David R. Henderson  

Krugman's Strange View About Planning for the Future

PRINT
Bio of Paul Krugman... Two approaches to macroeconomi...

Paul Krugman, in a post today titled "Debt, Diversion, Distraction," argues, as his title implies, that we get diverted and distracted from more important issues if we worry about the coming high deficits and debt. His reasoning is faulty.

First, and this is not the faulty reasoning part, he uses data from something called the CBPP without ever identifying that organization. A quick Google shows that CBPP stands for the Center on Budget and Policy Priorities. Here's the study that he must be referring to. It does, as he says, show that the future outlook on federal government looks rosier than the CBPP's projection looked 6 years ago.

But why not use data from the Congressional Budget Office? All projections of the future turn out to be wrong, but the CBO probably has less of an axe to grind than the CBPP. And, while the CBPP study claims that in 2046, the ratio of debt to gross domestic product will be 113 percent, the CBO's projection, as of July, was a higher ratio: 141 percent. That's a pretty big difference.

Now to the faulty reasoning part. Krugman writes:

So proposals to "deal with" the supposed debt problem always involve long-term cuts in benefits and (reluctantly) increases in taxes. That is, they don't involve actual policy moves now, or for the next 5-10 years.

So why is it so important to take up the issue right now, with so much else on our plate?

Put it this way: yes, it's possible that we may at some point in the future have to cut benefits. But deficit scolds talk as if they offer a way to avoid this fate, when in fact their solution to the prospect of future benefit cuts is ... to cut future benefits.


But is there no difference between putting in place now policies that would cut benefits from, say, 10 years on, and Krugman's apparently preferred alternative of waiting 10 years and then cutting benefits immediately? Any person who plans his future will tell you that there's a huge benefit. If I can know that my Social Security benefits 10 years from now will be, say, 20% lower than I had thought due to means testing, I can plan my saving now. But if I simply think that the government will cut benefits 10 years from now and I don't know whether that's true and even if I think it's true, I don't know who will get cut and by how much, it's harder to plan.

Krugman seems to anticipate that objection, because here is his next paragraph:

If you try really hard, you can argue that locking in policies now for this future adjustment will make the transition smoother. But that is really a second-order issue, hardly deserving to take up a lot of our time. By putting the debt question aside, we are NOT in any material way making the future worse.

Does it look as if I tried "really hard" to do the reasoning in my paragraph immediately preceding this quote? And how he does he know that it's second-order? To a lot of people currently aged 45 to 65, it's pretty important.


Comments and Sharing






COMMENTS (18 to date)
Thaomas writes:

I do not see any argument for means testing SS that is not just and argument for steeper progression of income tax rates. SS is already taxed.

But I do agree that it would be better to institute a carbon tax now rather than wait a couple of decades when the problem will be much worse and the likelihood of having a far less optimal policy will be higher.

James Hanley writes:

During the recession Krugman was arguing that we shouldn't try to reduce benefits then, that we should wait until the economy was stronger. Now that we're out of the recession he's shifting his reasons for not reducing deficits.

Don Boudreaux writes:

In 2004 Krugman sung a different song. A slice (emphasis added):

TONY JONES: When you say the not-too-distant future, what does that mean?

We know there may be a crisis in paying, for example, in social security...

PROFESSOR PAUL KRUGMAN: What I envision is that at some point, we have about 10 years now until the baby boomers hit the United States.

The US even more than other advanced countries has a welfare state that's primarily a welfare state for retirees.

We have the huge bulge in the population that starts to collect benefits and earn the next decade.

If there isn't a clear path towards fiscal sanity well before that, then I think the financial markets are going to say, "Well, gee, where is this going?"

