Paul Krugman is one of America's intellectual treasures, but he is stunningly off when it comes to the deficit. He argues that if re-elected, Obama should "just say no" to all efforts to seek a major budget deal. In so doing, he belittles Bowles, Simpson and others who warn about a looming and potentially crippling fiscal crisis. He's not the only deficit denier, but Mr. Krugman is so respected by the left wing of the Democratic Party that his arguments could prove quite problematic.
His recent column opens with perhaps the most dangerous and short-sighted argument, namely that our historically low U.S. treasury rates prove that "we are not facing any kind of fiscal crisis." But our rates are not at historic lows because of our chronic deficits, rather in spite of them. We are (in the eyes of those seeking to purchase the safest debt possible) the cleanest port-o-potty at the county fair thanks to the awful state of much of the rest of the world's beleaguered economies.
That's great for us now, but let's be clear. For our rates to remain low in the future, four things have to occur: our economy must remain tepid, Europe has to be a mess, China must not get its act together, and the U.S. government has to keep printing money to buy its own debt. Do we really want to depend on the world looking this bad so we can maintain affordable debt?
Some, like Mr. Krugman, claim that this time it's different; the world has changed so much that the U.S. will maintain a permanent and wide lending advantage and that low rates for U.S. treasuries will be perpetual, even when the world recovers. We've heard this story too many times before with disastrous consequences. "This time it's different" gave us the tech bubble, the housing crisis, and the complacency of the so-called "great moderation."
Here's why we should reject this line of thinking once again. History has shown that one of the most powerful market forces is simply regressing to the mean. In other words, what goes up must come down. With interest rates at the 99th lowest percentile -- going back more than 100 years -- at some point rates will regress to their historic average. When that surely occurs, rising rates will cost taxpayers hundreds of billions in interest payments, and capital markets could conceivably shudder like they have in Europe.
Mr. Krugman also asserts that America doesn't have an entitlement problem. Over the next 30 years the number of people over the age of 65 will double, but the number of people who are working age and pay for the elderly's benefits will increase by less than one-fifth. And, due to increasing life expectancy and benefits that rise faster than inflation, the average lifetime benefit each senior receives eventually doubles. Folks, that's an entitlement problem. The current financing mechanisms for both Social Security and Medicare don't come close to meeting our target expenditures. And don't kid yourself that this yawning gap between entitlement spending and revenue can be closed by taxing the wealthy alone. That's a fairy tale, as our recent paper proves.
There was a time when this country could afford to invest significantly in big things -- sending a person to the moon, constructing a web of highways, and sending the greatest generation to college. But we have cut that way back. In the 1960s federal money toward investments outpaced entitlements by three to one. This year it was three to one in the opposite direction, and by 2022 the major entitlement programs will outpace all public investments by six to one. That is the price of not making minor adjustments to our entitlement programs.
As we hurdle toward the fiscal cliff, the wings of both political parties will reject any attempt at reasonable compromise. The right will dig in on taxes and leave this country's government woefully underfunded. The left will dig in on entitlements and leave us perilously overcommitted. Should he be re-elected, we hope President Obama will firmly reject Mr. Krugman's advice and say "yes" to a balanced deal that will be good for our economy and provide security for generations to come.
Jon Cowan is President and Jim Kessler is Senior Vice President for Policy at Third Way, a moderate think tank.