Deficit Hawks Versus Deficit Worshippers: Paul Krugman Leads the Charge
As the U.S. federal government sinks ever deeper into irreversible fiscal imbalance, a cadre of pro-deficit economists, led by Nobel laureate Paul Krugman, have been pounding the airwaves, making the case for an emergency government jobs program, funded by, no surprise, an even larger dose of deficit spending. The case presented by Krugman rests on two pillars: 1. The rate of unemployment is so severe, it risks undermining any sustained economic recovery, threatening larger deficits down the road; 2. Low interest rates mean the U.S. government can fund additional debt cheaply, those rates in turn assured by the current state of the bond market.
I sympathize with Paul Krugman’s concern about unemployment. Clearly, TARP and the other bailout and stimulus measures were aimed at Wall Street’s recovery, not Main Street’s. But I disagree with his optimism regarding the ability of the United States economy to absorb more sovereign debt. In only nine years, America’s national debt to GDP ratio has doubled, currently standing at 80%. Furthermore, his belief that interest rates offered on U.S. government debt can be maintained at perpetually low rates is based on theology, not economic science. It is inevitable that interest rates will rise for a host of reasons, not the least being that the U.S. will find increasing competition in the sovereign debt market from other deficit-seduced governments. Even a modest rise in bond yields will utterly devastate the capacity of the American government to service its public debts. Fiscal collapse would be the result, bringing in its wake a level of unemployment that would leave even Paul Krugman pining for the jobless rates of late 2009.