A few years ago, Berkeley economist Brad DeLong proclaimed his faith in Paul Krugman. “If the past decade has taught me anything, it has taught me that mistakes are avoided if you follow two rules,” DeLong wrote. “(1) Remember that Paul Krugman is right; (2) If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.”
DeLong is a smart guy, so I've generally taken his advice to heart. But it hasn't always been easy. In particular, I've always found Krugman's complacency about the nation's long-term fiscal outlook to be maddening. For years, he's been warning that deficit worries are just a cover for conservative attacks on the welfare state.
I've always thought this line of argument did a disservice to genuine budget hawks, many of whom are not welfare state antagonists. But I should have listened to DeLong, because Krugman was right about the political effects of deficit hysteria, even if he was wrong about the motives of many involved in promoting it. It's amazing to me that we're having a full-throated argument over deficit reduction while the economy is still so fragile. I know that "stimulus" is a bad word these days -- indeed, it was deficit hysteria that made the word profane -- but stimulus should still be on the table.
So Krugman was right. But it was still gratifying to see him give a nod to long-term fiscal problems this week. In a post focused on why we shouldn't be worrying about the short-term deficit, Krugman acknowledged that we should be worrying -- at least a little -- about long-term debt. "If and when the economy recovers we really should be trying to reduce the debt ratio, not just keep it stable," he wrote in a blog post today. "Also, an aging population and rising health care costs mean that under current policy we will have a substantial structural deficit a decade from now, even if we don’t have one currently."
A recent GAO study underscores the dangers of debt rather than deficits. As my fellow Tax Notes columnist Bruce Bartlett has observed, the principal driver of the nation's long-term deficits is actually interest on our debt. "As a share of the deficit, interest would rise from 19.2 percent this year to 62 percent in 2020," Bruce writes. "In the long run, virtually all of the deficit is accounted for by interest on the debt."
The problem, in other words, is not really spending on entitlements and discretionary programs, although some restraint is necessary, especially for health care programs. Rather, the real problem is inadequate taxation. By refusing to raise taxes (and promising only vaguely and unconvincingly to cut entitlement spending), Republicans are guaranteeing that Americans will be stuck with a huge and growing bill for interest on the nation's debt. As Bruce contends:
- Refusing to raise revenue automatically leads to higher spending for interest on the debt. However, Republicans routinely deny this, asserting that capping revenue at some arbitrary percentage of G.D.P. will somehow or other force huge cuts in spending that will prevent deficits from rising to inconceivable levels. Implicitly, they believe in a nonsensical theory called starve-the-beast that is totally refuted by the budgetary experience of the last 20 years.
Bruce is right in his diagnosis, I think. Unless lawmakers are willing to gut popular programs like Social Security and Medicare, they are not going to realize the savings needed to pay for their tax reluctance. Starve the beast has clearly failed, and it's time for Republicans to acknowledge that fact and return to some real fiscal conservatism -- the kind that involves actual hard work and painful choices, not just empty rhetoric.