We Have No Budget Problem–Really!

Paul KrugmanYou probably remember Dr. Evil of the Austin Powers films. Both characters had been frozen (or something) in the 60s and so they are a little out of touch. So when Dr. Evil hatches his evil plan he says that he will ask the United Nations for, “One million dollars!” Then he does his evil little finger thing so we know that he thinks he is being very evil indeed. Number 2 kills his buzz, “Don’t you think we should maybe ask for more than a million dollars? A million dollars isn’t exactly a lot of money these days.”[1]

Paul Krugman says that the deficit scolds remind him of Dr. Evil. They try to end budget arguments by saying, “The deficit is one trillion dollars!” I assume they then laugh maniacally, do the pinky finger thing, or engage in some other action that gets across the importance of their statement. I’ve long had two reactions to these kinds of people. First, everyone knows the deficit is on the tall side of a trillion dollars. Second, the deficit keeps coming down—it will be less than a trillion dollars this year and was as high as $1.4 trillion in 2009.

Krugman offers up some very straightforward math in his column today, That Terrible Trillion. Let’s assume that the deficit is $1 trillion, even though it is actually supposed to be about $100 billion less than that this year. If we had a deficit of $400 billion, the total debt (as a percentage of GDP, which is what is important) would be declining. So we don’t worry about that. That puts the deficit we should worry about at $600 billion. If the economy were not in recession, that would bring in an extra $450 billion in tax revenue. That gets us to a $150 billion deficit. In addition, if we were out of recession, lots of people now on assistance would have jobs. This would save at least $150 billion. Therefore: no long term budget problem as long as we fix the economy.

Well, that’s not exactly true. We currently pay twice as much per person for healthcare as most OECD countries. In the long run, this is going to bankrupt us. (Sadly, this is usually presented as a Medicare problem, but it is not: it is a general healthcare problem that simply affects Medicare.) The ACA (Obamacare) is going to help in this regard. Hopefully, we will be able to do other things to improve the situation. But note: the budget scolds not only don’t care about the real problem, they want to use the current budget deficit to cut benefits to poor and middle class citizens.

The “one trillion dollars” argument is not an argument. It is a mirage. Don’t let people use it to justify dismantling our social contract.

Update (17 December 2012 5:03 pm)

Jonathan Chait wrote an article this afternoon, Krugman’s Deficit Calm Perhaps a Tad Too Calm, in which he takes Krugman’s case to task for being too lackadaisical about deficits. It is much ado about nothing, as he makes clear in the last paragraph:

Now, maybe a deficit of the current size isn’t so awful that we have to agree to terrible policy in order to fix it. We don’t. We’re not Greece, we’re not becoming Greece, and the consequences of the deficits are not the threat to life on Earth that the deficit scolds have made it out to be. The Center on Budget and Policy Priorities has argued that the alleged need for $4 trillion in deficit reduction cited over and over by the fiscal scold community may be overstated, but $2 trillion in additional savings would nicely stabilize the debt.

So what’s he whining about? I don’t know. Just needed to publish something, I guess.

[1] Here is the clip in all 16 seconds of its glory:

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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