A response to Prof. Krugman's response

In this week's Quote of the Week, I took aim at Professor Paul Krugman's read of our nation's fiscal condition. Apparently, I wasn't alone. In his somewhat snarky response (titled "Special Bulletin: Fractions Have Denominators") to apparently widespread criticism of his previous op-ed, he writes:

I’ve been getting some mail over yesterday’s column, with angry correspondents posting charts like this, showing government spending as a percentage of GDP, to claim that government spending has too surged:

But if you look at the raw numbers on government spending, here’s what you see:

Feel the surge!

What’s going on? Yes, that’s right: it’s what happens when you divide by GDP in a time of terrible economic performance. Spending hasn’t surged; in fact, it grew more slowly in the two years after Lehman collapsed than in the two previous years, despite a sharp rise in spending on safety-net programs. Instead, GDP growth has plunged.

I posted a comment on Prof. Krugman's new article, and I'll repeat it here.

Yes, Prof. Krugman, fractions do have denominators. The problem, though, is that the fraction does not become meaningless simply because it is the denominator changing rather than the numerator--it merely changes the fraction's meaning. 

Spending IS still increasing, by the looks of your graph about 30% over 5 years. That's significant. If a household increased spending while its income decreased, it could only do so by incurring debt. Clearly this is what we are doing with spending vs. tax revenues. 

The gap between the numerator and the denominator is DEBT, and our growing DEBT is the problem. That is the true meaning of the first graph you posted. This is the dangerous behavior that those "on the right" are decrying, and explaining the behavior of the denominator does not erase their fears. 

We are spending ever more money on interest servicing the debt, and an increase in interest rates will make the debt absolutely untenable. Think about it as a homeowner with an ARM ready to kick in. They can afford it now, but not when the higher back end rate kicks in. That's the danger, and it doesn't have anything to do with numerators or denominators. It's the gap that matters.

The Wall Street Journal also ran an opinion column (worth a read) essentially responding to Prof. Krugman. In it, they wrote:

The costs of TARP declined by $262 billion from 2009 as banks repaid their bailout cash, payments to Fannie Mae and Freddie Mac were $51 billion lower (though still a $40 billion net loser for the taxpayer), and deposit insurance payments fell by $55 billion year over year.

"Excluding those three programs, spending rose by about 9 percent in 2010, somewhat faster than in recent years," CBO says.

Somewhat faster. You've got to laugh, or cry, when a 9% annual increase qualifies as only "somewhat faster" than normal.

Stripping out the effects of TARP and deposit insurance, the Journal ran the following graphic to show actual spending trends since 2008. They are indeed alarming, and to read Prof. Krugman's op-ed without also consulting this chart is certainly irresponsible.

Note that I am certainly not one of those "on the right" that I mentioned in my response to Prof. Krugman. I am, however, a fiscal conservative, and I am deeply concerned about our ballooning debt. We as a government (and a nation) are essentially repeating the sins of now-underwater homebuyers of the last decade. Prof. Krugman is only confusing the issue by obscuring the facts. Thank you to the Journal for clearing things up.


[New York Times]
[Wall Street Journal]