.

7
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

I then look at whether central banks can reduce or even eliminate this risk. I
distinguish between two sources for the increase in spreads, sunspots or
deteriorations in fundamentals. I argue that central banks, by being large stable
investors, can prevent multiple equilibria and eliminate spreads when they are due to
sunspots, but that the conclusion is less obvious when spreads are due, at least in part,
to deteriorated fundamentals. The reason in short, is that central banks are parts of
the consolidated government, and their interventions change the composition, but not
the size either of the overall consolidated government liabilities, or of the overall risk. I
discuss why this may be different in the case of the European Central Bank, for
example in its ability to decrease Italian spreads during the Covid crisis.

Section 6 takes up two issues which have come up about the relation of central banks
to debt sustainability. Some observers have argued that, through quantitative easing
(QE) and the large scale purchases of government bonds, central banks are monetizing
the deficits and bailing out governments. I argue that this is not the case. Others have
argued that, to alleviate the debt burden, central banks should simply write off the
government bonds they hold on their balance sheet. I argue that it is not needed, and if
it were to be done, it would do nothing to improve the budget constraint of the
government.

Section 7 concludes. Negative (r-g) makes the dynamics of debt much more benign.
This does not, however, make the issue of debt sustainability disappear, both because
of endogeneity, i.e. the effect of fiscal policy back on the neutral interest rate, and
because of uncertainty, in particular with respect to r.

The best way to assess debt sustainability is through the use of a stochastic debt
sustainability analysis, or SDSA, an approach which allows one to take into account the
specificities of each country and each year. Given the complexity of the assessment, I
am skeptical that one can rely on quantitative rules. If, however, such rules are used,
they should be based on requiring the primary surplus to adjust to debt service rather
to debt itself. It cannot avoid including exceptions however, such as the need to allow
for larger primary deficits when the central bank is constrained by the ELB.

Chapter 5 looks at the welfare costs and benefits of debt and deficits and draws
implications for fiscal policy. The chapter is organized around four sections. The first
two sections discuss what may feel like an abstract and slightly esoteric topic, namely
the effects of debt on welfare under certainty and then under uncertainty, but, it turns
out, is a topic that is central to the discussion of fiscal policy.

8
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

Section 1 looks at the welfare costs of debt under certainty. Public debt is widely
thought of as bad, as “mortgaging the future.” The notion that higher public debt
might actually be good, increase welfare (on its own, i.e. ignoring what it is used to
finance) feels counterintuitive. The section reviews what we know about the answer
under the assumption of certainty. The answer is that debt might indeed be good, and
that the condition, under certainty, is precisely (r-g)<0. The section puts together the
two celebrated steps of the answer. The “Golden Rule” result, due to Phelps 1961, that,
if (r-g)<0, less capital accumulation increases welfare; and the demonstration by
Diamond 1965 in an overlapping generation model, that, if (r-g)<0, issuing debt does,
by decreasing capital accumulation, increase the welfare of both current and future
generations. These are clearly important and intriguing results. They are, however,
just a starting point.

A major issue is again uncertainty, the issue taken in Section 2. Under the assumption
of certainty, there is only one interest rate, so the comparison between r and g is
straightforward. But, in reality, there are many rates, reflecting their different risk
characteristics. The safe rate is indeed less than the growth rate today. But the
average marginal product of capital, as best as we can measure it, is substantially
higher than the growth rate. Which rate matters? This is very much research in
progress but, thanks to a number of recent papers, we have a better understanding of
the issue. For example, in the Diamond model, which focuses on finite lives as the
potential source of high saving and excess capital accumulation, the relevant rate is
typically a combination of the two, although with a major role for the safe rate. Going
to the data suggests that the relevant rate and the growth rate are very close, making
it difficult to decide empirically which side of the golden rule we actually are. In other
models where, for example, the lack of insurance leads people to have high
precautionary saving, potentially leading to excess capital accumulation, the answer is
again that the safe rate plays a major role; in that case however, while debt is likely to
help, the provision of social insurance, by getting at the source of the low r, may
dominate debt as a way of eliminating capital overaccumulation. Overall, a prudent
conclusion, given what we know, is that, in the current context, public debt may not be
good, but is unlikely to be very bad—that is, to have large welfare costs; the more
negative (r-g), the lower the welfare costs.

Section 3 turns to the welfare benefits of debt and deficits.

There are two lines of arguments in favor of the use of fiscal policy and debt. The first
is the “pure public finance” argument, which assumes that output remains at potential

9
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

and focuses on the use of debt either to smooth distortionary taxes or to allocate the
cost of exceptional spending across generations. This may be the case if the
government must finance a war, or embarks on a major public investment, for example
a Green Deal to fight global warming. The use of debt allows the government both to
smooth taxes and thus reduce tax distortions, and to shift some of the cost to future
generations if so desired.

In the current context however, where the room for monetary policy to sustain output
is limited by the effective lower bound, fiscal policy can play another role, that of
helping maintain output at potential. This macro stabilization role is called the
“functional finance” argument for the use of fiscal policy and debt. The section reviews
the role of debt, spending, and taxes (and, by implication, deficits) in affecting
aggregate demand: Higher debt affects wealth and thus consumption demand. Higher
government spending affects aggregate demand directly, lower taxes do so by affecting
consumption and investment. Multipliers, that is the effect of spending and taxes on
output, have been the subject of strong controversies and a lot of recent empirical
research. The section discusses what we have learned. The basic conclusion is that
multipliers have the expected sign, and fiscal policy can indeed be used to affect
aggregate demand.

