DeLong Smackdown Watch of the Day for June 11, 2010: Gene Healy
A Contest: Analogies for the Pain Caucus

Short-Term and Long-Term Debts and Deficits

Henry Blodget asks a question:

Buzzup Finance - Our Questions For Paul Krugman, Brad DeLong, Niall Ferguson, And The Tea Party: How are we going to work our way out of our long-term debt-and-deficit problem?  If you're going to point to the post-WW2 period as evidence that our projected debt-to-GDP ratio is nothing to worry about, please acknowledge that one fundamental difference between now and then is that overall debt-to-GDP (including consumer and private sector debt) is VASTLY higher now than it was then.  Specifically, overall US debt-to-GDP is now 375%+, which is the highest in history by a mile (see chart below).  Immediately after WW2, it was far lower than that, despite the large debts the government wracked up during the war.  Compounding this massive debt load, as you have both acknowledged, is the huge problem of our bankrupt entitlement programs.  It is easy for politicians to increase spending, but hard for them to cut it.  When countries hit the government debt-to-GDP ratio that we are going to hit, Niall Ferguson says, it is rare for them to work their way out of it without destroying the currency.  So how, and when, are we going to begin to address these huge problems--and who is going to pay the price?  Pain, it seems, is unavoidable.  It just seems a matter of when, how (and who).

I think the right answer to the question has two parts:

  1. The question has nothing whatsoever to do with what American fiscal policy should be over the next three years. If we spend an extra $1 trillion over the next three years in unemployment-reducing stimulative fiscal policies, we raise--at current interest rates--real government debt service in 2030 by $7 billion a year. If we delay the adjustment of our health care spending so that the excess of health spending inflation over CPI inflation continues for an extra month into the 2020s we also raise real government debt service payments in 2030 by $7 billion a year. Whatever we do (defined as spending up to an extra $1 trillion) in the short run (defined as the next three years or so) is rounding error in the context of our long-run fiscal stability problems.

  2. Given that the answer to Blodget's question has nothing whatsoever to do with what the deficit should be over the next several years, Blodget's question is a very good one. The problem of our bankrupt entitlement programs does lie more than a decade in the future, but it is a very very very very big problem indeed. Financial markets currently believe that we will solve it successfully with probability 1--and that gives me some hope. But not a terribly large amount of hope.

Think of it this way: our natural gas pipes are corroding, and there is a good chance that tomorrow ten years from now we will have a gas leak and if we do not fix it the house will explode. And Henry Blodget is using that danger to argue that we shouldn't turn on the heat tonight even though it is snowing outside...