21 Feb 2013

Krugman: High Deficits Are Due to Either a Depression or a Recovery, But Never to My Policies

All Posts, Krugman 10 Comments

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.

10 Responses to “Krugman: High Deficits Are Due to Either a Depression or a Recovery, But Never to My Policies”

  1. Major_Freedom says:

    I don’t even get the “higher interest rates means healthier economy” assumption.

    Higher interest rates could mean lower saving and investment relative to consumption (bad for growth), or it could mean more money printing (not indicative of growth).

    • Bob Murphy says:

      MF the only thing you need to know about interest rates, is that when they hit 0% the laws of economics flip.

      • Ken B says:

        But you can’t tell, because it’s unobservable.

      • Major_Freedom says:

        Oops, I forgot.

        Kidding aside, if the laws change at 0%, then they have never changed. After all, 0.25% is not 0%.

        • Bob Murphy says:

          No, there’s a zone of uncertainty centered at 0% with a radius of 26 basis points.

          • Major_Freedom says:

            This is almost as scientific and logical as FDR’s choice for the par value of gold redemption.

  2. Yancey Ward says:

    Krugman will maintain his deficit blinders until the next Republican sits in the White House. We all know this.

  3. Bharat says:

    This alone is a good response to Krugman’s recent blog post about about the “psychology” of Austrian proponents. One wonders if Krugman examines his own psychology before he speaks about that of others.

  4. Tel says:

    The Fed can basically keep manipulating interest rates forever. There’s no way anything can force up interest rates if the Fed just chooses to keep printing money and buying.

    However, the catch is inflation, and devaluation of the US dollar. Suppose Europe gets its act together (admittedly unlikely) and we have a situation with a stable Euro and cash interest rates in Europe of perhaps 3% or something like that. That means international investors will steer away from the US dollar and toward the Euro. In which case, the US Treasury won’t have a problem with interest rates, but they will have a problem with inflation, and the US economy will be unable to buy raw materials (e.g. oil) on the international market.

    What the Fed is depending on here is that all the other countries also want to devalue their currency (i.e. make themselves poorer) so they are all trying the same trick — but it can’t work. It just isn’t possible for everyone to devalue against everyone else.

  5. Stefan says:

    Because debt is always sustainable. Unless it mustn’t be. Because it really isn’t. Although I said it wasn’t. Because it never was. Unless I say it is. Because then it must be. -Big Pauly K.

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