Section 4 puts the conclusions about welfare costs and benefits of debt and deficits
together, and draws implications for fiscal policy. In short, one can think of two
extreme approaches to fiscal policy. The first is the pure public finance approach. The
other is the functional finance approach. The implication of the arguments developed
in the previous sections is straightforward. The weaker private demand and thus the
lower the neutral rate, the lower the costs of debt, the smaller the room for monetary
policy, and the more the focus of fiscal policy should be on functional finance and
macro stabilization. This is particularly the case if the effective lower bound is strictly
binding: in this case, the macro stabilization role of fiscal policy, and the reliance of
deficits even if this increases debt, is essential. The stronger private demand and thus
the higher the neutral rate, the higher the costs of debt, the larger the room for
monetary policy, and the more the focus of fiscal policy can be on pure public finance
goals, and fiscal consolidation if debt is thought to be too high. The section presents
the basic argument and discusses a number of related issues, such as the role of the
inflation target, or alternatives to deficits to increase aggregate demand.

The purpose of the next and final chapter is, by focusing on three recent fiscal policy
episodes, in the European Union, in the United States and in Japan, to give more flesh

10
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

to these propositions.

Chapter 6 looks, in light of the previous discussion, at three episodes of fiscal policy
in action.

The chapter looks at three recent episodes where, for better or for worse, fiscal policy
played or is playing a major role. The purpose is not to review them in full, which
would take another book, but to show and discuss fiscal policy choices in the light of
the analysis so far.

To caricature just a bit, the three episodes can be thought of “too little?”, “just right?”,
“too much?”

Too little? The first section looks at the period of “fiscal austerity” that took place in
the wake of the Global Financial Crisis. After the large initial increase in debt due to
the crisis, the focus quickly turned to debt reduction. This was particularly true in the
European Union, which embarked on a strong fiscal consolidation. Today, there is fairly
wide agreement that, at least in Europe, the fiscal consolidation was too strong, too
much based on the traditional view of debt, both by markets and by policy makers, and
came at a substantial output cost.

Just right? The second section looks at the Japanese economy over the last three
decades. Japan experienced the ELB constraint starting in the mid-1990s, earlier than
either the United States or Europe, and has remained close to it ever since. Japanese
macroeconomic policy is often characterized as a failure, with the central bank unable
to achieve its inflation target, a low growth rate, and debt ratios steadily rising to
reach more than 170% for net debt and 250% for gross debt. I think it should be seen
instead as a qualified success, with the use of aggressive fiscal and monetary policies
to compensate for very weak private demand: Output has remained close to potential.
Growth is low, but because of demographics, not productivity growth, and not debt.
Inflation is low, lower than the target, but this is not a major failure. Looking forward
however, there are reasons to worry: The debt ratios are very high. So far, investors do
not mind, and 10-year nominal rates are close to zero. But can the build-up of debt
continue? What happens if interest rates increase? Are there alternatives?

Too much? The third section looks at the effects of the American Rescue Plan, the
stimulus program put in place by the Biden administration in early 2021. In 2020, the
focus of fiscal policy had been protection, of both households and firms. In early 2021,
the goal partially shifted from protection to sustaining the recovery. The program was

11
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

extremely large relative to the apparent output gap. The strategy (intentional or not)
was in effect twofold. For the Treasury, to strongly increase aggregate demand, and
thus increase the neutral rate so as to relax the ELB constraint. And for the Fed, to
delay adjustment of the policy rate to the neutral rate, allow for some overheating and
generate slightly higher inflation in the process. To a number of observers, the
program appeared too large, leading to worries about overheating and excessive
inflation. The section takes stock of where things are at the time of writing.

Footnotes
1. Some quotes. Schäuble: “Borrowing in times of crisis to stabilise the economy
makes sense, as long as the question of repayment is not forgotten. The need to pay
back the debt later is often overlooked.” https://www.ft.com/content/ 640d084b-7b13-
4555-ba00-734f6daed078 ; Krugman: “The bottom line is that government debt just
isn’t a major problem these days.” https://www.nytimes.com/
2020/12/03/opinion/biden-republicans-debt.html?smid=url-share ; Manifesto by 150
French economists: “Let’s agree to a contract between European states and the
ECB: The ECB commits to forgive the public debts that it holds, and the states agree
to invest the same amounts in ecological and social reconstruction.” Le Monde,
February 5, 2021. ↩

2. The rest of the introduction consists of a compendium of the introductions to each

chapter. Thus, think of it as cliff notes, and if you intend to read the book, you may
want to go directly to the chapters themselves. ↩

Citations
1. Interest rates are for 2021, based on the average of monthly observations, from
January to September, inclusive. ↩

2. Source: IMF Fiscal Monitor, October 2021 ↩

3. Source: Eurostat, irt_lt_gby10_m, as of November 1, 2021 ↩

4. Source: Eurostat, irt_lt_mcby_m, as of November 1, 2021 ↩

5. Source: Eurostat, irt_st_m, as of November 1, 2021 ↩

6. Values taken from series for Euro area ↩

7. Edmund Phelps. The golden rule of accumulation: A fable for growth-men.

American Economic Review, 51-4:638–643, 1961. ↩

12
Fiscal Policy Under Low Interest Rates • Fiscal Policy Under Low Interest Rates Chapter 1| Introduction

8. Peter Diamond. National debt in a neoclassical growth model. American

Economic Review, 55 (5-1):1126–1150, December 1965. ↩

13
Another Random Scribd Document
with Unrelated Content
lift me, but I fell against the wall.
"Take a sip of this, we must restore circulation. It is the cold as
much as anything; another sip, Miss Vaughan." He used my true
name on purpose; it helped to restore me. He was most humane
and kind; he did not even remind me of Dutch courage.

