So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.
The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.
If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.
As I said, deficits saved the world.
In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.
But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think. ….
Dateline November 3, 2004
Paul Krugman: “[The Budget Deficit] is comparable to the worst we’ve ever seen in this country. It’s bigge[r] than Argentina in 2001.”
Inquiring minds are reading Krugman calls on Bush to reign in the red.
TONY JONES: Well, the US is not just labouring under a record trade deficit, there are warnings tonight that its budget deficit could precipitate a Latin American style financial crisis.
Influential economist Paul Krugman says the US will face a severe downturn before the end of the decade unless the $500 billion fiscal debt is rectified.
In his latest book, The Great Unravelling, the Princeton University economist is calling on President Bush to abandon his program of trillion dollar tax cuts, otherwise, he claims, there may not be enough funds to pay for the waves of baby boomers who will soon retire.
I spoke to Paul Krugman a short time ago.
TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis.
You’re now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis.
What’s the evidence for that?
PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course – it’s the biggest budget deficit in the history of the world – but it’s a budget deficit that as a share of GDP is right up there.
It’s comparable to the worst we’ve ever seen in this country.
It’s biggest than Argentina in 2001.
TONY JONES: It’s a bit more than arithmetic though, isn’t it?
Would you agree with the proposition that you’re slowly transforming yourself, in a way, from a pure economist into also something of a political activist?
PROFESSOR PAUL KRUGMAN: Well, yeah, I mean, it’s not what I intended. But I came in writing as a journalist, writing occasional columns in the 90s, mostly about economical fears with a political tinge.
I came to the New York Times intending to do pretty much the same thing.
But then it became clear very early on that the President of the United States was irresponsible and dishonest on matters economic and it turned out that what I learned there was true of other kind of policies as well.
So, I was forced, if you like, just by the arithmetic of understanding how the budget works into a much broader critique of this really kind of scary thing that’s happening to my country.
Q. What’s different?
A: Politics: a democrat ultra-liberal is in the White House.
Krugman is not only a Keynesian Clown, but a hypocrite.
Mike “Mish” Shedlock