People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.that's from the 2nd paragraph of Dwindling Deficit Disorder, Paul Krugman's powerful New York Times column this morning, which I strongly urge you read. As he says in the paragraph immediately before,
A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far — where are the soaring interest rates we were promised? — protests that we are having the wrong conversation have consistently fallen on deaf ears.As is usual with Krugman, he supports his assertions with irrefutable data and presents it with a clear command of effective phrasing.
He reminds us that the deficit IS shrinking, having peaked at $1.4 trillion in 2009 while CBO estimates for 2013 are down to $845 billion. What is important, according to Krugman, is debt as a percentage of GDP. As he puts it,
all we need is a deficit small enough that debt grows more slowly than the economy.He reminds us that in the 3 decades after the Second World War, our debt doubled but during the same period as at percentage of GDP debt fell 3/4 in the same time frame.
Please note - the key number is the debt percentage, so even if debt - the accumulation of deficits - is going up, if the economy is growing faster it is not to Krugman the real issue.
Krugman argues that a sustainable deficit would be around $460 billion,
according to new estimates by the budget office, half of our current deficit reflects the effects of a still-depressed economy. The “cyclically adjusted” deficit — what the deficit would be if we were near full employment — is only about $423 billion, which puts it in the sustainable range; next year the budget office expects that number to fall to just $172 billion. And that’s why budget office projections show the nation’s debt position more or less stable over the next decade.That is, without the draconian cuts from the sequester, and without any so-called Grand Bargain that would at least partially roll back if not slash the reach of the social safety net.
Krugman acknowledges that there are long-term issues with the growth of health care expenditures - as one over 65 I can see how that would be were my wife's current medical expenses being paid by Medicare. He nevertheless argues that no coherent argument has been presented as to why those long-term concerns should be driving current economic policy now, when in fact the deficit may even be too small.
Here let me remind readers of something Krugman has pointed out before, even if not a focus in this column. The cost of borrowing is currently very low. The amount of economic activity that could be stimulated by more federal government borrowing makes it foolish not to do more stimulus activity with borrowed funds. The ROI is close to spectacular, and it is the one way we could be creating enough more jobs to begin to truly recovering the economy. The taxes on those additional jobs would have a real multiplier effect in the public sector - sales and state and local income taxes would go up, the spending at the retail level would create not only more retail jobs but more jobs in manufacturing, the additional income in private hands would begin to push real estate values back up, and we would not be continuing to lose state and local government jobs.
Krugman knows that inside the Beltway there are those who are invested in fear-mongering about the deficit:
Fiscal fearmongering is a major industry inside the Beltway, especially among those looking for excuses to do what they really want, namely dismantle Medicare, Medicaid and Social Security.They don't want the data to undermine the arguments they are pushing, and may even resort to using bogus or irrelevant numbers in an attempt to persuade us that we are still in a fiscal crisis.
But we aren’t. The deficit is indeed dwindling, and the case for making the deficit a central policy concern, which was never very strong given low borrowing costs and high unemployment, has now completely vanished.If there is any integrity in the Pulitzer Prize process, this column should get Krugman a Pulitzer for commentary to accompany his Nobel for Economics.