I keep waiting for time to “do this justice,” but that’s not going to happen. So let me quickly make my point:
I was flabbergasted a couple of weeks ago to read Krugman dismiss the CBO report on the budget outlook in this way:
Yesterday the CBO came out with its updated budget outlook — and the release was met with a collective yawn. Why? Basically, because the projections over the next decade just didn’t show the kind of fiscal disaster everyone in DC wants to believe in. That’s not to say that the outlook is completely benign — CBO still thinks we’ll end the decade with high debt by historical standards…[b]ut there’s nothing there lending comfort to the Greece, Greece I tell you crowd.
And there’s one especially telling point. CBO does show rising deficits by the end of the decade — but not, it turns out, mainly because of rising entitlement spending. Here’s their chart:
The big driver here is CBO’s assumption that interest costs on federal debt will rise sharply. And that’s not mainly because of rising debt; it’s because of an assumed rise in interest rates.
Why is this important? Well, one of the lines used by people determined to panic about the deficit is to say that relatively optimistic projections are based on the assumption that the economy will recover smoothly, and that there won’t be any setbacks. What people saying this fail to realize is that if recovery falters, it’s also more or less certain that interest rates will stay low, offsetting much of the deficit impact. [Bold added.]
Everyone got that? The CBO is showing that federal interest payments alone are going to more than double (as a share of the economy), eventually breaking 3% of GDP. So surely that is something to keep in mind, when we worry about the trillions in debt that the federal government has been wracking up these last few years–with Krugman wishing the numbers were higher.
And yet, no, to think this way just further underscores how stupid the deficit-phobes are, because they aren’t realizing that the rise in debt service payments will simply reflect a healthy economy (and its associated rise in interest rates).
This is classic. For the last four years, Krugman has constantly lecture people on the “myth” that Obama is a big-deficit guy. Why, it was all about the surging social safety net payments, and the reduced tax receipts, caused by the depressed economy. It just looked like we had big deficits, but it was an illusion that fooled idiots who can’t see how a bad economy changes things.
Now, when the CBO forecasts rising deficits down the road, Krugman explains that no, this too is an illusion. It only looks like we’re going to have big deficits, but it will be an illusion that fooled idiots who can’t see how a good economy changes things.
Let me make my point in another way: In various posts recently–here, here, and here, for example–Krugman carefully walks through the budget numbers, showing how the US actually doesn’t have a “structural budget deficit problem” at all. Never once did Krugman say, “Oh, by the way, a full 1.5% of GDP in these calculations is due to the low interest rates caused by the slump, so let’s make sure we keep that humongous factor in mind.”
Nope, the first time I have ever heard Krugman bring up this issue, is when he’s explaining that rising interest rates are associated with a healthy recovery.
So in summary, as usual, we have a Krugman Kontradiction: If he wants to ignore the fact that the debt is relatively easy to float right now, because of low interest rates, that’s defensible: but then he can’t bring it up to excuse the high debt burden the CBO is forecasting in a decade. Or, if Krugman wants to say the high debt burden in a decade should have an asterisk next to it, reflecting the change in interest rates, that’s defensible, but then Krugman can’t ignore today’s low interest rates when explaining away Obama’s fiscal policies.
Yet as is his wont, Krugman goes to the Blogger’s Buffet, only grabbing the “interest rates change depending on the economy” appetizer when it helps the point he’s trying to make that day.