Paul Krugman: Till Debt Does Its Part

My comments in red - MBC

Paul Krugman: Till Debt Does Its Part

http://www.nytimes.com/2009/08/28/opinion/28krugman.html?_r=1

Should you be worried about the national debt, or the politicians in charge of it?:

Till Debt Does Its Part, by Paul Krugman, Commentary, NY Times: So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. (I hate the use of this term, 'maturity'. If someone doesn’t agree with Mr. Krugman they are considered less mature? Anyway, even not taking offense at his words just consider what he’s saying – ‘we can deal with our debts if politicians… show maturity.’ That’s an awfully big IF and another thing history has proven quite unlikely to happen. Politicians are solely worried about amassing power, influence and funds to assure their next election.) Need I say more?

Let’s start with the effects of this year’s deficit. ... Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. (Where is this coming from? Who is talking about ‘balanced budget’? We’re talking about reducing or trying to get some control over the deficit. What a leap to absurdity.) It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression. (Check history – many feel now, with review, Federal actions prolonged things rather than shortened things.)

As I said, deficits saved the world. (So he claims.)

In fact,... the ... White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. ...

Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) (Why?) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. (I question the value of this analysis – he's understating by only considering interest on additional debt - our entire debt is still there and must be dealt with and that does sound a bit overwhelming.) That doesn’t sound like an overwhelming burden.

Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. (We’re buying or own debt – quantitative easing) Despite the prospect of big deficits, the government is able to borrow money long-term at ... less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency. ...

So is there anything to worry about? Yes, but the dangers are political, not economic. (Very stupid argument – lacks the very basic insight of how the politics of any situation plays out in the economic reality)

As I’ve said, those 10-year projections aren’t as bad as you may have heard. Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.

That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! (pure genius – Mr. Maturity blaming the conservatives, as it this single issue is what’s solely behind keeping healthcare reform bill from approval!) — as efforts to “pull the plug on grandma.”

So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.