Keynesian(?) Insanity

Paul Krugman comes out with another of his blog posts of the “if you can’t dazzle them with brilliance, baffle them with bullshit” variety, spouting numbers regarding the national debt that are truly mind boggling in their insanity. I thought he had topped out with his, “we don’t have to repay all this federal debt, we’ll just sit on it and inflation growth will make it go away for us,” but Saturday’s post really outdoes that one.

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.

I think his premise is that if you throw enough numbers around that the reader’s eyes will glaze over, and then you can say anything you want and they will just nod.

Here’s the kicker, “find another 1-2 percent of GDP in revenue or cost savings.” That’s like telling your boss that you want a raise of “1-2 percent of his profits,” or Ford saying that they are going to allocate “5% of General Motors’ revenue for contingency planning.” The only reasonable basis for budgeting is one’s own spending basis.

Assuming that government spending is, at that point, 20% of the GDP then to “find another 1-2 percent of GDP in revenue or cost savings” one would have to reduce government spending or raise revenue by 5-10 percent. That’s not the simple, child’s play exercise that Krugman presents with his “1-2 percent of GDP” game.

In what world does "a budget deficit of 2-3 percent of GDP," or a budget deficit of any magnitude, and a "steadily declining debt/GDP ratio" as he states, mean that the debt itself is going away? He's back to the mantra of "growing ourselves out of debt" again, but now he's doing so while insisting that we can do it with ongoing deficit spending.

In personal terms, what "growing ourselves out of debt" means is if you owe $100,000 on your house and have an income of $50,000 per year, then when your income goes up to $100,000 per year you no longer owe any money on your house and no longer need to make any house payments.

Another really bizarre part of this exercise is that Krugman assures us that if the government is continuing to build debt at a 2-3 percent per year rate, that cutting spending by 1-2 percent would not only quit building that debt, it would pay it off.

“Get within hand grenade distance, then just fire a bullet and you’re good.”

Maybe this is the “new math” that I’ve been hearing so much about, or maybe it’s just that I’m beginning to see why “Keynesian Economics” doesn’t work in the real world. By the math that I use, -2 minus –1 is still –1, so that leaves us still increasing debt. The best case, using his “ranges,” is –2 minus –2 leaving 0. That means we would have quit building the debt, but it hardly pays it off.

He goes on to say that we could easily raise taxes by I-2 percent if it weren’t for the Republicans. Except, of course, it would need to be more like 10% which might not be such a snap, and another “of course” is that Obama and Company have been cutting taxes instead of raising them.

That doesn’t even deal with the issue of him assuming that there is no interest on the federal debt, or that the interest rate we are paying now will not increase in the next ten years.