Krugman: CBO Doesn't Know How to Read Its Own Report

Krugman: CBO Doesn't Know How to Read Its Own Report
Profile photo of Robert P. Murphy

Paul Krugman reads the latest long-term forecast from the US Congressional Budget Office (CBO) and he likes what he sees. EvenCBO Forecast though the nearby graph is the CBO’s projections for the growth of federal debt, Krugman nonetheless offers this rosy commentary:

Nick Bunker notes an important point about the CBO’s new long-term fiscal projections (pdf): The budget office has marked down its estimate of long-term interest rates…

This markdown has the effect of making the budget outlook — which was already a lot less dire than conventional wisdom has it — look even less dire. But there’s a further point worth emphasizing: the CBO has just declared an end to the debt spiral.

You’ve heard the story: the more debt we have, the more we pay in interest, so the bigger the deficit, and the faster debt grows, until boom, we’ve turned into Greece, Greece I tell you.

…So we turn to Table A-1 on page 104 of the CBO report, and we learn that for the next 25 years CBO projects an average interest rate on federal debt of 4.1 percent and an average growth rate of nominal GDP of 4.3 percent. And this means no debt spiral at all.

Now, wait a second, you may say: higher debt will mean higher borrowing rates, because people will fear that we’re about to turn into Greece, Greece I tell you. That was the theme of quite a few analyses…

As many of us pointed out, however, such results were driven almost entirely by the euro crisis; high-debt countries that borrow in their own currencies haven’t seemed to face anything like the same costs…

I don’t want to say that debt doesn’t matter at all. But it clearly matters a lot less than the fearmongers tried to tell us.

Huh, even though that graph–which I took from the cover of the CBO report–looks pretty scary, apparently the report actually shows that the budget outlook “is even less dire.” I mean, Krugman tells us that the CBO has declared “an end to the debt spiral,” and some of the numbers on page 104 of the report apparently mean that the fearmongers are full of it–we don’t need to worry about the debt getting out of control.

In contrast to Krugman’s optimistic assessment of what the CBO report says, here’s a decidedly different take:

The gap between federal spending and revenues would widen after 2015 under the assumptions of the extended baseline, CBO projects. By 2039, the deficit would equal 6.5 percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 106 percent of GDP, more than in any year except 1946—even without factoring in the economic effects of growing debt.

Beyond the next 25 years, the pressures caused by rising budget deficits and debt would become even greater unless laws governing taxes and spending were changed. With deficits as big as the ones that CBO projects, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.

…How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government’s willingness or ability to pay its debt obligations, which would require the government to pay much higher interest costs to borrow money. Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country.

Even before that point was reached, the high and rising amount of federal debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget…

Well gee whiz, what kind of fearmonger wrote this shoddy analysis? As Krugman gets sick and tired of pointing out, talking about the debt leading to a “fiscal crisis” and spiking interest rates just shows how ignorant the analyst is, because everybody knows this type of thing can’t happen to the United States. You would think that someone describing the CBO analysis would finally get it, since–Krugman has just assured us–the new CBO report shows that there will be no debt spiral and that the fearmongers are full of it.

So where did I grab the above analysis? The Heritage Foundation? The Wall Street Journal? John Cochrane’s blog?

Nope, I quoted the above from the Executive Summary of the new CBO report itself. But it doesn’t appear until page 3 of the report, so I’m guessing most of Krugman’s readers won’t see it.

  • Steve Klein

    The section R.P.M. quotes from in the CBO report is discussing the year 2039, 25 years in the future!! Try reading a CBO report from 1990 or 2000 that discussed the 25 year outlook (without adjusting for the 2007 financial crisis). They are about as useful as toilet paper in guiding any organization's reaction to future events.

    This report should be looked at similarly. And if I'm reading Krugman correctly, his point is that deficit spending has not had a negative effect on interest rates (either in the US or other developed nations). Therefore it would be more useful to concentrate more pressing issues (long term unemployment, infrastructure repair) then to keep drumming on about the negative effects on deficit spending on borrowing costs.

  • Richard Evans

    I seem to remember that Krugman said Obama hadn't borrowed and spent nearly enough to stimulate the economy, while "austerity" in the UK would lead to a plague of burning hail, three headed dogs and a-wailing and a gnashing of teeth. How's that prediction working out again?

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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