Krugman on the Debt and Deficits

Paul Krugman has taken some rather interesting stances on the fiscal situation here in the U.S. First up is a piece entitled Fiscal Train Wreck from March 2003,

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.


Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion.

And that’s way too optimistic. The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account ? as the C.B.O. cannot ? the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it’s clear that the 10-year deficit will be at least $3 trillion.


That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 ? make that 3, O.K., maybe 4 ? percent of G.D.P. But that misses the point. “Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

What does he say today (well at least in August 2009)? Well, lets take a look,

I respect Jim Hamilton a lot, so I take his criticism seriously — and he raises questions that others raise too about my relatively sanguine assessment of the debt situation. Yet I think that he and others are quite wrong, on several counts.


But let’s take a slightly later start date: in 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.

So how was that possible? Was it through drastic cuts in defense spending? On the contrary: we’re talking about the height of the Cold War (with a hot war in Korea along the way), and federal spending actually rose as a share of GDP. So yes, it wasn’t entitlement programs, but it wasn’t exactly discretionary either.

How, then, did America pay down its debt? Actually, it didn’t: federal debt rose from $219 billion in 1950 to $237 billion in 1960. But the economy grew, so the ratio of debt to GDP fell, and everything worked out fiscally.


Jim gets scary numbers about the debt burden by assuming that we’ll have to pay off the debt in 10 years. But why would we have to do that? Again, the lesson of the 1950s — or, if you like, the lesson of Belgium and Italy, which brought their debt-GDP ratios down from early 90s levels — is that you need to stabilize debt, not pay it off; economic growth will do the rest. In fact, I’d argue, all you really need to do is stabilize debt in real terms.

Note that in 2003 Krugman was just fine looking at the 10 year budget predictions. Now, why that’s silly we just need to alter our perspective. And the new post mentions nothing about Social Security and Medicare whose fiscal/actuarial position has not changed appreciably since 2003.

Now some might argue, and indeed in the comments to other posts people have argued, that during the fat years you trim the deficits or best of all run surpluses and in the lean years run the deficits. Sure, that is a some what simplified version of Keynesian fiscal stimulus. My response is lets make a list of the two situations,

View from 2003:

  1. The economy was in recovery.
  2. The fiscal outlook was a $1.8 trillion deficit.
  3. Social Security and Medicare were in serious actuarial imbalance (tens of trillions of dollars).

View from 2009:

  1. The economy is in recession.
  2. The fiscal outlook is $9 trillion deficit.
  3. Social Security and Medicare were in serious actuarial imbalance (tens of trillions of dollars).

The view in 2003 terrified Krugman, so much so that he took personal action regarding his own finances. Switch to 2009 and, meh guys like Prof. Hamilton are just being alarmists. The view from 2009 is pretty much worse than it was in 2003, and it seems to me that yes, if one was worried about the fiscal outlook in 2003, then in 2009 it is even more worrisome. I agree with James Hamilton,

If the government tries to double taxes on people like me, it’s in real political trouble. If it doesn’t try to double taxes on people like me, it’s in real solvency trouble.

It looks like we may have a problem here.

Thanks to for the links, and their article is also well worth reading. And yes, I know that this stuff is rather old, but…well Krugman is basically saying the samethings today he did in August, “No worries, we’ll grow our way out of it.”

FILED UNDER: Economics and Business, US Politics, , , , , , , , , , , , , , , , , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. steve says:

    Krugman is definitely partisan. Having said that, he does note that we were starting a war, which might have had a major impact on oil. I also think it much different to add debt when the economy is doing well and when it is in crisis. You seem to be supporting debt creation during good times and opposing it during recession, judging by your voting preferences, or just debt creation during Republican admins then opposing it when a Dem is in office.

    The biggest difference right now, is that at least there is awareness of debt as an issue. When a huge bill is proposed, it must come with a payment plan. I will take that as a first step. Then we need to really work on debt reduction.


  2. kth says:

    I think you have him dead to rights, as far as viewing our medium-term fiscal picture through a partisan lens. But note that your observation is entirely devoid of policy implications: it’s still a bad idea to assume new strategic obligations (i.e., start a war) and cut taxes at the same time, and it’s still a bad idea for the government to cut spending or raise taxes when consumers are sitting on their wallets.

  3. Steve Plunk says:

    Grow our way out of it? Perhaps he means inflate our way out of it. A home with a fixed mortgage is a safe bet during inflationary times.

  4. Steve Verdon says:

    Steve (not Plunk) & Kth,

    Uhhhmmm no. I’m not advocating any such policy such as taking on debt in an expansion and cutting spending/raising taxes during a recession. My point is much, much, much simpler and went right over your heads. I’ll try again,

    Irrespective of the policy implications here, the fiscal situation is alarming. If it was scary in 2003, it is even moreso now.

    That’s it. Now, what do we do about it? Well, to vastly over-simplify:

    1. I think addressing the growth of health care costs; particularly Medicare would help.
    2. Not pour hundreds of billions into zombie banks would be another good place to look.
    3. Promoting an environment for robust economic growth (i.e. the global warming legislation should probably wait).

    And Kth, the long term fiscal outlook is just as bad. We cannot grow our way out of the Medicare problem, not without some sort of really spiffy technological advancement. And pinning one’s hopes on such an unlikely event strikes as very bad policy.

    When a huge bill is proposed, it must come with a payment plan.

    Really, where was the payment plan for the stimulus? And you sure are putting alot on the idea that Congress will have the guts to reduce Medicare payments. If Congress fails health care “reform” will start out in the red from day one and just get worse.

  5. steve says:

    The stimulus, as you know, is intentional deficit spending. Just as there were tax cuts under Reagan and Bush that were intended to stimulate the economy out of a recession.

    What I have been unhappy with for a long time is stuff like Medicare D. Not paying for the wars (the funding for the two wars is a little fuzzy by my readings, so I may be wrong about deficit funding on these).

    As to your other recommendations, I think those a good start. I would add pulling out a lot of our troops from overseas where other countries should pick up the burden. Europe is not a pauper. I would give the administration some credit for wanting to take out Medicare Advantage. The Republicans immediately demagogues this (Oh, the irony) demonstrating how difficult it will be to reduce Medicare. I cannot imagine any first term POTUS taking this on TBH. I have actually kinda come to the conclusion that it will take a political suicide to accomplish. We really need a health care system that includes the old folks, the ones who really vote, in with everyone else.


  6. Too bad the deficit Stimulus spending went on so many things that won’t provide much stimulus, certainly not enough to justify the ultimate cost when all the interest payments (or requisite inflation) are included.

  7. Joanna Benz says:

    I really hope that President Obama takes action towards resolving the national debt, as well as helping people further with their personal debts.

    I believe we are in a crisis situation, and we all need to do all we can to resolve it.

  8. Joanna Benz says:

    I really hope that President Obama takes action towards resolving the national debt, as well as helping people further with their personal debts.

    I believe we are in a crisis situation, and we all need to do all we can to resolve it.