CLARA VAUGHAN

BOOK III.

CHAPTER I.

In the morning I dreamed of Isola. Across a broad black river, I saw

her lovely smile. Thick fog rose from the water, in which two swans
were beating a dog, and by snatches only could I see my darling.
She waved her little hand to me, and begged me, with that coaxing
smile which bent cast iron and even gold, to come across to Isola. In
vain I looked for a boat, even in my dream I knew that I could not
swim, and if I could, the lead upon my eyelids would have sunk me.
So I called to her to come to me, and with that cry awoke.
It was striking ten--my own little clock which my father gave
me. I counted every stroke. What was Mrs. Shelfer doing, that she
had not called me yet? What was I doing, that I lay there so late; for
I always get up early? And what was the sun about, that no light
came into the room? I knew it was ten in the morning.
 I felt all round. I was in my little bed, the splinter at the side of
the head-board ran into my finger as usual. There I was, and
nowhere else. Was it a tremendous fog? If it was, they should have
told me, for they knew that I liked fogs. At least they thought so,
from the interest I felt.
I groped for the little bell-pull, a sleezy worsted cord, which
meant to break every time, but was not strong enough to do it. I
jerked with all my strength, which seemed very little somehow. What
a pleasure! The bell rang like a fire-peal. I fell back on the pillow,
exhausted, but determined to have it out with Mrs. Shelfer. I put my
hands up to arrange my hair, to look a little more like Clara Vaughan,
when the light should enter, and to frighten Mrs. Shelfer.
There was something on my head. I never wear a night-cap; my
long black hair would scorn it. Am I in a madhouse, is this put to
keep me cool? Cold it is, and my brain so hot. All Wenham lake on
Dives, and he will only hiss. While I am pulling at it, and find it
streaming wet, in comes--I know her step--Mrs. Shelfer. But there is
no light from the passage!
"Mrs. Shelfer, what do you mean by this?"
"By what, my dear good soul? I have done all the blessed things
I was told to do for you. You might have put a ostrich feather or a
marabout to my mouth, Miss Valence, and tucked me up, and a
headstone, and none the wiser, when Uncle John brought you home
last night."
"I suppose I am dreaming. But I am sure I rang the bell."
"Miss Valence, you did so, and no mistake. Bless me! I started in
my shoes. A good job, Shelfer wasn't home, he's so nervous. He'd
have gone for gin straightways. Now get up, that's a dear good soul,
and when you have had some breakfast, we'll talk over it, Miss
Valence. Let me see how your eyes are. Uncle John said they was
bad, and I was to keep them covered. I expects him here every
minute. Now turn them up to the light. What large eyes you have, to
be sure. Bless me! Where are your long black lashes?"
"Mrs. Shelfer, there is some strange mistake. Let the light into
the room."
I had risen in the bed, and her breath was on my forehead.
"Light, dear child, I can't let more. The sun is on your face."
I fell back upon my pillow, and could rise no more. The truth
had been tingling through me, all the time she talked. I was stone-
blind. I flung the bandage from me, and wished my heart would
break. Mrs. Shelfer tried some comfort. She seemed to grieve for my
eyelashes, more than for my eyes; and addressed her comfort more
to my looks than sight. Of course, I did not listen. When would the
creature be gone, and let me try to think?
Poor little thing! I was very sorry; what fault was it of hers?
Who and what am I, blind I, to find fault with any one who means
me well? I drop my eyelids, I can feel them fall; I lift them, I can
feel them rise; a full gaze, a side gaze, a half gaze; with both eyes,
with one; it is all the same; gaze there may be, but no sight.
Henceforth I want no eyelids.
The sun is on my face. I can feel his winter rays, though my
cheeks are wet. What use is he to me?
I have the dagger somewhere by which my father died. Let me
find it, if I can.
I could have sworn that the box was in that corner carefully
concealed. I strike against a washing-stand. Ah, now I have it; the
box is locked, my keys are in the top-drawer. I bear the box to the
bed, and go groping for the chest of drawers. Already I can tell by
the sun-warmth on my face, which way I am going. Surely, if I wait,
I shall have the instinct of the blind.
What care I for that? The coward love of life suggested that
poor solace. Now I have the keys. Quick unlock the box.
At length I throw the cover back. The weapon handle is to the
right. I stoop to seize it. I grasp a square of colour. Pretty instinct
this! I have got my largest drawing box.
Oh paints, my paints, so loved but yesterday, that ape the
colours I shall never see, my hot tears make you water-colours
indeed! If God has robbed my eyes of sight, He has not dried my
tears.
The gushing flood relieves me. What right have I to die? Even
without asking if my case be hopeless! Who knows but what these
lovely tints may glow for me again? May I not once more intone the
carmine damask of the rose, the gauzy green of April's scarf?
Softening scenes before me rise. I lay my box of colours by, and
creep into my bed for warmth.
Presently the doctor comes. Inspector Cutting has chosen him,
and chosen well. From his voice I know that he is a gentleman, from
his words and touch instinctively I feel that he understands the case.
When he has finished the examination he sees me trembling for
the answer which I dare not seek.
"Young lady, I have hopes, strong hopes. It is quite impossible
to say what course the inflammation may pursue. All depends on
that. At present there is a film over the membrane, but the cornea is
uninjured. Perfect quiet, composure, so far as in such a case is
possible, cold applications, and the exclusion of light, are the simple
remedies. All the rest must be left to nature. Avoid excitement of
any kind. Diet as low as possible. Do not admit your dearest friends,
unless they will keep perfect silence. Even so, they are better away,
unless you pine at loneliness."
"Oh no. I am quite accustomed to that."
"That is well. I shall make a point of calling daily, but shall not
examine your eyes every time. The excitement and the effort would
strain the optic nerve. Our object is to keep the inflammation from
striking inwards. I should not tell you all this, but I see that you have
much self-command. On that and your constitution, under
Providence, the cure depends. One question. I am not a professed
ophthalmist, would you prefer to have one?"
"Oblige me with your opinion."
"It is a delicate point for me. There is no operation to perform.
It is a medical, not a surgical case. I have dealt with such before.
Were you my own child I would call in no ophthalmist, but as you
are a stranger to me, I wish you to decide for yourself."
"Then, I will have none. I have perfect confidence in you."
He seemed gratified, and took his leave. "Please God, Miss
Valence, you shall look me in the face ere long."

