Paul Krugman is still ignoring America’s economic realities
On Friday, New York Times columnist Paul Krugman declared that President Obama’s almost complete avoidance of the budget deficit in his inauguration address “was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing.”
Why does Krugman say this? He claims the evidence just isn’t there to support concerns about the federal budget.
The entire column is full of fallacies and falsehoods, but here are two particularly egregious ones that are easily taken down:
According to Krugman, the first bit of evidence is the lack of fiscal crisis facing America in the moment:
First, they have cried wolf too many times. They’ve spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.
But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit.
This is a fair point – depressed interest rates have kept federal interests at record lows. However, that doesn’t mean interest payments are low. In fact, in the 2011 fiscal year, interest payments were $454 billion, or 12.5% of the federal budget. This is not exactly small change, and as the debt grows this dollar value will go up.
Krugman is also correct that the depressed economy has kept interest rates low. Taken at face value, it appears Krugman is almost cheering the lack of jobs and economic growth in the country, since it has kept interest rates low. This despite writing just last week that “neither the current deficit nor projected future spending deserve to be anywhere near the top of our political agenda. It’s time to focus on other stuff — like the still-depressed state of the economy and the still-terrible problem of long-term unemployment.”
Next, Krugman’s argument essentially claims the current the economic depression is being caused by too little spending. This ignores how much federal spending has increased since 2007. According to the Office of Management & Budget (the White House’s accounting arm, for all intents and purposes), the federal budget went from $2.66 trillion in Fiscal Year 2006 to $3.52 trillion in 2009 to slightly over $3.8 trillion in 2012. That’s not exactly small change, and it doesn’t even include the $7.7 trillion in loans the Federal Reserve made once the financial crisis hit.
Krugman’s second major fallacy is regarding the debt problem itself:
Second, both deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.
The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which, therefore, led both to low tax receipts and to a rise in unemployment benefits and other government expenses. It should have been obvious that the deficit would come down as the economy recovered. But this point was hard to get across until deficit reduction started appearing in the data.
Now it has — and reasonable forecasts, like those of Jan Hatzius of Goldman Sachs, suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015.
Again, Krugman hides his misleading statements behind some truth. It is accurate to say some of the major deficits of the last few years were largely related to temporary spending in unemployment benefits, bailouts, etc. as well as a lack of tax revenues as people lost work. However, if the bailouts were supposed to be a temporary fix, why hasn’t this “temporary” increase of spending reversed, especially since the recession officially ended in June 2009? Over three years later, evidence tells us Washington has no intention of reducing those spending levels.
Perhaps most frustrating of all is Krugman’s unwillingness to recognize the long-term impact of current fiscal policies. Here is what he wrote last week: “Now, projections that run further into the future do suggest trouble, as an aging population and rising health care costs continue to push federal spending higher.”
If by “suggest trouble” Krugman means “point out we really are facing a fiscal crisis,” he is absolutely correct. To quote the Treasury Report this blog highlighted last week about the coming debt-to-GDP ratio:
[The public debt-to-GDP] ratio was 73 percent at the end of FY 2012 and under current policy is projected to grow to 78 percent in 2022, 145 percent in 2042, and 395 percent in 2087. While these projections are subject to considerable uncertainty, the debt-to-GDP ratio would continue to rise unsustainably under current policy.
In other words, even President Obama’s own Treasury Department – by proxy, President Obama himself – admits the debt is a problem. Additionally, the report shows the debt-to-GDP ratios Krugman crows about will begin reversing themselves in the very near future.
As the new Congress and President Obama debate sequestration, the debt ceiling, and the federal budget, the American people need to know the facts. Unfortunately, Paul Krugman appears willing and ready to frequently mislead and misstate facts a winner of the Nobel Prize in Economics should know.