We can call it doubling down on stupid, or trebling down on stupid, but Nobel laureate, Princeton University economics professor, Former Enron economic advisor, and ideologue Paul Krugman, is taking stupid to new levels in his latest screed on the Opinion Page of the New York Times where he castigates so many regarding their focus on the size and scope of the US debt as being misplaced and immaterial - while the focus has to be, despite all evidence delivered since 2009 that Keynesian economics doesn't work - that we need to embrace Keynesian economics even more in 2012 by increasing our government spending even more...while increasing taxes to narrow the debt growth...
Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe.
Krugman says that unlike a family in a particular country which is accountable and responsible for their debt obligations, the rules are entirely different for a nation state. Are they?
Tell that to the Greeks, or Italians, or Spanish, or any of the other countries that are at the focal point around the Euro crisis which threatens both the Euro currency and the European Union. Their debt levels, all at levels well above 100% of the GDP, resulting from years of fiscal irresponsibility and deficit spending, bring on a double hammer hit - the increasing costs (borrowing) needed to service the existing debt obligations as well as the challenges to find new borrowing to fund the never ending increase in their debt obligations. Yet, by dismissing the importance of the debt - Krugman effectively attempts to make the case that nations cannot default on their debt or enter 'bankruptcy'.
Greece and Italy are the most critical countries today in the Eurozone. Both face challenges in borrowing new funds to cover not only their on going annual budget deficits - but also to refinance their existing debt obligations. They lack the funds to retire the older debt - so they need to roll that debt over with new obligations. The EU has provided over one hundred billion euros for Greece to dodge default in 2011 - and Greece faces another such date in March 2012 where it will need about 130 billion Euro's to avoid default.
Meanwhile, as Greece faces that fiscal Armageddon, it also needs to address the root cause of it's current problem - the fact that it's fiscal policy regarding it's national budget is unsustainable. The Greek government has, in the name of their political ideology established an extremely generous series of entitlement programs based around 'social justice' and 'fairness'. They also have high tax obligations on their citizens to fund these programs - like retirement at full pensions at the age of 50 - but corruption and avoidance combined with the negative impact on the national economy limit the revenues that come in. So, Greece runs year after year a deficit budget - needing to borrow to cover the difference - as well as service the growing existing debt.
There is little confidence that Greece will ever repay its debt obligations - or be able to fund the minimum payments needed to satisfy the ever growing debt. Given this, the incentive to continue to lend funds to Greece lessens - even if yields increase. If Greece can't satisfy their obligations now - how will they satisfy higher yields in the future?
One of the limits that is being mandated on Greece in order to get their last bailout is to enact austerity measures to eliminate or lessen significantly their annual budget deficits. This is politically a tinderbox for the Greek government. There are those in Greece who embrace the Krugman approach - that debt is immaterial and 'social justice' and 'fairness' is the key obligation of government towards it's people. They resist the austerity measures - violently in some cases. Then there are those who accept that the past model over decades is unsustainable and that the role in government is not the 'nanny state'. The battle in Greece has deadlocked their government - and Armageddon moves closer.
How is this history, and those of other countries in economic troubles, not a lesson for the US? How are their experiences- the results of their decisions not a point of lesson for the US today?
Except for a brief period of 1998-2000, the spending of the US government has exceeded the revenues brought in. The national debt obligation of the United States approached $5 trillion in January 2001 when President George W. Bush took his oath of office. In his 8 years in office, President Bush and Congress, doubled the national debt of the US to nearly $10 trillion - spending more in those 8 years than the previous 42 President's and 106 Congress's had done.
Think about that...we castigate, rightly, the previous Administration for it's deficit spending - but before we end the present term of President Obama, the national debt will increase from about $10 trillion to over $16 trillion - doubling the pact of it's growth. Today we are 102% in our debt to GDP ratio, by the end of the year, we will be around 109%. Yet, this isn't a problem according to Krugman - who rarely hesitated to bash the previous Administration on ideological / economic grounds?
Rather than attempting to rein in our path in trying to follow in the footsteps of Greece and other European countries trying to deliver government benefits and entitlements in the progressive model - we are accelerating on this path under the current Administration.
Our spending has grown to unprecedented levels - as have our deficits.
This is an older chart made from 2009 - our actual deficits from 2010 and 2011 exceeded the levels projected - and we are on pace to exceed a $1.6 trillion deficit this year despite an ongoing budget war being fought in Congress.
