The phony debt ceiling crisis

Paul Krugman in the NY Times:

In March 2011 Erskine Bowles and Alan Simpson, chairs of a White House deficit-reduction commission, issued a frightening warning about U.S. government debt. Unless America took major steps to rein in future deficits, they warned, a fiscal crisis could be expected within two years.

Bowles described what he thought would happen: Foreigners would stop buying our debt. And he asked: “What happens to interest rates? What happens to the U.S. economy? The markets will absolutely devastate us.”

That was 12 years ago. When Bowles issued his warning, the interest rate on 10-year U.S. bonds was about 3.5 percent. Not much was done to reduce deficits, aside from a squeeze on discretionary federal spending that probably delayed economic recovery. But at the end of last week the 10-year rate, which has gone up substantially over the past year as the Fed raises rates to fight inflation, was … about 3.5 percent.

The point is that in the early 2010s, the last time we faced a potential crisis over the debt ceiling, there was an elite consensus that budget deficits were a severe, even existential threat. 

That consensus was completely wrong. Yet it dominated the political conversation, to such an extent that, as Ezra Klein pointed out, the media abandoned the normal rules of reportorial neutrality and openly cheered proposals to cut Social Security and Medicare....

It’s true that U.S. debt is very large — $31 trillion (said in your best Dr. Evil voice). But America is a big country, so almost every economic number is very large. 

A better way to think about debt is to ask whether interest payments are a major burden on the budget. In 2011 these payments were 1.47 percent of gross domestic product — half what they had been in the mid-1990s. In 2021 they were 1.51 percent. 

This number will rise as existing debt is rolled over at higher interest rates, but real net interest — interest payments adjusted for inflation — is likely to remain below one percent of G.D.P for the next decade....

In 2011 the budget office projected that under the most realistic scenario federal interest costs in 2021 would be 4.4 percent of G.D.P. — more than twice their actual level. It also projected that by 2035 federal debt would reach 187 percent of G.D.P. Its most recent projection puts that number at 117 percent....

Nonetheless, the debt scolds are trying to make a comeback. Partly that’s because ranting about federal debt sounds serious and hardheaded. Partly it’s because deficit rants are all too often deployed in the service of an ideological agenda, a push to cut Social Security, Medicare and Medicaid (but not, of course, giving the Internal Revenue Service the resources to crack down on tax evasion).

Here’s my proposal: Let’s not do 2011 all over again. Let’s not panic over an overhyped issue. Let’s not assume that deficit peacocks are doing anything more than posturing. And let’s not allow the media to become, once again, a de facto accessory to an ideological, partisan agenda.