Krugman Industrial Smoothing

"According to our latest quarterly thing, Kruger Industrial Smoothing is heading into the red. Or the black, or whatever the bad one is. Any thoughts?"

Paul Krugman writes in Minus 512, 2.4 Percent:

Policy makers have been worrying about the wrong things, obsessing over deficits when the real problem was lack of growth.

In The Arithmetic of Near-term Deficits and Debt he argues that the arithmetic says

the size of the deficit in the next year or two hardly matters for the US fiscal position — and in fact the size over the next decade is barely significant.

In defense of this hardly matters view, "Kruger" makes these points:

1. What matters is the real interest rate, and the real interest rate is low.

2. The estimate for "potential real GDP in 2021" is high enough that "an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs."

In other words, adding a trillion dollars to the Federal debt won't cost us very much. This is Krugman's argument.

So let me ask: Do you think Kruger's argument can win the hearts and minds of the Tea Party? of the Undecided?? of anyone not already Inclined to agree with him???

I don't.

First of all, he's playing with the numbers, talking about "real" debt versus "nominal" debt. (I didn't quote that part. I don't think it's valid. Debt is always in current dollars.)

Second, Krugman says adding to the debt won't cost us very much. But everybody and his brother -- liberals included -- all think the Federal debt is the reason our economy refuses to grow. It isn't. But people think it is. So nobody wants the Federal debt to go up. Not even a little. Krugman's argument will not fly.

Third, he's talking about "real potential GDP" ten years out. But even if, ten years from now, we still have the same estimate of "real potential GDP," there is no guarantee we'll actually achieve that best-case outcome. Little chance we will live up to our potential.

Krugman's argument is industrial-grade smoothing.


Remember, Krugman says "the real problem" is lack of growth.

What does he propose to do about it? Increase the Federal debt, because it won't cost us very much. But we've been increasing the Federal debt relentlessly -- since Reagan or before -- and it has not solved the problem of inadequate growth. So nobody thinks increasing the Federal debt more will solve that problem. And they're right.

But reducing Non-Federal debt will solve the growth problem. And you know what? People want to reduce their own debt. So they might even like that plan.