Paul Krugman on the Debt: Why He Can’t Be Taken Seriously

Comparing Paul Krugman’s comments on the issue of a U.S. debt crisis offers further proof that he’s a partisan hack, not an economist who can be taken seriously.

Paul Krugman before the debt ceiling “crisis”:

“Yesterday the CBO came out with its updated budget outlook — and the release was met with a collective yawn. Why? Basically, because the projections over the next decade just didn’t show the kind of fiscal disaster everyone in DC wants to believe in.Paul Krugman, February 6, 2013

“OK, another toe dipped in reality. The new CBO numbers are out, and they scream ‘debt crisis? What debt crisis?‘”Paul Krugman, May 15, 2013

“The new CBO long-term budget projections are out, and while they’re not good, they don’t show crisis levels of debt even looking out a quarter-century.Paul Krugman, September 17, 2013

What the CBO actually said before the debt ceiling “crisis”:

“In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by 2015. Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. By 2023, if current laws remain in place, debt will equal 77 percent of GDP and be on an upward path…. Such high and rising debt would have serious negative consequences: When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates. — Congressional Budget Office (CBO), February 2013

“Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy (see the figure below). Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely…. How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government’s willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money…. Increased borrowing by the federal government would eventually reduce private investment in productive capital, because the portion of total savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income in the long run than would otherwise be the case…. The risk of a fiscal crisis—in which investors demanded very high interest rates to finance the government’s borrowing needs—would increase. — CBO, September, 2013

Paul Krugman during the debt ceiling “crisis”:

“Add me to the chorus of those puzzled by the lack of market alarm over the possibility of U.S. default, induced by failure to raise the debt ceiling…. [T]he inmates have taken over the asylum…. What everyone stresses is that U.S. government debt, until now regarded as the ultimate safe asset, suddenly becomes not so safe. That could drive up short-term interest rates, at least a bit, because T-bills could start to trade at a discount relative to cash…. [F]or sure we should be looking at a plunging dollar, and probably carnage in the stock market too.Paul Krugman, September 25, 2013

[A] U.S. government default, which will happen unless Congress raises the debt ceiling soon, might cause financial catastrophe. Unfortunately, many Republicans either don’t understand this or don’t care…. [F]ailure to raise the ceiling would mean missed payments on existing U.S. government debt. And that might have terrifying consequences. Why? Financial markets have long treated U.S. bonds as the ultimate safe asset; the assumption that America will always honor its debts is the bedrock on which the world financial system rests…. Now suppose it became clear that U.S. bonds weren’t safe, that America couldn’t be counted on to honor its debts after all. Suddenly, the whole system would be disrupted…. [I]t looks quite possible that default would create a huge financial crisis, dwarfing the crisis set off by the failure of Lehman Brothers five years ago.”Paul Krugman, September 29, 2013

[T]this could create an immediate financial crisis, because U.S. debt — heretofore considered the ultimate safe asset — would be reclassified as an asset in default, possibly forcing financial institutions to sell off their U.S. bonds and seek other forms of collateral. That’s a scary prospect.Paul Krugman, October 10, 2013

Paul Krugman after the debt ceiling “crisis”:

“Matthew Yglesias notes an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds…. the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America. But, you say, wouldn’t China selling our bonds send interest rates up and depress the U.S. economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work…. It’s true that China could, possibly, depress the value of the dollar. But that would be good for America!The persistence of scaremongering about Chinese confidence is a remarkable thing: it continues to be what Very Serious People say, even though it literally makes no sense at all.Paul Krugman, October 18, 2013

I rest my case.

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