Even with a so-called debt solution being achieved late summer 2011, the growth of the size of the federal budget spending is hardly impeded. Which brings us to Krugman's and the left's other point that they use to 'manage' the size and scope of the 'unimportant' deficits and national debt - the need to increase taxes.
CBS News, in an interview yesterday with GOP Presidential Primary candidate Newt Gingrich, carried the water for the left when they insisted to the candidate that in order to cut the size of the, according to Krugman, unimportant size of the deficit, taxes have to be raised on Americans. Ignoring the fact that the media shouldn't be pontificating on the need to increase taxes to address the massive increases in government spending advocated by Obama and the left, increasing taxes will not solve the problem the left has delivered so resoundingly - but will do far more harm to the economic growth that is needed to reduce the impact of bad fiscal policies.
Since 1960, the country has historically taken from the economy about 18% as it's revenue to fund the services the responsibility of the federal government. During this same timeframe, we've spent about 20.3% of our GDP - a 2.3% gap that, while not ideal, was manageable and probably sustainable. In 2011, however, as the country stagnated in its economic recovery, we spent nearly 10% of our GDP more that we took in- and the future trend for this is to exceed 7 or 8% through 2021.
That rate is unsustainable - if for no other reason than we are going to need more and more funds each year in the federal budget allocated to service the existing and rapidly growing debt.
This is the path that Krugman is blind to see. The fiscal, moral, and intellectual bankruptcy of his progressive ideology prevents him, and the other progressives from seeing that we are not only charging down the path that Greece has taken, but are doing so on a far larger, far less sustainable scale. By 2020 - we will be spending more on servicing our national debt than we do today for our national security - by over $110 billion - and that is before we enact a $450 billion reduction in defense spending as demanded by the Obama Administration over the next decade.
But can't we just increase taxes, particularly on the wealthy, to fix this problem? That should be the solution - make the wealthy pay their 'fair share'.
The wealthiest 10% already account for 70% of the Federal income tax revenues. The bottom 50% pay no taxes to the Federal Government. The left insists that the bottom and middle class shouldn't pay more - so what if the wealthiest 10% see their taxes increased? We could double the tax rate for the wealthiest 10% - and even if their contributions doubled (which they won't) - we lack the funds to address the deficit problem - and will cripple any GDP growth.
If the US Government seized the entire net worth of Forbes Magazine's 400 wealthiest people - with a combined net worth of around $1.5 trillion, the Government wouldn't be able to cover this year's annual budget deficit. In fact, it would just offset the increase to the debt limit that the President will ask for this month. What happens next year? The next 400 wouldn't we as wealthy as the current 400 - and the current 400 were wiped out by the 'seizure'. Taxing the wealthy cannot fix the irresponsible progressive spending model - and increasing taxes on the middle class and wealthy also will not fix the irresponsible spending model.
Greece isn't the only model that we have to learn the above from - the lessons exist not only in other countries like Britain prior to Thatcher, or Italy, or France, but in cities and states that have operated for decades under the model and ideology of progressivism. Detroit, New York, Boston, Los Angeles, Philadelphia, Chicago, Madison, Harrisburg, and others are the cities that are a model of the path towards failure. California, Illinois, New York, Massachusetts, Washington, Connecticut, are current models - while Wisconsin and New Jersey are models on reversing the trend.
What Krugman cannot accept is that the progressive ideology he embraces is the problem - and reflects a problem on numerous levels. It demands a fiscally unsustainable model - and then works to destroy the incentives to build a vibrant economy - and a vibrant population.
We are witnessing the dismantling of the United States - via the mantra of 'fundamental change'. It is a case of having to destroy something in order to save it. Deficits are being increased to create an argument towards higher taxes and the redistribution of wealth to address the 'faults' of traditional American values - and the lie of the approach is that deficits and debt don't matter. They do. But if not addressed shortly - the damage will be so severe that it is irreversible...and that is another goal of the left.
UPDATE - From today's Financial Times, which I've just found, former Fed Chair Alan Greenspan adds his opinion to the argument that 'debt' doesn't matter....
The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the centre’s decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies by the International Monetary Fund have demonstrated, trying to solve significant budget deficits predominantly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent.Read the entire article at the link -
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