Later in this November 2004 interview with Tony Jones, Krugman says that if the 2004 Social Security surplus is removed from the budget, the U.S. budget deficit is "more than 6 per cent of GDP." Well, because Social Security revenues are spent by Uncle Sam in the current period just as Uncle Sam spends its other revenues, there's zero reason to remove the Social Security surplus from the budget - or, at least, there's no more reason to remove from the U.S. government's budget its Social Security surplus than there is to remove, say, whatever income-tax revenues Uncle Sam rakes in from Texans.

So without removing the Social Security surplus from the U.S. budget in 2004, the budget deficit that year was in fact about 2.5% of U.S. GDP. The current government budget deficit is projected to be about 2.6% of U.S. GDP - that is, just about the same percentage of GDP as in 2004 when Krugman was a deficit hawk who sensibly insisted that steps should be taken presently in order to better deal with the future.

AntiSchiff writes:

Dr. Henderson,

I agree with the point you make about Krugman's post, but please help me understand why I should be concerned about a 140% debt/GDP ratio, or even a 180 or 200% level. Clearly, bond markets are not predicting much in the way of inflation or interest rates in the future, and once the babyboomers die off, won't the demographics be much more favorable?

Mark Bahner writes:
...and once the babyboomers die off, won't the demographics be much more favorable?

That's not going to happen any time soon. Boomers were born 1946 to 1964.

Life expectancy at age 65 in the year 2016 is 83 for men, and 86 for women.

Sooo...1946 + 83 = 2029 for males born in 1946. And 1964 + 86 = 2050 for women born in 1964.

BC writes:

I guess Krugman must believe that it's ok to cut benefits for seniors right now since, according to him, people don't rely on promises of future retirement benefits in planning their own savings.

BC writes:

Actually, Krugman's logic implies that we should just eliminate Social Security altogether. Why promise future retirement benefits now if we don't even know for sure whether people will need them? Maybe, there will be a big stock market boom or people will save more than we expect them to. In any event if, in the future, it turns out that seniors need government-provided retirement benefits, Congress can just provide for those as part of the annual appropriations process. Social Security is already a pay-as-you-go system anyways, so why not just decide each year how much tax to levy and what benefits to pay without making any promises about future benefits?

As Krugman might argue: "Put it this way: yes, it's possible that we may in the future still have seniors that are dependent on Social Security benefits. But Social Security defenders talk as if they offer a way to deal with this dependency when in fact their solution to the prospect of future benefit dependency is ... to promise future benefits."

Harvey Cody writes:

Krugman’s punditry (to be distinguished from his past essays on economic research and analysis) is economically absurd. On the other hand, can sense be made of it (other than he is likely a sycophant)? I very much fear such is the case.

The US has:

• Issued bills and notes for $20T, unfunded pension liabilities of many multiples of $20T, Social Security and Medicare laws which entitle people who vote to about $1.4T/year (41% of the budget), $600B/year of “welfare” transfers, veterans and government employee pension obligations of $250/yr. - and all of these are growing;

• One of the highest (least competitive) federal corporate income tax rates in the world;

• Government employees and assets which must be maintained to perform basic government services;

• A need to have a capable military (conquering America is the biggest prize in the world - ever) – which may not be possible with its current $550B/yr. funding;

• An unusually low interest rate on the federal debt – with every 1% increase in interest rates the annual interest cost will increase by about $100B/year.

• A population which would revolt (at the ballot box, on the street or both) if the federal government were to cut benefits or services – or, perhaps if government does not continue to expand “services”;

• An economic and health disaster otherwise known as Obamacare which is just in its opening stages.

• On top of all the above, state and local governments spend another $275T and have many unfunded pension and other obligations.

• Government at all levels is exceedingly corrupt and it appears a majority of Americans intend to reward one of the most corrupt candidates in history to the presidency.

Raising taxes or printing money to pay these obligations will further depress – which would cause government transfer payments to increase. Lowering taxes to boost the economy has fallen out of favor with the public. The same is true for reductions in regulations, except the demand for more regulations appears to be higher than the demand for raising taxes.