CHAPTER II.

"Composure is my only chance." What chance have I of composure

until I know the meaning of what I saw last night? Blind though I
am, one face is ever before me. No thickening of the membrane can
exclude that face. Inspector Cutting is still below; I will send for him
at once.
Mrs. Shelfer remonstrates. "It will excite you so, my good friend.
The doctor said perfect quiet."
"Just so. I can have none, until I have spoken to your Uncle
John. Let him stay in my sitting-room, open the folding-door a little,
and then, Mrs. Shelfer, please to go down stairs."
I hear the Inspector's step, not so heavy this time. He asks how
I am, and expresses his sorrow. I feel obliged to him for not
reminding me that the fault was all my own. Then I implore him, if
he wishes me ever to see again, to tell me all he knows about the
men I saw last night.
Thus entreated, he cannot refuse me, but first looks up and
down the stairs, as I know by the sound of his steps; then he shuts
the door of the sitting-room. All he knows is not very much. They
are refugees, Italian refugees; two political and two criminal exiles,
leaders now of a conspiracy to revolutionize their country.
"But why does he not arrest them?'
"Simply because he has no right. As for the political refugees, of
course, we never meddle with them; as for the two criminals, they
have not been demanded by their Government. Wonderful now, isn't
it? The two fellows who have committed murder their Government
would not give sixpence for them; but the two men who have only
spouted a little, it would give a thousand pounds for either of them.
He can't understand such a system."
And Inspector Cutting sucks his lips--I know it by the sound--he
always does it when he is in a puzzle. Being a true Englishman, he
knows no more of serfdom, than of the dark half of the moon. I
mean, of course, political serfdom. Of social slavery we have enough
to last ten generations more.
"Would he be afraid to arrest them? He said they were
desperate men."
"He should rather hope he wouldn't. They had got their knives,
and pistols, and all that humbug. But it was more show than fight.
They were desperate men in a private quarrel, particular when they
could come round a corner, and when women were concerned; but
as for showing honest fight, he would sooner come across three of
them, than one good Irish murderer."
"What was his proof against my enemy? I need not ask him
which it was."
The excitement of this question sent needles through my eyes.
And I could not see him, to probe his pupils.
"Well, his proof was very little. In fact it was no proof at all as
yet. But he was not like a juryman. He was quite convinced; and his
eyes should never be off that man, until he had him under warrant,
and the whole case clear. Would that satisfy me?"
He spoke with such hearty professional pride, that I could not
help believing him. But as for being satisfied--why should his
evidence be a mystery to me? "Catch him at once," was my idea;
but a hot and foolish one. "Get up the evidence first," was Inspector
Cutting's, "I can catch him at any time." That was the whole gist of
it. Could he always catch him?
He scorned the idea of there being any difficulty about it. The
man could leave for no part of the Continent; he was a political
refugee. America was his only bourne beyond the Inspector's
jurisdiction. And thither he could not try to go without the Police
being down upon him at once.
By this time I was worn out, though my reasons were not
exhausted. In a word, I was only half satisfied, but I could not help
myself. If, in my helpless blindness, I offended Inspector Cutting, the
whole chance disappeared. Only one question remained. "Why did
he take me thither?"
"For excellent reasons. As to the one, it was most important
that I should always know him again. Moreover, it saved my energies
from waste. As to the other three, he had his own reasons for
requiring an intelligent witness about their proceedings."
I thought of the thousand pounds, and said no more. Inspector
Cutting was an Englishman, and proud, in his way, of English
freedom. But, like nine-tenths of us, he thought that we alone
understand what freedom is. What good was it to such fellows as
those? They would only be free of one another's throats. And like all
of us, with most rare exception, next to freedom, he valued money.
For our love of this, many foreigners jeer us. All we can say is, that
with us it is second, with them it is first. But we are of such staple,
our second is stronger than their first.
When the Inspector was gone, I formed a very sensible resolve.
Since there was nothing more to be done or learned at present, my
only care should be the recovery of my sight. If I were to be blind till
death, the purpose of my life was lost, and I might as well die at
once. But now the first blind agony, the sudden shock, was over;
and I had too much of what the Inspector denominated "pluck," to
knock under so.
 In the afternoon, when all was quiet, lovely Isola came. Strict
orders had been given that no one should be admitted. But Mrs.
Shelfer was not proof against the wiles of Isola.
"She smiled so bootiful, when I opened the door, Miss, it fetched
out all my hair pins; and when I told her you was ill in bed, and
struck stone blind along of some chemical stuff, two big tears came
out of her long blue eyes, same as the wet out of a pennorth of
violets, Miss; and as for stopping her, she threw her muff at me, and
told me to stop that if I liked, and to run and tell you that she was
coming, quick, quick!
"To be sure, and here I am!" cried the cheery voice I loved so
well. "Oh, Clara dear, dear Clara!" The little darling flung her soft
warm arms around me, utterly forgetful of her dress, forgetful of all
the world, but that little bit of it she held. Her delicious breath came
over my fevered cheek, her cool satin flesh was on my burning
eyelids. What lotion could be compared to this? How long she
stayed, I cannot tell; I only know that while I heard her voice, and
felt her touch, blindness seemed no loss to me. She pronounced
herself head nurse; and as for doctors, what were they, compared to
her own father? If she could coax him, he should come next day,
and deliver his opinion, and then the doctor might betake himself to
things he understood, if indeed he understood anything, which she
did not believe he did, because he had said she was not to come. My
drawings too she admired, much more than they deserved, and her
brother Conrad must come and see them, he was so fond of
drawing, and there was nothing he could not do. She was so sorry
she must go now, but old Cora must be tired of patroling, and she
herself had a lecture to attend upon the chemical affinity of bodies.
What it meant she had no idea, but that would not matter the least;
some of the clever girls said they did, but she would not believe
them; it took a man, she was sure, to understand such subjects. She
would bring her work the next day, such as it was, and the nicest bit
of sponge that was ever seen, it could not be bought in London; and
she would answer for it I should be able to paint her likeness in a
week; and she would not go till it was dark; and then the Professor
should come for her when his lectures were over, and examine me;
he knew all about optics, and retinas, and pencils of light, and
refraction and aberration, and she could not remember any more
names; but she felt quite certain this was a case of optical delusion,
and nothing else.
How I wished I could have seen her, when she pronounced this
opinion, with no little solemnity. She must have looked such a sage!
The thought of that made me laugh, as well as the absurdity of the
idea. But I only asked how the Professor was to examine my eyes, if
he did not come till dark.
To be sure! She never thought of that. What a little goose she
was! But she would make him come in the morning, before his work
began; and then old Cora would fetch her home to tea. And she had
very great hopes, that if she could only persuade her papa to deliver
a lecture in my room, it would have such an effect on my optic
nerves, that they would come all right directly, at any rate I should
know how to treat them.
Delighted with this idea, she kissed me, and hugged me, and off
she ran, after telling me to be sure to keep my spirits up, and the
bandage not too tight.
 The latter injunction was much easier to obey than the former.
She had enlivened me wonderfully, as well as nursed me most
delicately; but now that she was gone, the usual reaction
commenced. Moreover, although as the saying is, the sight of her
would have been good for sore eyes, the effort at seeing her, which
I could not control, when she was present, was, I already felt,
anything but good for them. And the loss, when she was gone, was
like a second loss of light.
Light! What million thoughts flash through me at that little
word! Swiftest thing the mind has met, too like itself to understand.
Is it steed or wing of mind? Nay, not swift enough for that. Is it then
the food of life, prepared betimes ere life appeared, the food the
blind receive but cannot taste? If so, far better to be blind from
birth. Well I know the taste from memory; shall I never taste it else?
Has beauty lost its way to me? The many golden folds of air, the
lustrous dance of sunny morn, the soft reclining of the moon, the
grand perspective of the stars (long avenue to God's own home), are
these all blank to me, and night made one with day?
Oh God, whose first approach was light, replenisher of sun and
stars, whence dart anew thy gushing floods (solid or liquid we know
not), whose subtle volume has no bourne or track; light, the dayside
half of life, leaping, flashing, beaming; glistening, twinkling, stealing;
light! Oh God, if live I must, grudge me not a ray!

