Panicking Over Deficits Is Not a Solution

Saturday, 16 August 2014 10:57 By Paul Krugman, Krugman & Co. | Op-Ed
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(Image: MEDI; Albania / CartoonArts International / The New York Times Syndicate)(Image: MEDI; Albania / CartoonArts International / The New York Times Syndicate)I figured that I could count on Dean Baker at the Center for Economic and Policy Research to debunk Larry Kotlikoff's recent "Eeek! Debt!" column in The New York Times. But in a blog post, Dean didn't go far enough.

In his column, titled "America's Hidden Credit Card Bill," Mr. Kotlikoff calculates the present discounted value of predicted funding gaps in federal programs, points out that they are really, really big numbers and declares America bankrupt.

As Dean said, this is silly, disingenuous or both. The American economy is expected to grow a lot in the future; meanwhile, real interest rates are expected to be only slightly above growth rates.

So any persistent gap between spending and revenues as a percentage of gross domestic product will be a huge number if converted to present values. However, the present value of expected future G.D.P. is also immense - at least a couple of quadrillion dollars. So is the gap big compared with the resources available to cover it? Mr. Kotlikoff gives us no way to judge.

The questions you should ask are how the fiscal path is likely to play out in reality, and what, if anything, we should do now to make the story better.

It's true that if current policies are continued with no change, we're highly likely to face an unsustainable fiscal gap - a gap that can't go on forever - if we look far enough away. Stein's Law, therefore, applies: If something can't go on forever, it will stop. Sooner or later, we will have some combination of benefits cuts and/or revenue increases.

Saying that this means that the United States is bankrupt is hyperbole; more important, it's not helpful. What, then, should we be doing right now?

The answer all the deficit-panic types offer is basically that we must cut future benefits. But why, exactly, is that something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I've asked for further clarification many times, and never gotten it.

You can argue that it's better to avoid abrupt changes - to put things on a glide path to sustainability. But that's a much weaker point than you might expect given all the cries of bankruptcy and crisis.

And Dr. Evil-type invocations of two hundred trillion dollars serve no purpose at all, unless your real goal is to scare people into preemptively dismantling the welfare state.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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