December 5, 2003

#137: Shifting the doomsday time frame

P. Krugman

There's always a market for pessimism, apparently, even if it means constantly shifting the doomsday time frame. Having been wrong on every prediction to date about the prospects for the current US economy, Paul Krugman has now pushed the goal posts of economic disaster so far back he's become a "futurist" of sorts. In Looting the Future (12/05/03) he reminds us of one of those wizened, skid row cartoon characters holding a placard reading, "The End is Coming."

But despite all the bluster, there are only two serious points in this column. And, as Krugman likes to say, "to be fair", we agree with one of them. The first is the claim that there is a 25% long-term budget gap that will exist regardless of economic recovery. This is crazy! Krugman gives no citation for this odd position but it probably harks back to the Brookings study by Auerback, Gale and Orszag he mentioned in The Tax Cut Con (9/14/03) in the Sunday New York Times Magazine. This was our comment about that in Squad Report # 122.

"Krugman delights in citing studies that show a long-term budget gap (because of the Bush tax cuts, of course) that is unaffected by economic growth rates. Ever wonder why an economy growing a 4% (which we expect to occur soon) wouldn't have better budget prospects than an economy growing at 2%? Here's the dirty little secret. The economists conducting these studies ASSUME that government discretionary spending rises proportionally with GDP. Talk about a catch 22! They don't even allow for the possibility that higher growth rates might be used for something other than more entitlement programs. In our view the Brookings study by Alan Auerbach, William Gale and Peter Orszag (cited by Krugman) represents nothing more than a liberal establishment terrified of losing the tax base which allows them to control spending by productive members of society. Without that tax base, some of these Brookings guys might actually have to work for a living!"
To put a finer point on it an economy growing at 2% doubles every 34 years compared with every 18 years when growing at 4%. Anyone who doesn't see that the latter rate gives broader societal options is "certifiable." Sure spending may go up, but at least there is a choice. Restoring fiscal order may be one of the choices.

All that said, we agree with Krugman that profligate spending can upset any degree of economic performance and the Bush administration is definitely soft on spending. As we noted in Squad report # 134, we found ourselves in the odd position of being "strange bedfellows" with Ted Kennedy and Krugman in opposing Medicare expansion. We're hoping Bush toughens up in his second term.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at December 5, 2003 1:11 PM
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