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 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.
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.
If only that were true...
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.