Paul Krugman: it’s your turn. Having denounced Paul Ryan’s budget proposal in your Friday New York Times column as “ludicrous” and having excoriated every prior effort by Republicans to begin to remedy our country’s fiscal woes, it is now up to you to rein in government spending. What would your suggestion look like? Let me help you out.
It is clear that you consider any attempt to slice the government pie – at least in the near term—wrongheaded and dangerous for the tentative recovery. You have argued consistently that the Stimulus program was not too large, but rather too puny to pump up demand.
By your standards, government spending, now cruising along above 24 % of GDP – an unprecedented peace-time level—should have moved higher over the past two years. Consequently, the nation’s deficit of about $1.7 trillion, which is running at nearly 10% of GDP, the highest in 65 years, should actually have been higher. It’s hard to imagine.
Some would argue that soaring deficits and debt take a toll on the nation’s confidence; that voters understand that there will be a day of reckoning. As the country’s debt rises, it inspires caution; the savings rate begins to creep up, offsetting the stimulative impact of the government’s spending.
That’s what happened in this country. After decades of declining to near-zero levels, the savings rate soared with the onset of the fiscal crisis and ramp-up of debt. Were people simply worried about losing their jobs? Or were they concerned that the country’s fiscal prospects might undermine the programs they counted on for their retirement? Are you sure you really know the answer Mr. Krugman?
A jump-up in government borrowings also constrains private investment, which is statistically associated with lower unemployment and more rapid growth. Government spending, on the other hand, correlates with rising unemployment. As Gary Becker (another Nobel Laureate) notes in a study coauthored with George Schultz and John Taylor, “when government purchases of goods and services came down as a share of GDP in the 1990s, unemployment didn’t rise. In fact, it fell, and the higher level of government purchases as a share of GDP since 2000 has clearly not been associated with lower unemployment.” There has been virtually no time in the country’s history when more government led to more prosperity. It is in textbooks that the argument lives on.
Clearly you disagree. You cannot see beyond the academic trenches; by inference, you have judged American consumers and investors insensible to the country’s fiscal plight.
How, then, would you explain the rise of the Tea Party – arguably the most energized political force in decades? If the country is ignorant of, or oblivious to the harm that indebtedness can cause, why do we have 87 new Republicans in the House, carrying out the demands of the electorate and trying to stop the spending onslaught? Is it all the work of those mischievous Kochs?
You might protest that this is a mischaracterization of your views. Perhaps you see value in trying to contain long-term spending, but consider that such efforts should be postponed until the economy is really humming. That would parallel the approach in President Obama’s recent budget proposal. Under that scheme, we would see government debt skyrocket to $14 trillion in 2015, or 76% of GDP. By reference, debt owed by the government of the U.K., which precipitated a powerful revamp of that country’s budget priorities, amounted to only 65% of GDP. Net interest on U.S. debt is projected in Mr. Obama’s budget to total $844 billion ten years out, or more than our soaring outlays for Medicare in that year. Since this estimate includes decidedly benign expectations on interest rates (consistently under 5%), the number will almost certainly be higher. (In fact, the president’s budget projections have already been shown to be overly optimistic; the CBO’s estimates show debt growing by $9.5 trillion over the next ten years, as against Obama’s $7.2 trillion estimate.)
In your world, not only are American consumers ignorant of the country’s fiscal plight, but international lenders are similarly clueless. How comforting it must be to be the only person who really understands how the economy works.
We understand that the only way that you see us getting out of this mess is to raise taxes on the wealthy. Let’s be clear: this year you would have had to raise individual taxes by 70%—on the entire country – to close the budget gap. Of course, just targeting the top earners would have meant an even greater increase. You may not have noticed, but an rising number of people are not paying taxes. In 2007 – before the financial crisis took hold – some 33% of those filing tax returns had zero or negative tax liabilities – up from 21% in 1990, for instance.
As to the top 5% of earners—that group that you would like to shoulder an increased burden – they already contribute far more than the bottom 95% of taxpayers. How much more should they bear? In any case, OMB projections already include a sizeable step-up in taxes, from 14.9% of GDP last year to 19.3% in 2016 – among the highest levels since World War II. In the past sixty years, that figure has averaged 18%. It isn’t taxes that are askew Mr. Krugman, it is spending, which is too high.
On your blog, you highlight the foolish notion contained in Mr. Ryan’s proposal that spending for health care as a percentage of GDP should go down. As an energetic supporter of President Obama’s health care plan, you must surely have noticed that he claimed to push in the same direction. In fact, you blogged last year that Obamacare would “cut government spending.” Perhaps you should reconsider Mr. Ryan’s proposal.
The bottom line, Mr. Krugman, is that you have yet to put yourself on the line. It takes courage to propose that our country make tough choices; it takes none at all to deride those who do so.
