"I get a lot of worried mail along the lines of “how on earth will we ever be able to pay off our debt”? Look, there are real worries — but the math per se isn’t very hard.
The Obama administration’s budget (pdf) predicts that by 2020 we’ll have net federal debt of around 70% of GDP and a budget deficit of around 4 percent of GDP. Now, you don’t have to go to a zero budget deficit to make headway on the debt — a budget deficit of 2-3 percent of GDP would imply a steadily declining debt/GDP ratio. So if you believe the administration’s budget estimates, we’ll need to find another 1-2 percent of GDP in revenue or cost savings."
Alright, Krugman - we'll see how our debt goes. As of 2009 fiscal year, our federal debt including intra-governmental obligations was around 83%. After taking into account some of Obama's pet projects, including spending the rest of ARRA, Obamacare, and the expected initiation of tougher Cap-and-Trade policies, I'm sure FY2010 will dwarf our measly 83% debt-to-GDP ratio, let alone 2020. Spendthrift that he is with other people's money, I wonder on what grounds can you claim further spending will reduce the debt?
Furthermore, you really do need to make a zero budget deficit to make any headway. If we are currently making deficits of 4% (like 2004 - during the boom), anything short of reducing spending by 4% will increase the debt. Krugman here plays a bait-and-switch - he attempts to show the reduction in the ratio of Deficit to GDP, which is a relative gain, and trick us into believing it can erase the debt entirely, an absolute gain. Here is some simple math to illustrate:
Mattheus' income in 2009: $100
Mattheus' spending in 2009: $104
Here I am running a deficit of 4%. If I follow Krugman's advice, and hope to wipe out the debt by reducing spending by less than 4%, this follows:
Mattheus' income in 2009 and 2010: $200
Mattheus' spending in 2009 and 2010: $207
In 2010, I only ran a 3% deficit; spending a measly $103 dollars. In relative terms, the deficit is lower. Instead of being 1.04:1, it is now 1.035:1. It's shrinking! Of course, even the layman sees that I owe more in absolute terms, because now I owe $7 extra as opposed to $4. The "ratio reduction" doesn't really make me any better off because I, in fact, ran another deficit and I will have to pay off even more. Krugman's analysis is faulty because he looks at the shrinking deficit ratio (1.35 as opposed to 1.4) and concludes that consecutive deficits can make it run to unity. Of course, we all know that consecutive deficits can only make a person (or nation) owe more. You do not become absolved of debt by reducing the "ratio" of debt/income but by paying back what you owe.
"Many independent sources are moderately more pessimistic; they think that on current policies we’d be looking at a deficit of 5-6 percent of GDP. So that makes it more like a 3 or 4 percent of GDP adjustment.
That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world. Or we could save a significant share of that total by not being totally prepared for the day when Soviet tanks sweep across the North German plain."
I'm not surprised Krugman thinks raising taxes is the panacea for debt. As usual, he puts so many carts before horses that he forgets how the carriage is pulled. It is not increased taxation that is necessary for salvation, but reduced spending. All other things being equal, government spending has to equal government income. G = Y. Instead of stealing more money from everyone (which is the equivalent of raising Y), Krugman could argue for less government intervention. But this, of course, would get in the way of his multiplier and a whole host of fallacies we don't want to get into.
As far as raising taxes by 3-4% and being "one of the lowest-tax nations in the advanced world," Krugman doesn't really seem to grasp how uncompetitive the US is in terms of investment. According to the OECD, the United States has the 2nd highest corporate tax rate in the world (Behind Japan - who knew?), and a personal tax rate of almost 30%. A 3-4% increase in personal taxes would place us near Canada and the UK. An increase on corporate taxes by 3-4% is financial Armageddon - hopefully Krugman isn't too stupid to see that. To his credit, he joins the ranks of tens of millions of uneducated, ordinary Americans who wonder why we still protect the Rhineland from the Warsaw nations.
"The only reason to doubt our ability to get things under control a decade from now is politics: if we’re still deadlocked, if sane Republicans are cowed by the Tea Party, then sure, we can have a fiscal crisis. And longer term, we’ll be in a mess unless we get health care costs under control — which is exactly what we’re trying to do, in the face of cries about death panels.
The numbers aren’t that bad; if we go wrong, the fault will lie not in our debt, but in ourselves."
His first statement is correct. Politics play the most important role in determining the fate of our economic future. His second, third, and successive statements are wrong. I knew I shouldn't have given him the benefit of the doubt to be correct on more than one count at a time, but darn it - I was hoping!
