What Krugman and Scarborough Missed in Their Debate

Nobel Prize-winning economist Paul Krugman and Morning Joe host Joe Scarborough sparred again during an extended debate on the Charlie Rose Show Monday night.

I think Scarborough won. He was clearly prepared while Krugman, who suffers “fools” badly, pretty much winged it. Krugman admitted that in his blog, where he said he was “tired, cranky and unready” and called the debate his “Denver moment,” after President Obama’s disastrous first debate against GOP nominee Mitt Romney.

Scarborough scored debating points by reminding Krugman that he had switched positions; the noted Keynesian had been a “deficit hawk” in the 1990s. Krugman parried that easily by saying times had changed and that in the current crisis we have to run deficits now and worry about debt  later. It’s standard Keynesianism—we have an “output gap” that only the government can fill by spending.

There are big problems with that approach, as I laid out in a column last year. But the bigger issue is Krugman’s absolute insistence that we don’t have to do anything about the long-term debt for the next decade.

Scarborough  argued that we needed to deal with it now, even if we phase in changes over the next few  years  as the economy improves.

You can watch the entire debate here.

But both missed the key point—interest rates. Krugman appeared to think the pluses of a growing economy would outweigh the negatives of higher rates and Scarborough, who is clearly not sophisticated on these issues, seemed to fear a market Armageddon in which investors stop buying Treasury debt.

Joe Scarborough, left, with Paul Krugman, right, and host Charlie Rose, center. Source: Bloomberg.

Joe Scarborough, left, with Paul Krugman, right, and host Charlie Rose, center. Source: Bloomberg.

On Morning Joe Tuesday, economist Jeffrey Sachs, a Keynesian himself but not in the Krugman mode, laid out the real damage rising rates could cause:

…The Congressional Budget Office said recently [that] within the next few years the interest payments on the public debt are going to rise so much that they’re going to squeeze out a lot of valuable government services or force further tax increases that people don’t want…

The [CBO] says that… this year, we’ll spend 1.4% of our national income on servicing the public debt. By 2023, before Krugman says we have a problem, they estimate it will be 3.3%–in other words, two percentage points more just to pay interest on the debt.…When you have to pay it back or service it, you don’t have money for the roads, you don’t have money for education.

Indeed, here’s what the Government Accountability Office wrote:

Under CBO’s January 2012 baseline budget projections,… spending on net interest would rise from $227 billion in 2011 to $624 billion (or 2.5 percent of GDP) in 2022…If interest rates are 1 percent higher than the rates assumed in CBO’s baseline budget projections, the government’s higher interest costs would add nearly $1 trillion to the cumulative budget deficit over the 10-year period (italics added).

CNN Money broke it down even further:

Over the decade, more than 14% of all revenue the government is projected to collect will be sucked up by interest payments…

Indeed, between 2013 and 2022, estimated interest costs will be:

  • higher than Medicaid spending;
  • equal to half of Social Security spending;
  • close to what is spent on all of defense.

And here’s the thing — the estimated interest costs assume a fairly steady and moderate increase in rates over the decade.

Long-term debt will rise sharply as 10,000 Baby Boomers a day retire and become eligible for entitlement programs like Medicare and Social Security.

Right now we have a window as the Federal Reserve pursues an easy money policy, with negative real interest rates. So, we can deal with it now—even phasing in reforms over time—when money is cheap and put ourselves on a sound footing. Or we can wait until there’s a real crisis and we have no alternative.

We know which is the right thing to do, but I fear that on this, Washington will go the way of the sequester again, with much graver consequences.

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