Paul Krugman: The Mostly Solved Deficit Problem (Nobel Prize Winner says Debt-to-GDP ratio is down)

New York Times ^ | 01/1 | Paul Krugman

[SeekAndFind]

The Center on Budget and Policy Priorities has a graph:

The vertical axis measures the projected ratio of federal debt to GDP. The blue line at the top represents the projected path of that ratio as of early 2011 — that is, before recent agreements on spending cuts and tax increases. This projection showed a rising path for debt as far as the eye could see.

And just about all budget discussion in Washington and the news media is laid out as if that were still the case. But a lot has happened since then. The orange line shows the effects of those spending cuts and tax hikes: As long as the economy recovers, which is an assumption built into all these projections, the debt ratio will more or less stabilize soon.

CBPP goes on to advocate another $1.4 trillion in revenue and/or spending cuts, which would bring the debt ratio at the end of the decade back down to around its current level. But the larger message here is surely that for the next decade, the debt outlook actually doesn’t look all that bad.

True, there are projected problems further down the road, mainly because of the continuing effects of an aging population. But it still comes as something of a shock to realize that at this point reasonable projections do not, repeat do not, show anything resembling the runaway deficit crisis that is a staple of almost everything you hear, including supposedly objective news reporting.

So you heard it here first: while you weren’t looking, and the deficit scolds were doing their scolding, the deficit problem (such as it was) was being mostly solved. Can we now start talking about unemployment?

[FroggyTheGremlim]

Let's see, the debt is up. GDP is down.

But debt / GDP is down?

Nope. Wrong. Krugman is an idiot.

Can I have my Nobel prize now?

[Pietro]

I guess running a deficit that is 75% of GDP is good?

[CMailBag]

[lurk]

I’m going to try this at home. I’m going to keep getting more credit cards and maxing them out. Then I’m going to get more jobs so that my debt to income ratio looks okay.

[SeekAndFind]

RE: GDP is down.

GDP is UP According to this news:

http://www.telegraph.co.uk/finance/economics/9758445/US-GDP-revised-up-as-consumer-and-state-spending-drives-growth.html

EXCERPT:

US GDP revised up as consumer and state spending drives growth

The US economy grew faster than previously estimated in the third quarter, as consumer spending picked up and state and local governments added to growth for the first time in almost three years.

Growth in the three months to the end of September expanded at a 3.1pc annual rate, according to the Commerce Department’s final estimate. This was revised up from a previous estimate of 2.7pc and is a sharp improvement over its initial estimate of 2pc.

The revision reflected stronger consumer spending, which accounts for about 70pc of America’s economy. The government said spending grew at an annual rate of 1.6pc in the third quarter, above its previous estimate of 1.4pc.

The Commerce Department also revised up its estimate of spending by state and local governments to show a gain of 0.3pc - the first quarterly increase in three years. State and local governments had previously been slashing payrolls and other spending in the aftermath of the Great Recession.
Total government spending grew at 3.9pc annual rate last quarter, reflecting a surge in defense spending.

CLICK ABOVE LINK FOR THE REST...

[Redmen4ever]

The assumptions underlying this are from a left-of-center think tank. But, even with these assumptions, without $1.4 trillion of additional deficit reduction, the ratio of debt-to-GDP goes to a trend of rising, which is (at this time) admitted even by Krugman to be a problem. So, we have a problem. The President’s solution to the admitted problem is additional tax increases. Round 2 if you will, of tax increases. “A balanced approach” of this Administration therefore means only tax increases.

Now, to turn the clock back to 2006, when Obama was merely a blowhard U.S. Senator, he described running a deficit that maintains the ratio of debt-to-GDP at 30 percent to be “unpatriotic.” His position now, as a blowhard U.S. President, is that running a deficit that maintains the ratio of debt-to-GDP at 60 percent is “responsible.”

Back in 2006, he said that deficit spending to counter a recession was a good thing; but, with recovery, we needed to return to a balanced budget if for no other reason than to restore the capacity to run a deficit to deal with a future contingency. I agreed with his thinking then, as I think most economists do. (By “most economists,” I mean economists not named Paul Krugman.) So, why would I change my mind today?

Oh, wait, I forgot, it’s because he’s Obama the Great, and I’m merely a peon. What was I thinking to ever question whatever Obama the Great is currently saying. Obama the Great is like the Koran, you know, eternally true from the beginning of time itself, only whatever part of it Muhammed said last trumps what parts of it he had previously said.

[LucianOfSamasota]

Projections are marvelous things. IF everything works out as projected, then I predict X.

But the PROBLEM with projections is that they are based upon assumptions which may not occur. And IF the projection is created based upon wishful thinking, or some underlying agenda, the probability may be quite high that the assumptions will not occur.

All the historical data I see suggests that we are adding debt at a rate of about 7% of GDP per year. Unless GDP is growing much faster than 7%, or someone has decreased the Federal outlays, the deficit will continue to grow.

I think Krugman's graph is projecting an uptick in GDP as if it is a permanent growth trend, i.e deducing that a change from 1% GDP growth to 3% GDP growth is a trend and projecting it to 5%, 7%, 9%, 11%, etc. - until the growth overpowers the spending.

I doubt that anyone who has ever met a budget in the real world would project that rising income would overwhelm unbridled spending. But the analysis gives Democrats a little more time to avoid accountability, and that seems to be their main goal: "steal all we can while we can, then blame the problem on the other guy".

