October 14, 2003


Don't Look Down (PAUL KRUGMAN, October 14, 2003, NY Times)

There is now a huge structural gap -- that is, a gap that won't go away even if the economy recovers -- between U.S. spending and revenue. For the time being, borrowing can fill that gap. But eventually there must be either a large tax increase or major cuts in popular programs. If our political system can't bring itself to choose one alternative or the other รณ and so far the commander in chief refuses even to admit that we have a problem -- we will eventually face a nasty financial crisis.

The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.

But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.

[RECYCLING ALERT] This reminds us [again] of a quote from Macaulay's History of England:
At every stage of the growth of the debt the nation has set up the same cry of anguish and despair....[After the Napoleonic Wars] the funded debt of
England...was in truth a fabulous debt; and we can hardly wonder that the cry of despair should have been louder than ever. Yet like Addison's valetudinarian, who continued to whimper that he was dying of consumption till he became so fat that he was shamed into silence, [England] went on complaining that she was sunk in poverty till her wealth showed itself by tokens which made her complaints ridiculous....The beggared, the bankrupt society not only proved able to meet all its obligations, but while meeting these obligations, grew richer and richer so fast that the growth could almost be discerned by the eye.

Sure it would be nice to have a government so small we could pay for it again, but that's not going to happen anytime soon, is it? And the complaint, heard from Republicans until Ronald Reagan's deficits and corresponding economic boom proved it to be ridiculous, that running a deficit has any appreciable effect on the health of a society, is by now so outmoded as to seem like hypochondriacal raving, as it does here from Mr. K[rugman]. It should suffice to point out that here, in the midst of what may come to be called the Fourth World War, the total government debt is $6.[8] trillion, with a GDP of [about $11] trillion--let's call it about 65% of GDP. By comparison, the debt rose above GDP during the Second World War (and the debt Mr. Macauly was reffering to was three times GDP), yet Republicans were denied control of Congress for sixty years when they called for balancing the budget. Democrats are more than welcome to this perennial loser of an issue.

Posted by Orrin Judd at October 14, 2003 9:39 AM

OJ you should blog Robert J. Samuelson column in the Washigton Post from last Friday, October 10, 2003. He makes a lot more sense than Krugman. Some quotes:

* * *

Almost everything you think you know about budget deficits is probably wrong or misleading. For starters, they don't automatically cripple the economy.

* * *

Indeed, rising deficits are sometimes helpful. They are now.

* * *

Higher deficits didn't raise interest rates.

* * *

But the biggest misconception about deficits is that, by themselves, they threaten the economy's long-term vitality. Not true. The real threat is rising government spending.

* * *

The danger is that higher government spending -- however financed -- will trigger a vicious circle. A sluggish economy makes it harder for government to pay promised benefits. Pressures mount to raise taxes, increase borrowing or abruptly cut benefits. The first two choices are self-defeating; the third is unfair. This is the death trap of the welfare state, here and in Europe and Asia.

The way to avoid the death trap is to minimize future spending increases. Some needed steps are obvious. Congress should gradually raise the eligibility ages for Social Security and Medicare to 69 or 70; make benefits less generous for the well-off elderly; fully tax all Social Security benefits; and eliminate unneeded or wasteful federal programs -- from Amtrak to farm subsidies.

* * *

Posted by: Robert Schwartz at October 14, 2003 1:44 PM

A Krugman explanation of the economics relating to how the Coyote manages to afford all those items he buys from the Acme Corporation would be a better use of the Times' valuable op-ed space than what he keystroked here (or just about any other week, for that matter), especially since the current debt as a percentage of the total GNP is far lower than the debt level 20 years ago, when Democrats first started howling about the "Reagan Deficits."

Given his apparent lack of financial resources, the Coyote seems to be racking up a substantial deficit, yet his monetary difficulties never seem to be a factor, let alone surpassing his problems with speed, gravity, instant tornado pills and the like. If Paul can explain the financial underpinnings between the desert southwest carnivore and his product supplier, then he deserves that Nobel Prize in economics all his accolytes keep talking him up for.

Posted by: John at October 14, 2003 2:39 PM

Krugman is insane. Samuelson merely funny.

I don't know how much less generous SSI benefits can be for me. Since I have no intention of ever retiring, I never paid attention to it, but last month I looked at my SSI payout. I will get back monthly just about what I paid in monthly. Only I paid in 40 years and would not, ordinarily, expect to get back more than 10 years or so.

But it ain't a pension, is it? It's insurance.

So how does SSI compare with my private life insurance? SSI's meagre return is much better. About three times better, in fact.

How does the economy know where the dollar came from? Why is government spending on, say, lighthouses less beneficial than private spending on, say, chincilla bedspreads?

Posted by: Harry Eagar at October 14, 2003 2:43 PM

Harry --

SSI is actually a welfare program.

May your return on your life insurance grow ever smaller.

Posted by: David Cohen at October 14, 2003 3:00 PM


We did.


Then the program will pay for itself. What's anyone worried about?

Posted by: oj at October 14, 2003 4:28 PM

Well, it could if all the money hadn't been spent on other stuff already.

If I had died when I was 32, which I was expected to do, my widow and kiddies would have been benefitted greatly by SSI. Far more than I could have provided through private insurance.

It doesn't much matter to me whether people call SSI a "welfare program." It helps people that the market treats badly. I'm not opposed to that.

Posted by: Harry Eagar at October 14, 2003 7:56 PM

"In 1950, for example, 16 workers supported one retiree. By 2014, in part because people are living longer, that ratio will be 2.7 workers to one retiree."

You had fifteen people helping you support your grandfather. But your kid will have 1.7 helping him support you. Taxes increase accordingly

Posted by: oj at October 14, 2003 8:03 PM

That's true.

You know what? If you privatize it, it stays true.

Posted by: Harry Eagar at October 14, 2003 9:43 PM

No, it becomes one person working for himself.

Posted by: oj at October 14, 2003 11:07 PM