Putting Things into Perspective

Here is an excellent post by Paul Krugman on his NY Times blog. The key bit:

There’s been some hysteria about the administration’s new estimate that the cumulative deficit will be $9 trillion over the next decade. Don’t get me wrong: this is bad. But it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t.

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.

The right would have you believe that this debt is the end of the world. It isn't. And if the economy picks up because of the stimulus from spending this extra money, then the debt won't grow by this amount. The key thing is to remember that this is an estimate. Because the recession is much worse than thought even six months ago, the "debt" got bigger. That's an illusion. The only thing that got bigger was the knowledge of how big it really was. The estimate of six months ago was too small. Keep that in perspective.