New York Times columnist Paul Krugman uses the passing of the Mayan date of apocalypse as a news hook to attack debt hawks, such Erskine Bowles and Alan Simpson, as “cultists” who keep predicting fiscal disaster is just around the corner:
Regular readers know that I and other economists argued from the beginning that these dire warnings of fiscal catastrophe were all wrong, that budget deficits won’t cause soaring interest rates as long as the economy is depressed — and that the biggest risk to the economy is that we might try to slash the deficit too soon. …
The key thing we need to understand, however, is that the prophets of fiscal disaster, no matter how respectable they may seem, are at this point effectively members of a doomsday cult. They are emotionally and professionally committed to the belief that fiscal crisis lurks just around the corner, and they will hold to their belief no matter how many corners we turn without encountering that crisis. … But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.
But until Barack Obama was elected and started running up trillion-dollar deficits, Krugman was a member of that doomsday cult. Back in 2003, for instance, Krugman compared the federal government to a gigantic insurance company — one with a side business providing national defense — that recklessly conducted its accounting on a cash basis. He favorably quoted a Treasury official calling the situation “an accident waiting to happen.”
The columnist was so alarmed over the fiscal impact of the Bush tax cuts and the coming Iraq war — he said he was “terrified” — that he even shifted his home loan from a variable-rate to a fixed-rate mortgage. The Great Reckoning had begun! Krugman:
The accident — the fiscal train wreck — is already under way. How will the train wreck play itself out? … But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that ”a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.
Talk about cognitive dissonance. Or maybe it’s intentional obtuseness. Or maybe just pure partisanship. Bush deficits bad. Obama deficits no problemo.
That, even though the Bush deficits averaged $250 billion a year, and the Obama deficits have averaged $1.3 trillion a year.
That, even though under Obama’s own 2013 budget, his two terms would add $8 trillion to the national debt vs. $2 trillion for Bush’s eight years.
That. even though we are now a decade closer to the time when Medicare really starts adding to the red ink, as this Obama White House chart shows:
I think a scene from the film “Moonstruck” provides a good way of thinking about the national debt. Plumbing contractor Cosmo Castorini enlightens a yuppie couple in need of a bathroom remodeling: “Look, there are three kinds of pipe. There’s aluminum, which is garbage. And you can see where that’s gotten you. Then there’s bronze, which is pretty good, unless something goes wrong. And something always goes wrong. Then there’s copper, which is the only pipe I use.
Right now, the U.S. debt probably isn’t a huge, immediate problem, given a) the size of the debt as a share of output, b) the economy’s nominal growth rate, c) government interest costs – though some research shows it may already be slowing growth.
Unless something goes wrong. An accident waiting to happen.
What if we have another financial crisis? The past one doubled our debt/GDP ratio. And every year that goes by that we don’t address our entitlement crisis adds trillions to the fiscal cost of any eventual solution. That is literally taking more money each year from our children to finance our consumption today.
Krugman — somewhere in there — must surely realize that. Again, cognitive dissonance or intentional obtuseness?