Paul Krugman on the Real Reason Behind the Deficit Panic and the Terrible Damage It Has Wrought
Paul Krugman attacks the recent, years-long panic over the national debt and deficits in today's column reminding readers that this once relentless topic in the news has pretty much disappeared from view. And for good reason, Krugman says, "The whole thing turns out to have been a false alarm."
There was a time not so long ago when it was all you could read or hear about. The media and politicians of both stripes kept sounding the alarm over budget deficits and rising debts. Very serious people said the U.S. would soon turn into Greece unless something was done. Obama tried to strike a "Grand Bargain" with Congress for a balanced budget. But, of course, this Congress does not bargain—refuses to raise taxes—and no deal was struck.
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. 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.
Krugman goes on to responsibly inform readers that things will get more complicated after about a decade as an aging population makes increasing demands on Medicare and Social Security. But, on the plus side, healthcare costs have dramatically slowed down, which none of the doomsday prognosticators saw coming. Krugman writes:
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. Oh, and the budget office now expects interest rates to remain fairly low, not much higher than the economy’s rate of growth. This in turn weakens, indeed almost eliminates, the risk of a debt spiral, in which the cost of servicing debt drives debt even higher.
OK, but still, Krugman allows, rising debt is not good. He also points out that it would take "surprisingly little" to avoid it.
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.
In short, the debt apocalypse has been called off.