Budget Smackdown: Krugman vs. Portman and Epstein

In a recent column, Paul Krugman dismissed concerns about the federal debt as a “false alarm,” a “disaster that wasn’t,” and an “imaginary budget and debt crisis.”

Krugman thinks that new CBO projections don’t look too bad. He says, “debt in 2039 — a quarter-century from now! — is projected to be no higher, as a percentage of G.D.P., than the debt America had at the end of World War II.” He concludes that “we don’t have a debt crisis, and never did.”

Gene Epstein of Barron’s looked at CBO’s numbers and Krugman’s claims. He noted that Krugman only looked at CBO’s “baseline” projection, which shows federal debt held by the public rising from 74 percent of GDP today to 106 percent by 2039. Unlike Krugman, I find that increase alarming, especially because there is little political will right now to reverse course and bring down the debt—unlike after World War II.

Also, as I charted here, World War II debt was stunningly high, so I don’t know why Krugman would take comfort in the government becoming that indebted once again. The chart shows that aside from WWII, federal debt has never been anywhere near as high as it is now.

There is more to the story. Budget wonks know that—unless we have major reforms—CBO’s baseline is a very optimistic projection. Krugman surely knows that too, but he decided not to tell his readers. CBO’s “alternative” projection is more politically realistic because, for example, it assumes that a slew of “temporary” tax breaks and the “doc fix” continue to be extended, as they have been in the past.

Under the CBO alternative, federal debt will rise to 163 percent of GDP by 2039. But it is even worse than that because CBO does not take into account the negative feedback effects of rising spending and debt on its basic long-range projections. With such feedbacks, the debt rises to 183 percent by 2039, according to the CBO (data for Figure 6.3).

All of the CBO projections are optimistic for reasons I mention in my USA Today op-ed and in this recent testimony. CBO projections, for example, do not include the budget effects of possible wars or deep recessions in the future. I’m not saying that they should, but users of the projections should be aware that unplanned contingencies could push the government into a financial crisis much faster than the decades-long projections show.

In a recent op-ed [$] in the Wall Street Journal, Senator Rob Portman examined the more realistic CBO alternative. But determined to undermine anyone who suggests that debt is a serious problem, Krugman decided to take a whack at Portman: “One thing you need to know is that none of Portman’s numbers refer to the CBO‘s baseline scenario; instead they refer to a much more pessimistic alternate scenario. That’s something he should have shared with readers.”

So Portman “should have shared with readers” the unrealistic scenario, but it’s OK for Krugman not to tell his readers that the one he is using is artificially sunny. Wow, that’s ironic, as Epstein notes.