Paul Krugman and Reality

In an editorial in the Bee this morning Paul Krugman commented "The long-run budget outlook is problematic, but short-term deficits aren't – and even the long-term outlook is much less frightening than the public is being led to believe." He refers to those who have raised larger concerns about our deficits as engaging in "deficit hysteria." He goes on to suggest "Now, as then, politicians and the media have bought into the notion that we must take drastic action quickly, even though there hasn't been any new information to justify this sudden urgency. "

Yet, when deficits were a quarter of their current size at about $400 billion, it was Krugman who made all sorts of claims about their evil consequences. When they were under 5% of GDP they were "destructive." Krugman claims that more than half of the current deficit was caused by the economic downturn. That still means that half was not.

True some economists argue, in Keynesian terms, that deficits don't matter in times of economic downturn. But look at the trend lines - the last deficit under Bush was about a third of the current level of deficit and about a quarter of the projected year's level. That half of a deficit that was not caused by the downturn is still twice the level of the prior unacceptable deficit. The percentage of the federal budget that is taken up in debt service, while unacceptably high in Bush's era has gone to stratospheric levels. The long term trends are accelerating and that is a bad sign. The amount of debt held by Americans has continued to decline - thus people and institutions outside the US will have an increasing role in determining how we may act in the future. Note discretionary spending during this cycle has increased by 84% - by any measure, even taking account for the countercyclical spending that is a pretty large jump.

Krugman's answer as to why there is more commentary on the deficit at this point (which he categorizes as hysteria) is politics. Well, if the commentary by a diverse set of economists about the problems of current state of the federal budget are politics then Krugman's differential response on deficits is hypocrisy.