CHAPTER III.
Low fever followed the long prostration to which the fear of outer
darkness had reduced my jaded nerves. This fever probably
redeemed my sight, by generalizing the local inflammation, to which
object the doctor's efforts had been directed. Tossing on my weary
bed, without a glimpse of anything, how I longed for the soft
caresses and cool lips of Isola! But since that one visit, she had been
sternly excluded. The Professor had no chance of delivering his
therapeutic lecture. In fact he did not come. "Once for all," said Dr.
Franks, when he heard of that proposal, "choose, Miss Valence,
between my services, and the maundering of some pansophist. If
you prefer the former, I will do my utmost, and can almost promise
you success; but I must and will be obeyed. None shall enter your
room, except Mrs. Shelfer and myself. As to your lovely friend, of
whom Mrs. Shelfer is so full, if she truly loves you, she will keep
away. She has done you already more harm than I can undo in a
week. I am deeply interested in this case, and feel for you sincerely;
but unless you promise me to see--I mean to receive--no one
without my permission, I will come no more."
It sounded very hard, but I felt that he was right.
"No crying, my dear child, no crying! Dear me, I have heard so
much of your courage. Too much inflammation already. Whatever
you do, you must not cry. That is one reason why I will not have
your friend here. When two young ladies get together in trouble, I
know by my own daughters what they do. You may laugh as much
as you like, in a quiet way; and I am sure Mrs. Shelfer can make any
one laugh, under almost any circumstances. Can't you now?"
"To be sure, my good friend, I have seen such a many rogues.
That is, when I know Charley's a-coming home."
 "Now good bye, Miss Valence. But I would recommend you not
to play with your paints so. There is an effluvium from them."
"Oh, what can I do, what am I to do to pass the endless night?
I was only trying to build a house in the dark."
"Sleep as much as you can. I am giving you gentle opiates.
When you can sleep no longer, let Mrs. Shelfer talk or read to you,
and have a little music. I will lend you my musical box, which plays
twenty-four tunes: have it in the next room, not to be too loud. And
then play on the musical glasses, not too long at a time: you will
soon find out how to do that in the dark."
He most kindly sent us both the boxes that very day; and many
a weary hour they lightened of its load. Poor Isola came every day
to inquire, and several times she had her brother with her. She made
an entire conquest of Mrs. Shelfer, who even gave her a choice
canary bird. I was never tired of hearing the little woman's
description of her beauty, and her visit to the kitchen formed the
chief event of the day. Mrs. Shelfer (who had Irish blood in her
veins) used to declare that the ground was not good enough for
them to walk on.
"Such a pair, Miss! To see her so light, and soft, and loving,
tripping along, and such eyes and such fur; and him walking so
straight, and brave, and noble. I am sure you'd go a mile, Miss, to
see him walk."
"You forget, Mrs. Shelfer, I may never enjoy that pleasure."
"No, no. Quite true, my good friend. But then we may, all the
same."
Exactly so. There lay all the difference to me, but none to any
other. This set me moralising in my shallow way, a thing by no
means natural to me, who was so concentrated and subjective. But
loss of sight had done me good, had turned the mind's eye inward
into the darkness of myself. I think the blind, as a general rule, are
less narrow-minded than those endowed with sight. Less inclined, I
mean, to judge their neighbours harshly, less arrogant in exacting
that every pulse keep time with their own. If eyes are but the chinks
through which we focus on our brain censoriousness and bigotry, if
rays of light are shafts and lances of ill will; then better is it to have
no crystalline lens. Far better to be blind, than print the world-
distorted puppets of myself. I, that smallest speck of dust, blown
upon the shore of time, blown off when my puff shall come; a speck
ignored by moon and stars; too small (however my ambition leap)
for earth to itch, whate'er I suck; and yet a speck that is a mountain
in the telescope of God; shall I never learn that His is my only
magnitude; shall I wriggle to be all in all to my own corpuscle?

CHAPTER IV.

Is there any Mocha stone, fortification agate, or Scotch pebble, with

half the veins and mottlings, angles, flux and reflux, that chequer
one minute of the human mind? Was ever machine invented to
throw so many shuttles?
At present I am gauged for little threads of thought--two
minutes since, the smallest thing I could think of was myself. Now it
is the largest. Must I grope from room to room, shall I never be sure
where the table is, where my teacup stands; never read, or write, or
