Paul Krugman, Can Kicker

Paul Krugman thinks that, when it comes to the country’s fiscal problems—$16 ½ trillion in debt, four consecutive $1 trillion deficits, etc.—America should kick the can down the road. “It’s the responsible thing to do,” he says. Our creditors aren’t exactly beating down the doors, interest rates are low (so borrowing is cheap), and besides, government spending is helping prop up the sluggish economy. Cut spending and the fragile recovery might fizzle.

“Slashing government spending destroys jobs,” writes Krugman, “and causes the economy to shrink.” Fair enough. But as Krugman himself admits, “we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt.” So Krugman’s fundamental point isn’t about whether or not spending needs to be cut—it does—but about the timing of those cuts: “nothing terrible will happen if we don’t fix everything this year.”

Krugman is right that, “nothing terrible will happen if we don’t fix everything this year,” but then, no one said it would. Speaker of the House John Boehner has called for balancing the budget within ten years. That means the debt continues to grow for at least a decade. Even Congressman Paul Ryan’s budget—which Krugman called “draconian”—didn’t try to fix everything in one year. Or even ten, for that matter. It called for continued—albeit shrinking—deficits at least through 2022. Presumably when Krugman says he wants to kick the can, he means “farther than Paul Ryan.”

Here’s the part Krugman leaves out, a part which makes all the difference: he assumes that there will be more favorable conditions for addressing the long term fiscal crisis at sometime in the future. This is a problematic assumption.

Set aside for a moment the sheer size of the debt ($16.5 trillion) and the fact that it continues to grow rapidly thanks to unprecedented deficits. Set aside the fact that the President’s own budget assumes debt service costs to exceed $550 billion annually by the end of his second term. Set aside the fact that artificially low interest rates discourage savings and encourage spending—both of which aggravate our long-term problem. Set aside any assumptions you might have about the economic drag created by higher taxes, more federal regulation, or Obamacare. Set aside all these common (conservative) objections and there remains one massive, compelling, immovable obstacle to prosperity through can-kicking.

Demographics.

As Jonathan V. Last describes in his fantastic new book, What to Expect When No One’s Expecting: America’s Coming Demographic Disaster, the birthrate in America is collapsing. It is now below replacement level, which means that, while America’s population will continue to grow for some years, in the coming decades, it will begin to contract.

The reasons for America’s declining birthrate are not as straightforward as you might think. Some obvious causes—e.g. the pill and abortion—contribute to, but don’t explain, America’s falling birth rate. Geographic mobility, more education, historically low infant mortality, falling marriage rate—all these contribute, too. What concerns us here is the fact that twenty or thirty years from now, America’s ability to dig itself out of our fiscal mess may well be dramatically reduced.

As Krugman knows, the primary drivers of our long-term debt crisis are entitlement programs—specifically, Medicare, Medicaid, and Social Security. As the Baby Boomers retire, the number of American’s drawing on these programs will radically increase and so will the costs of these programs. More retirees to care for is one thing, but a declining birth-rate means that there will be fewer and fewer young people—who work and pay taxes—to pay for these ballooning costs.

Unlike past fluctuations in population—due to war or disease, for example—in a population contraction due to sub-replacement level birthrates, the population will contract “from the bottom up,” meaning the first age cohorts to vanish will be the youngest; not because they died, but because they were never born. As this happens, the tax base will shrink just as the costs of caring for the elderly are exploding.

Krugman’s suggestion that we kick the can down the road assumes that our future economy will perform more or less like the economy America had during the middle third of the 20th century when our welfare programs were designed. Krugman’s advice is akin to telling a homeowner that, based on his current income, he can afford a second mortgage while ignoring (or simply missing) the fact that he’s about to take a significant pay cut.

There is no swift solution to America’s fiscal crisis. It has taken decades to create and will take decades to repair. A long-term, gradual fix makes the most sense and would be the least disruptive, both socially and economically. But the window for beginning such a gradual fix is closing, and more rapidly than many Americans seem to think. Krugman is right that we can’t fix the problem this year; but he’s wrong if he thinks we can afford to kick the can much longer.

Stephen P. White is a fellow in the Catholic Studies Program in Washington, DC and coordinator of the Tertio Millennio Seminar on the Free Society. The views expressed here are his own.

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7 thoughts on “Paul Krugman, Can Kicker

  1. downtowner says:

    Paul Krugman is correct that we need to continue to supply relief to the middle class through stimlulation and government spending. The main reason that Americans are choosing not to have children is because they cannot afford to do so with rising energy costs, stagnant wages, and lack of high paying jobs. Hopefully we can solve this wealth inequality problem with the 1% and Americans can start having kids again!

  2. Chris R says:

    Krugman’s statements are grossly irresponsible. He belongs on CNBC’s “American Greed” with all the other conmen. If Reid and Obama were corporate executives, they would go to jail. Their defense reminds me of Enron’s defense – by lying about our problems, we were able to keep the thing running longer. Having said that, when the reckoning comes and government has to cut, I hope the private sector is able to absorb the unemployed and put them to work.

    1. downtowner says:

      Chris, the private sector is not able to absorb the unemployed as it currently stands. What makes you think it would function any better under strict austerity like that of Greece, etc? That only serves to raise the unemployment rate. And it would only get worse if the government reigns in on spending because that money directly stimulates the private sector. You stop spending that money and the private sector suffers. That cycle is like a feedback loop that only gets worse and worse. This is why austerity only helps the rich get richer, while the unemployed and underemployed suffer the greatest burden. If anything we need to focus our relief efforts on the lower and middle class and not on the top 1%. Krugman is right that we haven’t done ENOUGH to stimulate the economy. He is one of the few economists who doesn’t put Wall street above main street. We could definitely use more of his leadership instead of Geitner/Bernanke who only care about their buddies on Wall Street. Obama definitely made huge mistakes with his financial advisor team trusting mainly wall street insiders who look out for the interests of banks above citizens like you and I.

      Also, I want to correct you. Corporate executives (read: banking industry) don’t go to jail, EVER. It would be nice if we could change that someday.

      1. Chris R says:

        If Reid and Obama were corporate executives in the private sector, they would be in jail like Jeffrey Skilling and Bernard Ebbers. Obama’s policies, particularly on healthcare and energy, are reckless and harmful to the private sector. Our US Senate is legally required to pass a budget, but Reid has been breaking the law for years for political reasons. There are ways to responsibly budget without wreaking havoc, but using Krugman’s Ponzi scheme to sell Obama’s ideology is certainly not one of them.

        1. downtowner says:

          I guess we will just have to disagree.You have failed to convince me that any of your claims are crimes worthy of jail. Also, you disingenuously paint Krugman as an Obama ideologue when he is one of the most outspoken Obama critics on the left. I think you would be better to focus your outrage on Wall Street which has still not been brought to justice for its crimes in the financial collapse of ’08, and it won’t as long as Obama relies on Wall Street insiders as his advisory team. The unregulated banking industry has harmed and will continue to harm the lower and middle class more than Obama’s ACA and energy policies ever will. Check your 401k for proof of that. Thanks for the debate, Chris.

          1. Chris R says:

            That’s funny what you said about Krugman! I hate to break it to you my little friend, but Krugman is a tool and has been selling their Ponzi scheme to fund Obama’s ideology.

  3. tranxtian says:

    What a waste.

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