Krugman says, in many and various ways, pay no attention to any of the above. If there are no politically feasible ways to address the above problems, it makes sense for Krugman and others to convince people they might as well party hard while the music is still playing.

I would love for someone to talk me off of this cliff.

Todd Kreider writes:

Mark Bahner wrote something unexpected for him, above. The time period of 2029 to 2050 for when a great majority of baby boomers will be dead is the most conservative range that assumes no serious advances in disease prevention and health care in the 2020s and 2030s.

It looks like we are less than 5 years away from a substantial percentage of the population taking some form of health pill. These pills will not only add several years to life expectancy but overall improve the health of all ages over 40.

Other technological changes are coming as well, which will force a rethinking of employment and retirement as health care expenses are drastically reduced. 9Then again, we don't know how much enhancements will cost in the 2020s or especially 2030s, either.)

David R. Henderson writes:

@AntiSchiff,
I agree with the point you make about Krugman's post, but please help me understand why I should be concerned about a 140% debt/GDP ratio, or even a 180 or 200% level.
The answer: the higher the debt, all else equal, including interest rates, the higher the percent of budget used for interest payments. This crowds out other spending but also puts pressure on taxes.
Clearly, bond markets are not predicting much in the way of inflation or interest rates in the future,
True. But bond markets are right until they’re wrong. But even if inflation and interest rates never rise due to higher debt, see my first response to you above.
once the babyboomers die off, won't the demographics be much more favorable?
It depends. See Mark Bahner’s comment above, and you’ll see that that’s a long time. Also, with improving life expectancy, even after the boomers die off, a few added years of life expectancy will put both Medicare and Social Security in deep trouble. Thus the need to make prospective changes now.

Todd Kreider writes:
Also, with improving life expectancy, even after the boomers die off, a few added years of life expectancy will put both Medicare and Social Security in deep trouble.

This assumes no improvements in either preventing disease or in treatments that would drastically cut Medicaid costs.

David Sinclair of resveratrol fame told the Washington Post last year that he thought it was possible to first reduce the risk getting age related diseases - cancer, stroke, heart attack Alzheimer's ,etc by 10% but that eventually by 50%. He didn't give a time frame but in other talks he has implied this will begin soon, the first wave of NR, NMN, Metformin, Rapamycin, etc based pills from 2018-2020 or so.

Other anti-aging researchers to pay attention to among others include Leonard Guarante, Cynthia Kenyon, Linda Partridge, Brian Kennedy and Matt Kaemberlein, who was featured on the front page of The NY Times this past summer with his rapmycin taking dog experiment.

I'm curious why David Henderson thinks the likelihood of these pills entering the market within a few years is so low that like most economists (Tyler Cowen, Paul Krugman, and Robert Gordon immediately come to mind) won't even mention them. What do the economsts without biochemistry backgrounds know that the top longevity researchers do not?

David R. Henderson writes:

@Todd Kreider,
I'm curious why David Henderson thinks the likelihood of these pills entering the market within a few years is so low
I don’t think it’s low; I think it’s fairly high.
This assumes no improvements in either preventing disease or in treatments that would drastically cut Medicaid costs.
I think you mean Medicare, not Medicaid. Improvements in preventing disease will, as you say, probably reduce health care costs. Improvements in treatments may not. Treatments may make it possible to treat diseases that were not treated before. The net result on health is GREAT. That it saves taxpayer money is less clear.

Mm writes:

@todd- the best new treatment for the gov't would keep you healthy & working all your life and at about age 66 it would rapidly kill you. A therapy that prevents you from dying at 74 from a heart attack, but means you live until 95 (requiring 8 years in a skilled care facility) will be a net cost increase. Remember SS was initially designed to kick in after the average person was dead.