draw; never tell when my hands are clean, except by smelling soap;
never know (though small the difference) how my dress becomes
me, or when my hair is right; never see my own sad face, in which I
have been fool enough to glory, never--and this is worst of all--never
catch another's smile?
Here am I, a full-grown girl, full of maiden's thoughts and
wonderings, knowing well that I am shaped so but to be a link in
life; must I never think of loving or of being loved, except with love
like Isola's; sweet affection, very sweet; but white sugar only?
When my work is over, and my object gained, when my father's
spirit knows the wrong redeemed, as a child I used to think I would
lay me down and die. But since I came to woman's fulness, since I
ceased to look at men and they began to look at me, some soft
change, I know not what, has come across my dream.
Is my purpose altered? Is my tenor broken? Not a whit of either.
Rather are they stronger set and better led, as my heart and brain
enlarge. Yet I see beyond it all, a thing I never used to see, a glow
above the peaks of hate, a possibility of home. "Saw" I should have
said, for now what have I to do with seeing?
On the fourteenth morning, I had given up all hope. They told
me it was bright and sunny; for I always asked about the weather,
and felt most cruelly depressed upon a sunny day. By this time I had
learned to dress without Mrs. Shelfer's aid. Still, from force of habit I
went to the glass to do my hair, and still drew back, as far as was
allowed, the window curtain.
Off with my wet bandage, I am sick of it; let me try no longer to
delude myself.
 Suddenly a gleam of light, I am sure of it; faint indeed, and like
a Will of the Wisp; but I am quite sure it was a gleam of light. I go
nearer the window and try again. No, there is no more for the
present, it was the sudden change produced it. Never mind; I know
what I have seen, a thing that came and cheated me in dreams; this
time it has not cheated me; it was a genuine twinkle of the sun.
I can do nothing more. I cannot put another stitch upon me. I
am thrilling with the sun, like Memnon. I fall upon my knees, and
thank the Father of light.
When the Doctor came that day, and looked into my eyes, he
saw a decided change.
"Miss Valence, the crisis is over. With all my heart I congratulate
you. Another fortnight, and you will see better than ever."
I laughed, and wept, and, blind as I was, could hardly keep
from dancing. Then I wanted to kiss the Doctor, but hearing Mrs.
Shelfer's step, made a reckless jump and had it out upon her.
"Bless me, why bless me, my good soul, if I was a young
gentleman now--"
"Why, Miss Valence, I am perfectly astonished," said Doctor
Franks, but I knew he was laughing; "if I had been requested, only
two minutes ago, to pick out the most self-possessed, equable, and
courageous young lady in London, I should have said, 'I don't want
any looking, I know where to find her,' but now, upon my word--"
"If you are asked to point out the most delighted, grateful, and
happy girl in London, you know where to come for her. Let me kiss
you, Dr. Franks, only once. I won't rob your daughters. It is to you I
owe it all."
 "No, to Providence, and yourself, and an uncommonly good
conjunctiva. Now be prudent, my dear child; a little ecstasy must be
forgiven; but don't imperil your cure by over-excitement. It is, as I
hoped it would be, a case of epiphytic sloughing" (I think that was
what he said), "and it may become chronic if precipitated. The
longer and more thorough the process, the less chance of
recurrence."
"Oh I am satisfied with one eye, or half an eye. Can you
promise me that?"
"If you will only follow my directions, I can promise you both
eyes, more brilliant than ever; and Mrs. Shelfer says they were
wonderfully bright. But what I order must be done. Slow and sure."
He gave me short directions, all upon the same principle, that of
graduation.
"And now, Miss Valence, good-bye. Henceforth I visit you only
as a friend; in which I know you will indulge me, from the interest I
feel in the case, and in yourself. Mrs. Shelfer's wonderful young lady
may be admitted on Thursday; but don't let her look at your eyes.
Girls are always inquisitive. If there is any young gentleman, lucky
enough to explain your strange anxiety to see, you will make short
work of him, when your sight returns. Your eyes will be the most
brilliant in London; which is saying a great deal. But I fear he will
hardly know you, till your lashes grow; and all your face and
expression are altered for the time."
"One thing will never alter, though it can find no expression, my
gratitude to you."
"That is very pretty of you, my dear child. You kissed me just
now. Now let me kiss you."
 He touched my forehead and was gone. He was the first true
gentleman I had met with, since the loss of Farmer Huxtable.

