It’s official: there is no debt problem. Paul Krugman says so — so it must be true:
[D]ebt and deficits have faded from the news. And there’s a good reason for that disappearing act: The whole thing turns out to have been a false alarm.
I’m not sure whether most readers realize just how thoroughly the great fiscal panic has fizzled — and the deficit scolds are, of course, still scolding. They’re even trying to spin the latest long-term projections from the Congressional Budget Office — which are distinctly non-alarming — as somehow a confirmation of their earlier scare tactics. So this seems like a good time to offer an update on the debt disaster that wasn’t.
About those projections: The budget office predicts that this year’s federal deficit will be just 2.8 percent of G.D.P., down from 9.8 percent in 2009.
You see the trick, right? He’s using 2009 as our baseline. But 2009, the Year of Our Stimulus, produced the worst deficit-to-GDP ratio since the late 1940s. This chart, produced in 2010, shows the historical perspective. Look at the yellow line at the bottom; that’s the deficit-to-GDP ratio. See how it spikes up in 2009?
It’s true that the fact that we’re still running a deficit means federal debt in dollar terms continues to grow — but the economy is growing too, so the budget office expects the crucial ratio of debt to G.D.P. to remain more or less flat for the next decade.
The economy is growing? Well . . . if we are using GDP as our measure (and Krugman does), Q1 was actually a contraction of a percentage point. But let’s return to the big picture as explicated by Krugman:
Things are expected to deteriorate after that, mainly because of the impact of an aging population on Medicare and Social Security. But there has been a dramatic slowdown in the growth of health care costs, which used to play a big role in frightening budget scenarios. As a result, despite aging, debt in 2039 — a quarter-century from now! — is projected to be no higher, as a percentage of G.D.P., than the debt America had at the end of World War II, or that Britain had for much of the 20th century.
See? Debt to GDP is no worse than just after World War II! Once again, of course, Krugman is playing with the numbers, as you can see by consulting the handy chart above again. This time, look at the green line on top. See the hugely monstrous spike in 1946? The total outlier, caused by years of destructive world war? The economic disaster caused by the crippling of an economy that spent four years without millions of its most productive citizens? We’re headed back there, on the natural . . . with no world war to explain the tremendous rise in the debt-to-GDP level. And nothing to stop us from breaking through the disastrous WWII levels.
(Note how the trough of that graph was 1971, when we finally went off the gold standard for good. That’s when we began our inexorable addition to the mountain of debt.)
Reassured yet? Oh, but Krugman says the problem is easily fixed:
Still, rising debt isn’t good. So what would it take to avoid any rise in the debt ratio? Surprisingly little. The budget office estimates that stabilizing the ratio of debt to G.D.P. at its current level would require spending cuts and/or tax hikes of 1.2 percent of G.D.P. if we started now, or 1.5 percent of G.D.P. if we waited until 2020. Politically, that would be hard given total Republican opposition to anything a Democratic president might propose, but in economic terms it would be no big deal, and wouldn’t require any fundamental change in our major social programs.
Love how the only possible roadblock might come from Republicans. Let’s be honest: he’s not really talking about spending cuts, or he would talk about Democrat intransigence too. Anyway, Krugman again cooks the numbers by expressing these tax increases or spending cuts in terms of a percentage of GDP. What are these piddling numbers in reality?
1.5% of GDP ($15.68 trillion) is $235 billion. That’s the tax hike or spending cut that Krugman says would be no problem. Yet the sequestration “cuts” (actually reductions in increases in spending) were only $85 billion off the hoped-for increases — about 1/3 of that $235 billion number. And Krugman wailed that they would cost us 700,000 jobs and that we needed to spend more.
The problem that Krugman “forgets” to confront is that, historically, no matter how high you raise that top rate, you never get federal revenue much above 20% of GDP. I have discussed that here before. Even with a top income tax rate of 90%, you still get 20% of GDP as revenue — because people change their behavior as you raise the top rate.
So we need to do it through cuts — and Krugman told us that a mere 1/3 the cuts he says are required were far too damaging to actually implement.
So you can pretend the numbers are small, and shrug off the political difficulties — but you are contributing to the situation and helping ensure it will never be fixed, Krugman.
So yes, we’re still headed towards the cliff. Clip and save Krugman’s column; it’s a keeper. Like his early 2000s call for a housing bubble, it will make fun reading sometime in our bleak future.