A Response to Brad DeLong

Brad DeLong makes two obvious mistakes in his responses to my Wall Street Journal op-ed.

Currently, 8% of all revenues (not GDP) goes on net interest on the debt, a figure that (as I pointed out) is projected by the Congressional Budget Office to rise to 20% by 2026. The CBO assumes that the current sweet spot when real growth exceeds the real interest rate lasts until just 2018. And its report makes very clear – as DeLong must know – that the debt cannot be held steady without some measure of what he would presumably dismiss as “austerity”. Here is figure 1-2 in the report:

Second, DeLong urges that we look not at the CBO’s extended baseline scenario, but at the alternative fiscal scenario, as if this somehow invalidates my argument because the “alternative scenario … this year shows a 2038 debt-to-GDP outcome not 48% points worse but instead 30% points better than last year’s”.

But that is only because the alternative fiscal scenario was even more appalling last year. It remains worse than the extended baseline in terms of the trajectory of the debt. Below I have a constructed a table of all the different scenarios discussed in the latest CBO report. As I said in the Wall Street Journal piece, “Only in three of 13 scenarios – two of which imagine politically highly unlikely spending cuts or tax hikes – does the debt shrink from its current level of 73% of GDP. [The other involves a productivity surge.] In all the other scenarios, it increases to between 77% and 190% of GDP” by 2038. Curiously, that last number is produced by DeLong’s preferred alternative fiscal scenario (see below).

I leave to one side what future measures of financial repression might do to the future path of real interest rates. My concern in the piece was solely with the implications of the CBO’s projections. As I said, anyone who can read this report and think “This is not a crisis” is indeed a fantasist.

Incidentally, I note that in that particular blogpost, Paul Krugman was referring to the Extended Baseline scenario, not the Alternative Fiscal one. Question for Matt O’Brien: is he also a “disingenuous idiot”?

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