In yesterday’s New York Times Paul Krugman has a column “Fight the Future” in which he says that “fiscal contraction” is “undermining what might otherwise have been a fairly vigorous recovery” and that focusing on long run fiscal sustainability “isn’t a way of being responsible”. He compares our fiscal problems with global warming and says that the “uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe”. But “delaying action on entitlement reform has no comparable cost”. He even says that seeking a “grand bargain” that links reduced austerity now to longer-run fiscal changes is harmful because it would involve negotiating with untrustworthy Republicans!
First of all, there has been no real fiscal austerity in the past five years. Federal expenditures took a huge jump from 2008 to 2009 and have increased each year since, in spite of huge deficits. The sequester will not cut spending in 2013 compared with 2012 but only slow down the rate of increase. There is little, if any, uncertainty about how fast the costs of healthcare in general, and Medicare in particular, will increase in the years ahead. The current slowdown in healthcare costs in the last few years still leaves it growing at twice the rate of increase of GDP. Demographics alone clearly show that the cost of Medicare will start increasing even more rapidly in just a few years from now.
Mr. Krugman concludes by saying that “influential people should stop using the future as an excuse for inaction. The clear and present danger is mass unemployment, and we should deal with it, now.” I basically agree with him! The question is how! Should we deal with it by artificial stimulation (bigger deficits and more debt) or rather by boosting the private sector with tax reform and strategic deregulation? It takes two to tango and Mr. Krugman doesn’t help by constantly ridiculing the Republicans!