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Paul Krugman’s Strange Argument That We Don’t Have To Worry About The National Debt

October 24, 2016

By Tim Worstall

Paul Krugman is offering a significantly strange argument about why we just don’t have to worry about the national debt. It’s only projected to rise to 113% of GDP after all. The problem here is twofold. Firstly, the projection is pretty rosy–there are a number of assumptions which look pretty good but one that’s rather missing, which is the idea that we’ll not have a recession for 30 years. The other is that Keynesian economics, and Krugman definitely belongs in the group that favours that idea, does state that we don’t want to have an ever rising debt. Rather, fiscal stimulus is a very useful thing to be able to do in the bad times, but we also want to do more than a bit of fiscal austerity in the good times. No, not so that we pay back the debt, but so that we dampen out the exuberance of the animal spirits when necessary as we also boost them when that is necessary. The net effect being that we should be in a roughly stable position over the business cycle with regards to the national debt.

The difficult thing now is that this is about as good as it gets. If people like Larry Summers are to be believed that is, we’ve got secular stagnation. Even if we don’t want to go down that road we do know that economic growth isn’t going to be stellar into the future for demographic reasons. This is, now is, thus the time that we should be fixing the roof while the Sun shines. And that’s exactly what Krugman is not recommending:

Why, then, do you see projections of a large debt increase? The answer lies not in a known factor — an aging population — but in assumed growth in health care costs and rising interest rates. And the truth is that we don’t know that these are going to happen. In fact, health costs have grown much more slowly since 2010 than previously projected, and interest rates have been much lower. As the chart above shows, taking these favorable surprises into account has already drastically reduced long-run debt projections. These days the long-run outlook looks vastly less scary than people used to imagine.

Still, it’s probably true that something will eventually have to be done to bring spending and revenues in line. But that brings me to the second point: why is this a crucial issue right now?

Read the full article at Forbes.com: Paul Krugman's Strange Argument That We Don't Have To Worry About The National Debt

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