On two different talk shows this week, House Budget Committee Chairman Paul Ryan (R-Wis) and Nobel Prize winning economist Paul Krugman conducted a spirited, if indirect, debate on how serious the fiscal crisis is.
The two men, of course, disagree about almost everything. Ryan, the Republican Party’s vice-presidential candidate in 2012, warned we had to start grappling with our long-term debt now or face the consequences. Krugman, who often criticizes Ryan in his New York Times column, says we have plenty of time to deal with it.
If we keep going down this path, we will have a debt crisis. It’s not an “if” question; it’s a “when” question. This is not a Democrat thing or a Republican thing; it’s a math thing.
A debt crisis is what they have in Europe…You cut the safety net immediately, you cut retirement benefits for people who’ve already retired, you raise taxes, slow down the economy, young people don’t have jobs. That’s the austerity that come when you have a debt crisis and when you keep stacking up trillion-dollar deficits,…it’s bringing us to this moment. Our goal is to prevent and pre-empt austerity so we get back to growth.
Here’s what Krugman said on “Morning Joe” Monday about entitlement spending:
If you take the past trends in health care spending and project them out 20 years, there will be a problem…And a lot of the proposals out there are saying because we face the threat in the future… what we need to do now is have a plan to cut benefits in the future. ..
I think we still have substantial running room…The best estimates say that we don’t have anything that looks like a catastrophic debt situation even ten years out.. .Advanced countries with stable governments…that borrow in their own currency have a lot of running room…On my list of things to worry about, the long-term deficit is probably number five, number six…
Krugman actually got some unexpected support last week in a report by economist John Makin of the conservative American Enterprise Institute:
Instead of bellowing about a disaster that never comes…, Congress should be cutting deficits through reforming entitlement programs and lowering tax rates while closing tax loopholes…Recognizing and striving to achieve the benefits of a sound fiscal policy will produce more progress on deficit reduction and debt stabilization than will empty threats of soaring interest rates and bond market collapse.
In December, the iconoclastic Makin wrote:
Though the US deficit is in the trillions of dollars, the United States is not in immediate danger of a financial crisis on the level of Greece’s because its borrowing costs are so low.
And there you have it: Low interest rates—actually negative real interest rates, because of the Federal Reserve’s easy money policies—have kept the government’s interest expenses down. That’s Krugman’s main argument for why we don’t have a crisis.
And maybe that’s true—right now. But rates won’t stay low forever, and when they start rising, interest payments will shoot up, too, and create a fiscal squeeze that will give us much less “running room,” in Krugman’s phrase.
And since as even Krugman acknowledged, we must address our estimated $60 trillion of unfunded health care liabilities at some point, why not take some steps now, when rates are low and we can forestall some of the worst consequences?
So, although Krugman is technically right in the short run, we need to take Ryan’s warnings to heart. I think his solutions are too radical, but we do have a long-term problem and it’s better to do something than nothing at all.