03/18/2010 05:12 am ET | Updated May 25, 2011

Krugman: Deficit Hawks Trying To Scare People With Big, Out-Of-Context Numbers

On ABC's This Week, host George Stephanopoulos asked Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, about the argument that the nation's rising debt level may lead to "a major weakening of American power." Krugman responded:

KRUGMAN: You know, first thing to say is people are putting their money where their mouth is, which is the bond market. Things were fine. You know, the U.S. government is able to borrow long-term at 3.3 percent interest rate. So, obviously, you know, the market is not convinced.

Now, the market has been wrong. But, then if you do the arithmetic, these numbers look huge. The American economy is huge. The debt burden, even after five years, is going to be well below as a share of GDP well below levels that lots of industrial countries have reached in the past, including ourselves after World War II, when we were able to handle that just fine. [...]

We're not going to hit 100 percent (of GDP in debt) until a decade from now. And countries have gone above 100 percent. I mean, if you actually ask about the interest cost, particularly inflation-adjusted interest cost, you know, we're now paying 1.2 percent real interest rate on federal debt. Even if you add 50 percent of GDP in debt, which I don't think is going to happen, that's still only a fraction of a percent of GDP in additional debt service costs.

Washington Post columnist George Will, a vocal deficit hawk, pushed back: "But even unreasonably cheerful assumptions about economic growth and interest rates, we're apt to be spending in 10 years $700 billion a year servicing our debt."

WATCH (debt discussion begins at about 12:30):

On Monday, Krugman took to his blog to call Will's response an example of "debt scare," joking that the statistic about 700 billion dollars should have been "read in the voice of Dr. Evil."

I get that a lot -- people who talk about the big numbers which are supposed to imply that things are terrible, impossible, we're doomed, etc.

The point, of course, is that everything about the United States is big. So you have to interpret numbers accordingly. As the graphic above shows -- it's taken from an article that managed to maintain a grim tone while reporting numbers that actually weren't all that grim -- what we're talking about is a debt-service burden roughly comparable to that under the first President Bush. How many of the people now warning about the impossible burden of currently projected debt were issuing similar warnings back in 1992? Not many, I'd guess.

As Krugman notes, the cost of servicing debt levels are quite low today by historical standards, and even when interests rates rise, they are projected to grow to levels experienced during the 1980s and 90s.

Moreover, as Huffington Post's Ryan Grim reported recently:

The focus on the deficit is also fraught with economic miscalculations. Long-term interest rates are extremely low, despite the hysteria, and the U.S. government is well positioned to meet its obligations indefinitely. The Chinese government, meanwhile, which holds a pile of U.S. debt, has little recourse other than to continue to buy U.S. bonds.

The Nation's DC editor Chris Hayes put it succinctly, using an old saying, in a recent column: "'When you owe $100,000, the bank owns you. When you owe $100 million, you own the bank' -- and it aptly describes the US relationship with China, which holds approximately 70 percent of its 2.3 trillion foreign reserves in dollars."

Nevertheless, deficit hawks are threatening a dramatic move to force cost-cutting plans, as McClatchy reported on Monday.

A bipartisan group of more than a dozen senators is threatening to vote against an increase in the debt limit unless Congress passes a new deficit-fighting plan.

"I will not vote for raising the debt limit without a vehicle to handle this. ... This is our moment," California Democratic Sen. Dianne Feinstein said.

She and nine other senators wrote to Senate Majority Leader Harry Reid, D-Nev., asking that Congress create a special commission to make recommendations that then could be decided by an up-or-down vote.

HuffPost's Jason Linkins has much more on this plan for a deficit-fighting commission HERE.