Krugman: Debt Arithmetic (Wonkish)

The whole tone of current discussion about deficits is one of urgency: deficits must be brought down now now now or crisis looms. Where is this coming from? Not from the arithmetic.

The way the story is often told, deficits mean higher debt, which means higher interest payments, which can mean a spiral into bankruptcy. And qualitatively that’s not wrong. If you put numbers to it, however, for countries that are not facing huge risk premia, the spiral is very, very slow.

snip

Still, Serious People tell us that investors will turn on us unless we slash the deficit immediately — and they know this because, well, um …

As I’ve often written, we’re in a strange state now where people who actually take textbook economics and simple arithmetic seriously are seen as dangerously radical and irresponsible, while people who believe in invisible bond vigilantes and confidence fairies, who claim to know what the market will want even though there’s no sign of that desire in current asset prices, are viewed as Very Serious.

http://krugman.blogs.nytimes.com/2011/05/24/debt-arithmetic-wonkish/

Turd Way types who wish to be the rainbow Raygun party and will propose slightly less absurd policies with the same underlying principles and call it "sensible" and "centrist". I'm sure many a "pragmatic" will be thrown in as well.

This is what Krugman used to think about deficit dangers...

A Fiscal Train Wreck
By PAUL KRUGMAN

... it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. 


So what?  ... we're looking at a fiscal crisis that will drive interest rates sky-high.

A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises."

But what's really scary ? what makes a fixed-rate mortgage seem like such a good idea ? is the looming threat to the federal government's solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 ? make that 3, O.K., maybe 4 ? percent of G.D.P. But that misses the point. "Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary;  his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.


How will the train wreck play itself out?  ... 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.


Recall. This was written with deficits at a dramatically LOWER level than today.

Krugman has consistently said that the jobs picture -- including underemployment and the alarming rise in long-term unemployment -- is the single most important economic issue right now. I suspect he would say that, with so much of our productive capacity currently going unused, the best way to address the long-term deficit issue is to generate more economic growth, so that more Americans have income on which to pay taxes.

asked him what he brought to the economy to straighten it out and he always told them "arithmetic".