Monday, March 29, 2010

Paul Krugman wrong on option for deficit reduction

Economist and New York Times blogger Paul Krugman does his readers a disservice in the course of a recent post meant to dampen fears over high debt levels:

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. [EA]

The idea that if we faced a fiscal armageddon we could solve our problem by reducing spending on the implements of actual armageddon is an appealing one. One that I ascribed to not that long ago. Too bad it's not true.

While it is true that we still spend a tremendous amount of money on defense compared to other countries, we aren't spending the way we did when those Soviet tanks that Krugman conjures up were an actual threat. According to the Congressional Budget Office the federal budget for defense was 8.1% of GDP in 1970. In 2007 it was 3.9%. They estimate that in 2020 it will be 3.6%.

The notion that we are spending 3 or 4% of GDP on defense against a Soviet threat that no longer exists is simply wrong. If we reduced defense spending by 3 or 4% of GDP in 2020 we would spend nothing on defense. While I'm willing to concede our current level of spending on defense is too high, I'm sure the optimal level is not zero.

Is it too much to ask that one of the world's premier newspapers and its Nobel Prize winning economist blogger level with their readers about the fiscal choices facing the nation?

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