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Mark Leibovich Is Fed Up with the Journalism of Mark Leibovich

Deficit Arithmetic: Henry Blodget Needs to Do the Math

The intelligent and articulate Henry Blodget arouses my ire by failing to do his arithmetic.

Henry Blodget:

Paul Krugman: Lost Decade, Here We Come: Where are we on this fight between Krugman (Keynesians) and Niall Ferguson, et al (who argue that our ballooning debts and deficits will kill us in the end)? In the middle.  We think Krugman is right about the short-term impact "austerity" will have on the global economy, and we never hear the Tea Party and other austerity pundits acknowledge that. At the same time, we don't think Krugman has yet offered a persuasive explanation for how we're going to climb out of the gigantic debt and spending hole we're digging without serious future pain.

Two observations:

  1. We are not going to get out of our long-run health-care spending overcommitments without serious future pain. The pain--in the sense of severe spending cuts relative to baseline or tax increases--is already baked into the cake.

  2. Whether we spend an extra $100 billion more (or less) this year on anti-recession measures is unimportant--is less than rounding error--in the long-term budget context.

Let's do the math:

Spend $1 billion today. Use the Treasury to borrow the money for 10 years at 3.20%. Expected inflation at 2 1/2% means that the real interest charges on the borrowing are only $7 million a year. And in 25 years the real American economy will be twice it's current size, and so the burden of raising taxes to actually pay off the debt will be half as big as it is today.

We do have enormous long-run deficit problems. They are not the result of any future difficulty in paying off what we are borrowing today. They will be the result of the enormous medical scare care spending that we have put in train for the 2020s, 2030s, and 2040s. To wonder how we will pay off the debt we are currently accumulating is to fundamentally misunderstand the situation we are in.

Suppose that we make decisions over the next two decades that mean that our current regime of excess Medicare and Medicaid spending growth--growth over and above inflation plus the growth in the real economy--ends not in 2030 but in 2031. Then the impact of those decisions will be to raise needed taxes in 2031 and every year thereafter by $70 billion a year. $70 billion--$7 million. A factor of 10,000. The effect on long-term budget sustainability of long-run health-care spending decisions is thousands and thousands of times greater than the effect of short-term recession-fighting fiscal stimulus decisions.

Why, then, do people talk as if not spending money fighting the recession now will materially ease the problem of getting our fiscal house in order? First of all, because they have not done the math.

But, Blodget might ask, what if interest rates spike? What if the real interest payment on $1 billion of government debt jumps from $7 million to $50 million a year, or even more?

It's unlikely--certainly nobody is betting on a spike in U.S. interest rates over any horizon priced into the observable yield curve. But it could happen. And then we would have a problem.

Since we are a reserve fiat currency it is almost surely our creditors' problem and not ours, but it is a problem. However, we have a bigger problem right now: 10% unemployment, five percentage points higher than it needs to be, something like $120 billion every month of wealth thrown away via unusued capacity and idle workers. Failing to do everything you can to solve a big problem now because the solution might--but probably won't--set us up for a smaller problem later does not seem to me to be wise policy. My answer would be different if the yield curve were flashing red, or even yellow. But it isn't.

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