Economists Hit Back at Alarmism Over the Debt

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The interest rates are about to go up on America's colossal debt, and the country will face some nasty choices. That's the argument Edmund Andrews presents in a buzz-generating article in the New York Times. U.S. borrowing, explains Andrews, has been "aided by ultralow interest rates" that are set to rise. Coupled with "a mountain of new debt" and "a balloon of short-term borrowings that come due in the months ahead," this rise poses a major problem--or so say Andrews and his sources.

But a fair number of experts disagree, including the Times' own columnist, Princeton economist and liberal writer Paul Krugman. He's one of a handful of economics authorities taking issue with Andrews's budget alarmism, and the implication that the government should tighten its belt. (Andrews wrote that the "additional $500 billion a year in interest expense" that could result "would total more than the combined federal budgets this year for education, energy, homeland security, and the wars in Iraq and Afghanistan.") Economists have been tussling over the dangers of the deficit for months. But here's what Krugman and his allies think the Times piece gets wrong:

  • 'Unsupported Assertions' Dean Baker of the Center for Economic and Policy Research takes issue with Andrews's comparison of the government to "overstretched homeowners" that eventually defaulted on mortgages."There is no evidence," writes Baker in progressive publication The American Prospect, "presented in this article that the rise in interest rates will place the U.S. government in a situation where it will be unable to pay its bills and no one cited in this article makes such a claim." He calls the article "completely unbalanced in not presenting the views of any economist who could put the deficit/debt issue in perspective for readers."
  • This Has Nothing to Do with Fiscal Policy  Former consultant James Kwak at The Baseline Scenario draws up a chart to refute the notion that the Obama administration's budgets are responsible for the worsening of the debt situation. "So far," he explains, "of the $8.3 trillion change in our projected fiscal situation, 16.1% is due to discretionary spending. 56.0% is due to lower revenues caused by … the recession and the financial crisis." Plus, the increase in debt would be 6.1 percentage points lower, he explains, "if 2018 GDP remained where it was projected in 2008." So the article is wrongly suggesting a spending cut to solve problems, when in fact "the problem is that the economy collapsed," lowering the denominator in the fraction that gives us debt as a percentage of GDP, and thus increasing the perceived quantity of debt.
  • Why Is Obama Listening to this Lunacy?  "Urg," responds Paul Krugman to the front-page story. He also recently wrote about the debt, arguing that the Obama administration is unwisely putting deficit reduction over job creation; in the column, he contended that while "spikes in long-term interest rates happened in the past ... it's hard to see why anything similar should happen now," and that it would be very risky to pull back from stimulus spending at this point. He calls Andrews's piece one-sided, and seconds Dean Baker's and James Kwak's responses to the article.
  • Three Key Points About the Deficit Berkeley economics professor Brad DeLong lists what should have been in the New York Times article:
  • In the long term--after 2020--we get health care spending under control or else.
  • In the medium term--between 2012 and 2020--we don't have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn't.
  • In the short term--between now and 2012--our problem is not that our deficit is too large but that it is too small.

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