Robert Bennett: Contrary to Krugman, debt outlook looks dim

By Robert Bennett, For the Deseret News

Published: Mon, Aug. 18, 2014, 12:00 a.m. MDT

 Specialist John O'Hara works at his post on the floor of the New York Stock Exchange in 2013.

Specialist John O'Hara works at his post on the floor of the New York Stock Exchange in 2013.

(Richard Drew, AP)

A month ago, in the New York Times, Paul Krugman wrote a column labeled “The Fiscal Fizzle — An Imaginary Budget and Debt Crisis.” Speaking to those who are worried about the size of our national debt, he said, “We don’t have a debt crisis, and never did. Why did everyone important seem to think otherwise?”

Krugman begins his analysis by comparing the current debt-to-GDP [gross domestic product] ratio to historic levels. He says the rate at which our debt is rising is nothing to worry about because even if it continues to go on at the same rate for 25 years, it “is projected to be no higher, as a percentage of GDP, than the debt America had at the end of World War II, or that Britain had for much of the 20th century.”

World War II is hardly the benchmark I would choose. Paying for it drove America’s debt to unprecedented highs and drove Britain into bankruptcy. After it ended, our post-war boom cut our debt-to-GDP ratio by two thirds, but Britain never really recovered. To say that both nations will be in the same fiscal fix in 2039 as they were in in 1945 is frightening rather than reassuring. No financial “peace dividend” similar to the one that began in 1946 will be available in 2040.

Next, with respect to interest rates, Krugman apparently believes the following:

When a nation’s debt rises excessively, so do expectations of inflation. Inflation decreases the purchasing power of dollars held by its bondholders. Investors will not buy any more securities from that nation unless they get a premium return on their investment. That means higher interest rates.

So, he reasons, if investors are currently willing to buy a nation’s securities at low interest rates, the nation’s debt is under control. American interest rates are lower than they have ever been, which shows we are not in trouble. To drive the point home, he goes abroad. “Did you know that Italy, which remains deep in debt and suffers much more from the burden of an aging population than we do, can now borrow long term at an interest rate of only 2.78 percent? Did you know that France, which is the subject of constant negative reporting, pays only 1.57 percent?”

The economists whom I trust disagree. There can be a different reason why interest rates are low. The current fear in the world is not inflation but deflation, a situation where a nation’s economy hits bottom and struggles to recover. Forget Greece as an example; it’s too small and has had too many internal structural problems to be taken as a model for us. Take Japan instead, a highly developed nation once seen as poised to take over the world. After going into deflation, roughly two decades ago, it has run up a debt-to-GDP ratio more than twice ours while trying to get out of it. It still hasn’t made it.

Krugman looks at interest rates in Italy, Spain and Japan and is reassured. I look at their stagnant levels of economic activity and am alarmed, particularly because they are not alone. The world is awash in debt — companies and individuals as well as governments. Debt can be beneficial — it empowers us to buy a home, get an education, start a business or win a war — but when it gets too big to be serviced easily, as it seems to be at the moment, it can drag down everyone and everything it touches, including a nation’s economy.

The issue a not a “fizzle” or imaginary; the crisis is real.

Robert Bennett, former U.S. senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.

1. Kass
Aug. 18, 2014

How about naming some of the economists whom you trust so we can do our own evaluations of their opinion and yours?

2. marxist
Salt Lake City, UT,
Aug. 18, 2014

Why does the Federal debt grow and how? First, the Federal debt grows when revenues (taxes) do not rise to the level of expenditures. Second, the debt is incurred through the sale of U.S. securities of various types.

As a general rule to measure the burden of the debt, economists look at the ratio of debt to GDP. I believe that is appropriate, based on my work as an economist the last 40 years.

What has been the pattern of debt to GDP over the years since WWII? The debt to GDP ratio peaked in WWII. It fell steadily through the 50's, 60's and 70's. Why? Largely because taxes on the wealthy and corporations remained high. With the arrival of Reagan and his tax cuts for the top end, the debt to GDP ratio climbed steeply thorough the Reagan years and Bush I. It leveled off and began to decline under Clinton, because Clinton taxed the rich.

Of course the debt to GDP ratio grew rapidly under Bush II with his high end tax cuts.

The ratio is now declining under Obama. Conclusion: tax the wealthy! It's good for them and us!

3. JoeBlow
Far East USA, SC,
Aug. 18, 2014

current and future debt is driven overwhelmingly by 3 issues.

Social Security

Everything else pales in comparison.

Rising health care costs, baby boomer retirements and our penchant to inject ourselves in every world conflict are the drivers of our debt

So, next time someone complains about the money spent on foreign aid, unemployment benefits or Obama's vacations steer them back to the real issues.

Would you rather attack the problem, or make insignificant political rants?

Focus on the real issues.

SS, Defense, Medicare

Fix those first, then hunt for the pennies.

4. Esquire
Springville, UT,
Aug. 18, 2014

Sadly, early in the Bush years, the Republicans gave us a tax cut, sending small checks to most of Americans in an amount that didn't really mean that much except to take out and spend for dinner and a movie, and not much more. Those checks took billions out of the federal treasury, and were accompanied by a permanent tax cut. While none of us like to pay taxes all that much, we also know that various government services, whether national security or a variety of domestic services, are important and wanted. So, most people don't want these services significantly cut. Now, take this tax cut, add to it the most costly foreign wars in history, ones we started, by the way, and increase other spending because it's good politics, and the GOP took a budget surplus and destroyed it. Bob Bennett was part of that fiasco. The lesson to be learned is don't let the Republicans be in charge of the budget. They talk a big game, but reality tells us a far different story. From Red Ink Ronnie to the modern era, the GOP is bad, bad, bad for the economy.

5. GaryO
Virginia Beach, VA,
Aug. 18, 2014

“Conservatives” continually harp now about the debt. But when Reagan TRIPLED the debt and when GW more than DOUBLED it again, they didn’t say a peep.

In fact, it was Dick Cheney who famously said, “Deficits don’t matter.”

Low Revenue – High Spending = High yearly deficits = High Debt

The problem is either high spending or low revenue, or a combination of both.

High Spending? Well yes. America spends more on our military then the next 8 highest spending nation’s combined. In fact, the over 50 BILLION dollars we spend on military retirement (for those who have served 20 years or over) is more than the ENTIRE military budget of Canada.

Low Revenue? Absolutely. In 1969 when we fought the cold war and the Vietnam war, spent billions on necessary social programs, and went to the moon, we still balanced the budget because we had enough revenue. Back then the highest tax bracket was 71%. Now it’s down to 38% because of trickle-down-economics forced upon us by the Reagan administration.

It was supposed to create jobs. Where are the jobs?

We need to stop coddling the rich and increase the high tax bracket again.