Krugman: “It’s the Politics, Stupid!”

grandma2Paul Krugman, in his most recent column, claims that, while new budget projections show a cumulative deficit of $9 trillion over the next decade, such deficits are manageable by historical standards, and the real danger going forward is political.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.

Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.

Krugman does acknowledge that Medicare and Medicaid have financing problems in the long term, but suggests that spending for those programs should not be too hard to solve in the context of health reform. He cautions, however:

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”

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