Is This Krugman? I must just be stupid. Paul Krugman has a Nobel Prize in Economics, surely he must know what he is talking about? In a recent column, "Nobody Understands Debt," :
In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.
So the fact that for every dollar the government spends 42 cents is borrowed is not a cause for concern. The fact that the government debt to GDP ratio for the first time is over 100% is no cause for alarm. Really? Here is part of his argument:
And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.
Yes in the short term Krugman does have a valid point. Even a radical cutter like me would go about the needed reforms gradually, over 5 years or so.
Lord Keynes was famously asked about what the effect of his policies would be in the long term. He said "In the long run we are all dead." Of course Keynes is dead and we are living in his long term. We cannot continue to kick the can down the road forever. This is far better than allow a crisis to occur and be forced to either print money or drastically cut government spending all at once.
Of course Krugman thinks we can.
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
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First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
To a degree Krugman is right. However we are living in a time where the tax base is NOT growing as rapidly as the debt, nor is it likely to grow that fast anytime soon. The Japanese have been stuck in this scenario for 20 years and their debt to GDP ratio is over 200%. This cannot be sustained. The Japan example does tell us that the US has a few years before the proverbial "fecal matter hits the circular air circulation device."
I have been saying that this is 4 to 8 years. It could be longer, or it might be shorter. The question is asked in environmental circles. If you have a pond and it takes 30 days for the lily plant to cover the pond, and the lily plant grows 50% every day, on what day is the pond 1/2 full? The answer is on day 29. The point they are making is that with exponential growth the problem is not recognized until it may be too late.
We may not have much warning when the bond buyers quit buying. In fact if the US attacks Iran, I can see Russia and China quit buying bonds and selling the ones they have. The problem is inevitable, if things continue as they are, but the exact time of the crisis is not predictable.
Even with the unrealistic growth predicted by the Congressional Budget Office, even with the Office predicting the Bush tax cuts expiring next year (a 4 trillion tax increase), the Office is still projection a 13 trillion dollar increase in the debt over ten years. (This is from July 2011)
This almost doubles the debt in ten years.
Here is a debt chart from the interestingly-named site Babylontoday.com
The chart is a little out of date, US Government debt debt is now 15 trillion.
Here is the projected government debt over the next few years.
(If you notice this chart includes State and Local government debt, but does not include government guaranteed debt like Fanny Mae and Freddy Mac.)
Let’s say the debt does double over the next ten years and interest rates also double. What will that do to the deficit? Let’s do the math.
From a little google research it appears that the percentage of interest of government expenses is 6%. Since we borrow 42 cents for every dollar that is spent that means the percentage of the interest of total government revenue is 6/58 or roughly 10%. So if interest rates go from the historic low of 2% they are now to 4%, and the debt doubles, that means the ratio of the interest payments to government revenue will go up to 40%. Obviously this is a back-of-the-envelope kind of calculation that ignores economic growth. The point is that we have reached a point where the current deficit of the US Government is not sustainable.
Krugman is right, "no one" understands debt. No one in government, and especially no one that writes for the New York Times understands debt.