After decades of witnessing the few in government, the few economists and the few advisors fail to compete against the ever increasing numbers of inevitable selfish few who will always remain in societies, one might think that citizens would recognize necessity to rally together and use overwhelming numbers to affect real change.
I believe the main point of his article, was not so much that government is not spending enough, it’s that the budget was based on numbers and assumptions with no basis in reality. The same people that support the Republican party, and the notion that we must “reign in spending”, are the same people that scream bloody murder when you talk about THEIR entitlements, e.g. Social Security, Medicare (“not over my dead body”), and attack any cut on defense spending as unpatriotic. Well, if we keep the entitlements, the money has to come from somewhere, based on factual budget numbers. If we plan to cut spending, then everyone has to face the hard realities of what those cuts really mean, and stop complaining when they get what they asked for.
The real courage, requires all Americans to accept some hard facts, and…for politicians in this country to stop the lies, and stop putting their own re-election politics above the good of the country.
Paul Krugman is a professor of economics at Princeton, has a B.A. from Yale, a PhD from MIT, and has taught at Stanford, Princeton, and MIT. He has been a columnist at the New York Times for 12 years.
Liz Peek has a B.A. from Wellesley, has been a partner at Shroder, Inc., and is a columnist with The New York Sun, FoxNews.com, The Huffington Post, The Motley Fool and Women on the Web (wowOwow.)
I’ll go with Paul Krugman, thank you.
While I don’t subscribe to Paul Krugman’s view on increasing government spending as a way out of our deficit mess, I certainly cannot subscribe to Mr. Ryan’s ridiculous attempt either. Ryan’s spending slash fails to target the major problem areas (defense spending and Medicare) because targeting those would anger his constituency. Does every plan have to cater to the extremes? Democrats and Republicans both are to blame and neither can see past their own noses when it comes to proposing solutions. The extremists are ruining this country.
I suspect that a full analysis of Paul Ryan’s proposal will have me opposed to much of it, because you can’t address just one side of a multifaceted problem. That said, kudos to him for opening with the reality that we can’t fix the budget crisis in this country without looking at Medicare. (I’m surprised to hear he didn’t deal with Social Security in his proposal too, but Medicare is actually the bigger problem.) You also have to get some control over defense spending. Unfortunately, we’ll have to consider higher taxes as a part of the equation, especially for those of us (and I mean me, and those earning more than I am) who are reasonably able to bear that cost. No politician—not even the so-called tea-party variety—will be able to stand behind the depth of cutting that it would take to close the gap just like (as you point out) you can’t raise taxes by enough to close it.
We need to cut reasonably, raise revenue reasonably, and focus the remaining spending the government DOES do in ways to encourage growth and private investment to help close the gap the rest of the way. Once we get back to a balanced budget, we’ve got to keep the lid on—no more massive unpaid for tax cuts, no more massive new Medicare prescription drug plans. (I’m still miffed at Republicans for that hole blown in the budget, no matter how popular it was with seniors. We should have tied THAT effort to reductions in other government spending as offsets.) We will need actual fiscal restraint in good times as much as we do in bad.
We need a responsible debate on these topics, and on that point I have a few beefs.
“Statistically associated” does not mean “caused by”. In fact, death is “statistically associated” with heart attacks, but I’m pretty sure death doesn’t cause a heart attack.
And I bet it doesn’t take a Nobel Laureate to tell you that since the typical Washington Republicrat response to lower unemployment is to bolster the economy through government spending, you certainly wouldn’t expect periods of high government spending to be associated with lower unemployment. Especially if you double-down and use government spending as a percentage of GDP, since government spending goes up as a response to the economy faltering. When the economy does well by definition unemployment is down, GDP is up, and therefore government spending as a percentage of GDP goes down. This does not mean the lowering spending as a percentage of GDP will positively impact unemployment.
We need a honest debate on these topics on all sides. Let’s not cite a hypothetical tax rate for 2016 (which almost certainly assumes the “Bush” tax cuts expire) as showing taxes aren’t out of line, and pretend that your own statistic doesn’t show that CURRENT taxes being currently below historical averages as a percentage of GDP. How much more should the top 5% bear? Let’s get back to that historical average and then talk.
Kudos to Paul Ryan for proposing something in a way that kicks off the debate and shows an understanding of some of the pain that will be involved here. I hope the President does this same this week. And then I hope that Congress can set aside the rhetoric to do what’s right for America. While I’m at it, I should probably wish for a pony.
While I whole-heartedly agree with your editorial on Mr. Krugman’s article…I think the most compelling point is your last paragraph: “The bottom line, Mr. Krugman, is that you have yet to put yourself on the line. It takes courage to propose that our country make tough choices; it takes none at all to deride those who do so.”
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