New York Times columnist Paul Krugman is perhaps the most ardent Keynesian economist in the U.S. today. Let’s agree that Mr. Krugman is a very intelligent and articulate fellow. He is a Nobel Prize winner and undoubtedly has made important contributions to economics. But he has the absolutely nutty idea that extreme deficit spending not only doesn’t hurt our economy but can actually be beneficial. His column, “Time To Borrow” in yesterday’s NYT is a perfect example of this dangerous idea. Here is the essence of his thinking:
Our national debt of $19 trillion is just a big scary number. Actually just our public debt alone of $13 trillion (on which we pay interest) is 75% of GDP, the highest since the end of WWII, and is projected (by the CBO) to steadily become much worse.
Federal interest payments are only 1.3% of GDP, low by historical standards. Just lock in repayment with 30-year inflation protected bonds, yielding .64% interest. Okay, suppose we can lock in very low interest payments on our current debt and therefore just borrow away oblivious to total debt for the next 30 years. In 2046 I expect to be gone but my children and grandchildren will still be around. Why should they be stuck with paying off or refinancing our own extravagant debt at likely much higher interest rates?
There are pressing infrastructure problems all over the country which need fixing now. For example, in Florida, green slime infests beaches because of failure to upgrade an 80 year old dike. The answer is to let Florida voters decide if they want to issue bonds for this project and pay them off with state tax revenue. Nebraska, for example, has decided to raise its state gas tax by 6 cents/gallon in order to pay for infrastructure upgrades.
Conclusion. The U.S. is currently in a huge fiscal bind with massive debt and continuing large annual deficits. It is extremely reckless to continue even current deficit spending, let alone increasing it, for anything less than a true national emergency. Infrastructure repair, for example, is an important but routine need which should be paid for out of current tax revenue.
The federal Highway Trust Fund is almost out of money. It takes in $35 billion per year from the 18.4 cents per gallon federal gas tax, which has not been raised since 1993. Sometime this summer the government will have to cut back on payments to state highway departments unless Congress acts. As the above chart from the Economist shows, the U.S. spends much less of GDP on roads than many other developed nations. Something clearly needs to be done because we need many improvements in infrastructure. But there are better ways and poorer ways to solve this problem. Here are two good ways as described by Thomas Donlan in a recent issue of Barron’s:
A bill to raise the gas tax by 12 cents per gallon over two years has been introduced in the Senate by Bob Corker (R, Tenn.) and Chris Murphy (D, Conn.). Each penny added to the federal gas tax rate will raise $1.3 billion and this would solve the problem.
Repeal the federal gas tax and turn federal highway construction entirely over to the states. Each state could then increase its own gas tax and/or pay for construction with tolls on bridges and roads.
Here are two examples of poor ways to replenish the Highway Trust Fund:
Continue adding to the Fund with borrowed money. $54 billion has been borrowed since 2008 for this purpose. Presumably the Sequester will make it much harder to continue such deficit financing.
Rep John Delaney (D, Mary.) has proposed a tax break for repatriated foreign profits by multinational American companies if part of the money brought back was spent on infrastructure bonds. This would interfere with the urgent need to reform corporate taxes with significantly lower rates offset by lowering deductions, in order to make our corporate tax internationally competitive.
Conclusion: There is a good chance that the Budget Sequester established by Congress in 2011 to control discretionary spending, as well as the widely recognized urgent need for corporate tax reform, will lead to a “good” rather than “bad” solution to the shortfall in the Highway Trust Fund. This is just one specific example of the challenge to sensible budgeting by Congress.
A much broader approach is needed to really shrink the deficit. Stay tuned!