AntiSchiff writes:

Dr. Henderson,

Okay, I take your point about higher debt eventually meaning higher taxes or inflation in the future, ceteris paribus, but what am I to think of the case of Japan? Japan's debt/GDP ratio is well over 200%, and it's safe to say the demographic dynamics there are much worse than any we could predict here. Yet, interest rates on their debt are lower than ours, even nominally negative in some cases. Moreover, Japan's had a much higher debt/GDP ratio than we have for decades, yet no hint of problems with inflation and while taxes have increased, they've not exploded.

Do you think Japan's situation is dangerous, and if so, shouldn't a sophisticated person like yourself be able to profit handsomely at some point if the bond market has it wrong?

AntiSchiff writes:

Dr. Henderson,

By the way, I don't favor running deficits without a good reason, like a just war for example. I just don't understand why the debt and deficit should be a priority. What's a precise way we laypeople can think about these things? What does the math look like and how can we start to be sure we're in trouble? It seems to me, especially in light of some very good comments on this thread, that there's a great deal of uncertainty about our fiscal position in the future.

David R. Henderson writes:

@AntiSchiff,
but what am I to think of the case of Japan? Japan's debt/GDP ratio is well over 200%, and it's safe to say the demographic dynamics there are much worse than any we could predict here. Yet, interest rates on their debt are lower than ours, even nominally negative in some cases. Moreover, Japan's had a much higher debt/GDP ratio than we have for decades, yet no hint of problems with inflation and while taxes have increased, they've not exploded.
All true. As you might have noted, though, my argument did not depend on interest rates or inflation rising. See my earlier response to you.
Do you think Japan's situation is dangerous
Yes.
if so, shouldn't a sophisticated person like yourself be able to profit handsomely at some point if the bond market has it wrong?
Yes, but that’s a big “if.” Also, although I thank you for the compliment, I don’t think I’m sophisticated. Remember Keynes’ injunction about the market remaining irrational longer than you can remain solvent. But, more important, as I’ve noted, my argument does not depend on bond prices falling.
What's a precise way we laypeople can think about these things? What does the math look like and how can we start to be sure we're in trouble?
I don’t know.

Todd Kreider writes:

To David Henderson: I cannot see how, say, a 30% decrease in the incidence of major cancers would not be a huge savings for taxpayers. Include a 30% reduction in Alzeimer's disease cases, since the first pills would also prevent or significantly delay the onset of that disease, and you get another huge savings in medical costs. The same for diabetes and heart disease.

"Treatments may make it possible to treat diseases that were not treated before."

I can't think of any, especially when Alzheimer's and Parkinson's diseases are significantly reduced, which is coming fairly soon, that is, years, not decades away.

To Mm: The Social Security system was created when those who lived to the age of 21, 55% would collect SS past 65. By 1960, 65% of 21 year olds lived to 65 and by 1990 75% lived to age 65). Most of those who lived to 65 had another 13 to 14 years left.

Mark Bahner writes:
It seems to me, especially in light of some very good comments on this thread, that there's a great deal of uncertainty about our fiscal position in the future.

Here's how I view the uncertainties:

1) Will the world economy grow as I've predicted for more than a decade? If so, we're golden...at least 30+ years out (because the transition might be pretty dramatic).

2) Will maybe the world economy "grow" by prices for almost all goods collapsing, due to lower production costs? If so, the result should still be good, but if the prices of everything (including human labor) collapsed and just kept heading downward, it seems to me that it wouldn't show up as positive GDP growth. (I would definitely appreciate thoughts of economists on this scenario.)

3) If I'm totally wrong about both 1 and 2 (which seems unlikely to me) it seems like there are a host of questions, like:

3a) Will Social Security and Medicare be adjusted so that only people with 10-15 years of life left collect them?

3b) Will SS and Medicare be adjusted by some sort of means testing, such that people who really don't need them get much less?

3b) Does there come a point where our debt/GDP ratio becomes high enough that people refuse to buy U.S. bonds without higher interest rates? (That seems like it could turn very ugly very quickly.)

Comments for this entry have been closed
Return to top