Wikinvest Wire

More on Krugman, deficits, and debt

Tuesday, December 01, 2009

Apparently, enough others noted Paul Krugman's comments on debt and deficits over the weekend that he was compelled to pen this retort at his NY Times blog.

When I was on This Week yesterday, George Will tried his hand at the debt scare thing, saying that we’re in terrible shape because by 2019 the interest on the debt will be SEVEN HUNDRED BILLION DOLLARS. (That should be read in the voice of Dr. Evil). I get that a lot — people who talk about the big numbers which are supposed to imply that things are terrible, impossible, we’re doomed, etc.

The point, of course, is that everything about the United States is big. So you have to interpret numbers accordingly.
...
And bear in mind my point about causes of deficits: the deficits of the Reagan-Bush years were essentially gratuitous, the result of a desire to cut taxes while increasing military spending, rather than a response to a temporary emergency. So that debt burden should have been more worrying than what we’re facing now.

But people still seem to think that repeating those big numbers is enough to make their point.
The chart below was offered as evidence that servicing the debt in the future will be no more onerous than it was in the late 1980s.

If only that were true...
IMAGE Taking Krugman at his word that context is important, it's critical to note the starkly different conditions that exist today versus the 1980s.

Back then, after Alan Greenspan and crew had re-jiggered the Social Security system, surpluses could be counted on to fund part of any budget deficit with baby boomers not set to start collecting for another 20 years. Moreover, we had just embarked on a two-decade long bull market in stocks that would be the cure for many ills following Paul Volcker's penal interest rates in the early-1980s.

My God, we had just created a financial juggernaut based on one of the most reckless credit expansions in the history of the world and this proved to be enough to sustain the entire free world until the wheels fell off last year.

Today, social security is about to turn into a net drag for the federal budget as boomers begin to start collecting en masse and, the U.S. economy is anything but poised for growth.

In that context, people are justifiably scared of what $700 billion debt service payments mean to the nation's long-term health.

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7 comments:

fish said...

I guess that the furry little academic stopped reading General Theory right about the time Keynes mentioned that during periods of robust economic health that debts were supposed to be repaid.

If Krugman has any sense whatsoever he's negotiating for an unmarked burial plot so the impoverished masses won't be able to violate his corpse after the s really hits the fan!

AJ said...

I wonder how much of that debt wouldn't exist if we didn't go on so many overt and covert military adventures over the past several decades.

Maybe, instead of spending almost a trillion dollars to ruin Iraq, we could spend that money on research, education, or health care? I'd rather help Americans than hurt Muslims.

staghounds said...

"After interest rates rise".

Ha, ha, ha.

fish said...

Apparently there is more than one Paul Krugman.... he seems to be his own evil twin.


http://finance.yahoo.com/tech-ticker/article/380621/Niall-Ferguson%3A-Even-Krugman-Admits-the-Deficit-Is-Unsustainable

Anonymous said...

Yes, please give us a McMansion today, and we promise that our children will work enough overtime to repay the debt tomorrow.

Too much debt caused the Great Depression, but most economists are so clueless that they promoted debt build up again. Just like the central bank did in the 1920's.

John S said...

The deficits of the Reagan years may have been essentially gratuitous, but the current group of clowns have added as much debt in 12 months than Reagan did in 8 years. And I seem to remember that Reagan created 10 or 20 million jobs. President Pelosi and her TV spokesman Obama? Not so much.

Anonymous said...

"The deficits of the Reagan years may have been essentially gratuitous, but the current group of clowns have added as much debt in 12 months than Reagan did in 8 years. And I seem to remember that Reagan created 10 or 20 million jobs. President Pelosi and her TV spokesman Obama? Not so much.:

see, you are one of the people that krugman is saying just don't get it. it's not raw numbers. you're numbers aren't probably adjusted for inflation. but that's not the point, the point is that what does it represent as a percentage of GDP?

a lot of the deficit you subscribe to obama is bush's. he is the one that signed the $700 billion dollar wall street bailout at the request of hank paulson.

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