CHAPTER V.

When Isola came on the Thursday, and I obtained some little

glimpse of her, she expressed her joy in a thousand natural ways,
well worth feeling and seeing, not at all worth telling. I loved her for
them more and more. I never met a girl so warm of heart. Many
women can sulk for days; most women can sulk for an hour; I
believe that no provocation could have made Isola sulky for two
minutes. She tried sometimes (at least she said so), but it was no
good.
And yet she felt as keenly as any of the very sulkiest women
can do; but she had too much warmth of heart and imagination to
live in the folds of that cold-blooded snake. Neither had she the
strong selfishness, on which that serpent feeds.
In the afternoon, as we still sat together, in rushed Mrs. Shelfer
with her bonnet on, quite out of breath, and without her usual
ceremony of knocking at the door. I could not think where she had
been all the day; and she had made the greatest mystery of it in the
morning, and wanted to have it noticed. Up she ran to me now, and
pushed Isola out of the way.
"Got 'em at last, Miss. Got 'em at last, and no mistake. No more
Dr. Franks, nor bandages, nor curtains down, nor nothing. Save a
deal of trouble and do it in no time. But what a job I had to get
them to be sure; if the cook's mate hadn't knowed Charley, they
would not have let me had 'em, after going all the way to Wapping."
She holds up something in triumph.
"What is it, Mrs. Shelfer? I am sorry to say I cannot see."
"And right down glad of it, I am, my good friend. Yes, yes. Or I
should have had all my journey for nothing. But Miss Idols knows, I'll
be bound she does, or it's no good going to College."
"Let me look at it first," says Isola, "we learn almost everything
at college, Mrs. Shelfer; but even we senior sophists don't know
every thing without seeing it yet."
"Then put your pretty eyes on them, Miss Idols; I'll be bound it
will make them caper. I never see such fine ones, nor the cook's
mate either. Why they're as big as young whelks."
"Mollusca, or Crustacea, or something!" exclaims Isola, with
more pride than accuracy, "what queer little things. I must take
them to my papa."
"Now, young ladies," cried Mrs. Shelfer in her grandest style, "I
see I must explain them to you after all. Them's the blessed shells
the poor sailors put in their eyes to scour them out, and keep them
bright, and make them see in the dark against the wind. Only see
how they crawls. There now, Miss Valence, I'll pick you out two big
lively fellows, and pop one for you in the corner of each eye; the
cook's mate showed me how to lift your eyelids."
"How kind of him, to be sure!'
"And it will crawl about under the lid, you must not mind its
hurting a bit; and it won't come out till to-morrow when the clock
strikes twelve, and then it will have eaten up every bit, and your
eyes will be brighter than diamonds. Charley has seen them do it
ever so many times, and he says it's bootiful, and they don't mind
giving five shillings a piece for them, when they are scarce."
"Did Mr. Shelfer ever try them? His eyes are so sharp: perhaps
that is the reason."
"No. I never heard that he did, Miss. But bless you he never
tells me half he does; no, nor a quarter of half." At this recollection,
she fetches a little short sigh, her nearest approach to melancholy,
for she is not sentimental. "Care killed the cat," is her favourite
aphorism.
"Then when he comes home, Mrs. Shelfer, pop one of these
shells, a good big one, into each of his eyes; and let us know the
effect to-morrow morning, and I'll give you a kiss, if you do it well."
This is the bribe Isola finds most potent with everybody.
"Lor, Miss Idols, bless your innocent heart, do you suppose he
would let me? Why he thinks it a great thing to let me tie his shoe,
and he won't only when he has had a good dinner."
"Well," cries Isola, "I am astonished! Catch me tying my
husband's shoes! I shall expect him to tie mine, I know; and he shall
only do that when he is very good."
With a regal air, she puts out the prettiest foot ever seen. Mrs.
Shelfer laughs.
"Lor, Miss, it's all very well for girls to talk; and they all does it,
till they knows better. Though for the likes of you, any one would do
anything a most. Pray, Miss Idols, if I may make so bold, how many
offers of marriage have you received?"
"Let me think! Oh I know! it's one more than I am years old.
Eighteen altogether, Mrs. Shelfer; if you count the apothecary's boy,
and the nephew of the library; but then they were all of them boys,
papa's pupils and that, a deal too young for me. They were all going
to die, when I refused them; but they are all alive so far, at any rate.
Isn't it too bad of them?"
"Well, Miss Idols, if you get as good a husband as you deserve,
