Krugman on Dealing with the Federal Debt

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National DebtRecall the good ole days of 2001 when then Fed Chair Alan Greenspan testified before the Senate Budget Committee on the dangers of the projected zero federal debt [we’re at $11 trillion now]. Bush-Cheney with the help of supine Democrats, took care of that ‘danger.’ 

Paul Krugman has some thoughts on what to do now.

by Paul Krugman

Dealing With The Debt: A Brief Note

I get a lot of worried mail along the lines of “how on earth will we ever be able to pay off our debt”? Look, there are real worries — but the math per se isn’t very hard.

The Obama administration’s budget(pdf) predicts that by 2020 we’ll have net federal debt of around 70% of GDP and a budget deficit of around 4 percent of GDP. Now, you don’t have to go to a zero budget deficit to make headway on the debt — a budget deficit of 2-3 percent of GDP would imply a steadily declining debt/GDP ratio. So if you believe the administration’s budget estimates, we’ll need to find another 1-2 percent of GDP in revenue or cost savings.

Many independent sources are moderately more pessimistic; they think that on current policies we’d be looking at a deficit of 5-6 percent of GDP. So that makes it more like a 3 or 4 percent of GDP adjustment.

That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world. Or we could save a significant share of that total by not being totally prepared for the day when Soviet tanks sweep across the North German plain.

The only reason to doubt our ability to get things under control a decade from now is politics: if we’re still deadlocked, if sane Republicans are cowed by the Tea Party, then sure, we can have a fiscal crisis. And longer term, we’ll be in a mess unless we get health care costs under control — which is exactly what we’re trying to do, in the face of cries about death panels.

The numbers aren’t that bad; if we go wrong, the fault will lie not in our debt, but in ourselves.

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