[lacrew]

The start point of the graph is around 72.

Now, I haven’t won a Nobel prize in a while; but, isn’t our debt $15.9 trillion and GDP $15.8 trillion.

Wouldn’t that make our ratio 100ish?

What flawed assumptions were used to make this propaganda.

[Pollster1]

So you heard it here first: while you weren’t looking, and the deficit scolds were doing their scolding, the deficit problem (such as it was) was being mostly solved. Can we now start talking about unemployment?

Krugman is as enthusiastic although inept a liar today as when I knew him back in the 1970s and 1980s:

The "recovery" assumption includes an extremely robust recovery for which there is no evidence beyond his assumption that it would be nice if the socialists and crony capitalists had more of our money to use in destroying our country.

The graph he chose to display starts in 2012 at 72% (peaking at 80% to 82% in 2014, regardless of spending cuts) and assumes that the current level of debt is acceptable, despite the evidence in our anemic recovery that we are already at a debt level that is economically crippling. A more accurate measure of national debt to GDP would be $16.4T/15.5T = 105.8%, not 72%.

National debt to GDP was under 20% until the Great Depression, rose to 40% before FDR took office, skyrocketed to 120% by the end of WW2, dropped to 70% before Truman left, 55% under Ike, 35% under LBJ, stayed in the low 30s under Nixon, Ford, and Carter, rose steadily to 65% under Reagan and George H. W. Bush, and dropped to 55% under Clinton. The ratio rose to 65% in the first six Bush years, then skyrocketed to 85% under Bush/Pelosi (for which I will never forgive Bush or Pelosi). Debt to GDP has continued rising under Obama at almost the same pace as under the two years of Bush/Pelosi, and I am thoroughly disgusted with Obama, Pelosi, Reid, and Boehner for what they are doing to our children. The $6T in frivolous deficit spending has harmed not only our country today but also the country our children will inherit.

There are innumerable other problems in Krugman's analysis, but the bottom line is that it is the usual Krugman propaganda - cherry-picked facts selected to further a big government agenda and not to honestly present objective reality.

[fhayek]

I think that you put your finger on it. This country has always managed to outgrow its debt problems, and Krugman just naturally assumes that this will continue to happen in the future. What we need to factor in is the effects of higher taxes, Obamacare, higher energy costs, greater regulations, rules which strengthen organized labor, etc. (In short, the Obama Administration) will have on growth rates going forward. I believe that I am on solid ground in predicting these aforementioned policies will dampen economic growth in this country. In fact, I cannot see how they will not. Growth projection greater than 2 or 2.5% are overly optimistic. We could barely achieve 2% growth when we were coming out of a recession, and that is when growth rates are likely to be their highest. So, no, growing out of our current debt problems are exceedingly unlikely, especially when debt growth continues to outpace GDP growth.

[andy58-in-nh]

Subtract government spending from GDP and it goes negative. And even currently projected spending is unsupportable by even the most insufferable tax increases, which in turn would depress investment and consumer spending.

Typical Krugman BS in support of a centrally-planned state-run economy.

[KarlInOhio]

The start point of the graph is around 72.

Now, I haven’t won a Nobel prize in a while; but, isn’t our debt $15.9 trillion and GDP $15.8 trillion.

Wouldn’t that make our ratio 100ish?

What flawed assumptions were used to make this propaganda.

They might not be including the Social Security bonds in the total because they are owed by the government to itself.

http://www.treasurydirect.gov/govt/reports/pd/mspd/2012/opds122012.pdf lists how the debt is organized. It is roughly
$1.6 trillion in publicly held treasury bills,
$7.3 trillion in publicly held treasury notes,
$1.2 trillion in publicly held treasury bonds,
$0.8 trillion in inflation protected securities,
$0.5 trillion in publicly held non-marketable securities
and $4.8 trillion in government held non-marketable securities which is largely the Social security lockbox.

Exclude the intergovernmental holdings and we "only" have a debt of $11.6 trillion.

[Vince Ferrer]

If we have solved the deficit then we no longer need to raise the debt ceiling.

[Vendome]

Sure Pythageroues
..

[Vendome]

Well Euclid, your ratio arguments are irrational and besmirch the gawd Obama ...

[Captain Rhino]

Okay, so the good Professor Krugman is saying that the very bad national debt situation is still getting worse but now it is getting worse at a slower rate.

Swell. So went does think we will reach a point where the US government is actually paying down the debt?

[LucianOfSamasota]

Subtract government spending from GDP and it goes negative.

Do you know of a reliable source for private sector GDP minus government spending?

[1010RD]

The graph scales don’t match. The graphic is meant to decieve the innumerate.

Also, the “spending cuts” are illusory and in the future where a new Congress can change everything.

[lacrew]

Well it looks like Krugman is using the ole’ social security slight of hand. The same slight of hand was used, btw, to give us our ‘Clinton Surplus’. The government simply borrowed enough from the SS Trust fund to make up for the annual deficit and said ‘looky, a surplus’.

I don’t buy the ‘government owes it to itself’ argument one bit...because the government doesn’t have any money! The SS trust fund is now running in the red every year...and last I checked the general fund was running a deficit...so, where does the government get this money, to pay to itself? Taxes.