and that is saying a deal, he'll tie your shoe may be for a month, and
then he'll look for you to tie his."
"And long he may look, even if he has shellfish in his eyes. Why
look, Mrs. Shelfer, they're all crawling about!"
"Bootiful, isn't it? Bootiful! I wish Miss Valence could see them.
And look at the horns they goes routing about with! How they must
tickle your eyelids. And what coorious eyes they has! Ah, I often
think, Miss Idols, I likes this sort of thing so much, what a pity it is
as I wasn't born in the country. I should never be tired of watching
the snails, and the earywigs, and the tadpoles. Why, I likes nothing
better than to see them stump-legged things come to table in the
cabbage. I have not seen one now for ever so long. Oh that Charley,
what dreadful lies he do tell!"
"What about, Mrs. Shelfer?"
"Why, my good friend, he says them green things with stripes
on, and ever so many legs, turns to live butterflies, after they be
dead. But I was too many for him there. Yes, yes. The last one as I
boiled, I did not say a word about it to him, but I put it by in a
chiney-teacup, with the saucer over, in case it should fly away. Bless
your heart, young ladies, there it is now, as quiet as anything, and
no signs of a butterfly. And when he tells me any lies, about where
he was last night, I just goes to the cupboard, and shows him that;
and never another word can he say. And so, Miss Valence, you won't
try these little snails, after my journey and all!"
 "Of course I won't, Mrs. Shelfer. But I am sincerely obliged to
you for your trouble, as well as for all your kind nursing, which I can
never forget. Now let me buy those shellfish from you, and Miss
Isola will take them as a present to her papa."
"No, no, unless he will put them in his eyes, Miss. I won't have
them wasted. Charley will sell them again in no time. He knows lots
of sailors. Most likely he'll get up a raffle for them, and win them
himself."
Away she hurries to take off the bonnet she has been so proud
of, for the last two and twenty years. Though I declined the services
of the ophthalmist snails, my sight returned very rapidly. How
delicious it was to see more and more every day! Plenty of cold
water was the present regimen. Vision is less a vision, every time I
use it. In a week more, I can see quite well, though obliged to wear
a shade.
One morning, dear Isola runs upstairs, out of breath as usual;
but, what is most unusual, actually frowning. Has Cora tyrannised,
or what? Through the very shade of her frown, comes her sunny
smile, as she kisses me.
"Oh, I am so vexed. I have brought him to the door; and now
he won't come in!"
"Who, my darling?"
"Why, Conny, to be sure. My brother Conrad. I had set my heart
on showing him to you, directly you could see."
"Why won't he come in?"
"Because he thinks that you ought not to see strangers, until
you are quite well. He has not got to the corner yet. I can run like a
deer. Send word by me, that you are dying to see him."
 "Not quite that. But say how glad I shall be."
"I'll say that you won't get well till you do."
"Say what you like. He will know it's only your nonsense."
Off she darts; she is quick as light in her movements, and soon
returns with her brother.
I lift my weak eyes to his bright ones, and recognise at once the
preserver of my mother and myself. But I see, in a moment, that he
has not the faintest remembrance of me. My whole face is altered by
my accident, and even my voice affected by the long confinement.
When he met me in the wood, he seemed very anxious not to look
at me; when he saved my life from the rushing mountain, he had
little opportunity. Very likely he would not have known me, under
another name; even without this illness. So let it be. I will not reveal
myself. I thanked him once, and he repulsed me; no doubt he had a
reason, for I see that he is a gentleman. Let that reason hold good:
I will not trespass on it.
He took my hand with a smile, the counterpart of Isola's. He
had heard of me so constantly, that I must excuse the liberty. A dear
friend of his sister's could be no stranger to him. A thrill shot
through me at the touch of his hand, and my eyes were weak. He
saw it, and placed a chair for me further from the light. On his own
face, not the sun, for the "drawing-room" windows look north, but
the strong reflection of the noon-day light was falling.
How like he is to Isola, and yet how different! So much stronger,
and bolder, and more decided, so tall and firm of step. His
countenance open as the noon, incapable of concealment; yet if he
be the same (and, how can I doubt it?), then at least there seemed
to be some mystery about him.
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