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Home Publications Blogs Beat the Press Krugman Uses Misleading Deficit Graph

Krugman Uses Misleading Deficit Graph

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Tuesday, 04 December 2012 08:34

Paul Krugman's columns and blogs are a great source of insight on the economy and the budget, but he does occasionally make mistakes. He is guilty of one today, when he used a very misleading graph on the sources of the budget deficits in his blog

There are two major problems with the graph. First, it begins in 2009. This might lead readers to believe that large budget deficits had been an ongoing problem. That is not true. The deficit was just 1.2 percent of GDP in 2007 and was projected to remain low until the collapse of the housing market sent the economy plummeting in 2008.

The other problem is that it shows the deficit in nominal dollars rather than as a share of GDP. This conceals the fact that the deficit was projected to be about half as large as a share of GDP in 2019 as it was in 2009. While the deficit projected for 2019 would still be too large to sustain indefinitely, by not expressing the deficit relative to the size of the economy, readers are likely to exaggerate the extent of the problem it would pose. 

A graph that gives a better picture of the problem of the budget deficit in relation to the economy would look like the one below. The point is that the collapse of the economy gave us large deficits. Even with the wars and the Bush tax cuts to the rich, the deficits would still have been manageable had the economy not collapsed.

deficits-per-GDP-10-2012Source: Congressional Budget Office.

Comments (20)Add Comment
...
written by Chris, December 04, 2012 9:47
The point of Krugman's graph was to illustrate that the true driver of the deficit is un-funded tax cuts for the rich and military bloat from the Bush years, not to show the decline in the deficit.

The context of his post was basically to show that tax increases on the wealthy will help battle the long-term deficit issues, while they can stimulate spending and pass middle-class tax cuts to address the fiscal cliff's austerity effect and avert recession.
...
written by skeptonomist, December 04, 2012 10:18
Dean says "The deficit was just 1.2 percent of GDP in 2007 and was projected to remain low...". When the economy is in a bubble, revenues are abnormally high and projections are usually too optimistic. Back around 2000 when there was a stock-market bubble the US was running surpluses and this was "projected" to be the case for the indefinite future; Greenspan actually claimed that the debt might be paid down too fast.

The fact is that economies are cyclic and authorities such as Fed chairmen have never been able to eliminate recessions. In prosperous times it is therefore not sufficient to maintain deficits which are "projected" not to add to debt/GDP. If debt/GDP is not to increase in the long run, overall levels of taxation should be high enough to take the effects of recession into account. It is also anti-Keynesian to reduce tax rates in good times, or to keep them so low that there are deficits then; there should be surpluses in those times.

To take an over-simplified view (most economics is over-simplified), debt/GDP has increased since 1980 because tax rates on the rich have been continually cut. It is important to try to prevent bubbles and the ensuing recessions, but they are not the fundamental reason for the trend of increasing debt.
...
written by Stuart Levine, December 04, 2012 10:55
I agree with Chris, above. Krugman was not trying to present a "graph that gives a better picture of the problem of the budget deficit in relation to the economy," but rather a chart showing the various constituent drivers that create the federal shortfall. In other words, the shortfall is caused by drivers X, Y, and Z. That's Krugman's chart. The shortfall, as a percentage of GDP, is your chart and is due primarily to the contraction of GDP that we call the Lesser Recession. Different charts to express different concepts.
" too large to sustain indefinitely" - Really?
written by Paul Mathis, December 04, 2012 11:05
The slope of the line of the deficit-to-GDP ratio is clearly negative and has been since 2009 even though GDP has been increasing far below its potential. With more stimulus, GDP growth would accelerate and the line slope would be even more sharply negative.

With interest rates on 10-year T-Bonds still at historic lows, what exactly is the "sustainability" problem with the deficit? Clearly, the U.S. government can always pay its debts because it can "print" money in any amount at any time to do so.
misleading because these deficits are not from spending...mostly transfers
written by pete, December 04, 2012 11:16
Essentially there is no macroeconomic problem.

As most economists know, transfers are not really a "deficit", in the sense of taking resources out of the economy. Government spending like foolish wars or to Deans favorite overpaid doctors and nurses does take away from our consumption of iphones and Pinot Noir. But taxing( or the equivalent, borrowing money) to pay unemployment or social security does not...simply takes from some to give to another.

Hence we have very low interest rates, because real spending remains low and might fall, while transfers are huge and growing.
obama/bush tax cuts and revenues
written by pete, December 04, 2012 11:36
Most of the loss in revenue from these cuts is in the meat of the population, the middle class cuts. This is true going forward. This is why Obama should have shut them down in 2010 and returned to Clinton era rates when he bluffed and was found holding nothing.
The $250k plus revenues are only like 25% of the lost revenues.
Deficits correlating to unemployment
written by David, December 04, 2012 1:04
Interesting that the unemployment rate shadows the deficit/gdp % . Of course, correlation does not imply causation. If anything unemployment caused the deficits to remain high after the initial saves and stimulus.

pete, those are interesting numbers, where did you get them? (busy day today for me)
@chris and @stuart
written by Anthony, December 04, 2012 2:19
You have both, I think, missed Dean's point. Krugman's blog post was not focused on "drivers" of the deficit, but on Bush tax cuts in particular. Krugman said, "So now we face a substantial long-run deficit largely created by those tax cuts"--a conclusion he drew from a somewhat misleading graph. Dean's point is that one cannot make this argument if one takes into account the financial picture before the economic collapse. Future budgetary deficits as of 2007 were perfectly manageable, although regrettable and unnecessary; but following the crash, the deficit ballooned. The obvious source of this increase was the demand hole created by the housing crash and the subsequent recession.
@Anthony
written by Chris, December 04, 2012 2:54
Dean's criticism of the graph has to do with the context and conclusions, he's not saying that the data is misleading. There's nothing misleading about the CBO saying the future projected deficit (after the wars wind down and we come back from the downturn) is largely driven by Bush tax cuts (mostly for the wealthy). After all, the fiscal cliff problem is all about identifying long-run drivers of the deficit (and addressing them), while boosting/maintaining spending in the short-run to avoid a slump in growth.

For the point Krugman was making, I still think the graph is relevant and not misleading. The CBO projections assume that once the economic downturn is out and things are "normal" that the main driver will be these wasteful tax cuts for the wealthy.
Of course
written by Mcwop, December 04, 2012 3:30
What nobody wants to discuss is that we actually need to run BIGGER deficits.

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.

1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.

1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.

1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.

1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.

1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001

2004-2007: U. S. Deficit Reduced 61% (from $413B to $160B) Great Recession began 2008

There is no reason to cut spending or increase taxes (even on those dreaded rich people) right now with high unemployment and low inflation. I know this goes against portions of the economic religions of democrats and republicans.
@Chris
written by Anthony, December 04, 2012 3:37
You are still misreading Dean's post, I think. The graph gives the deficit in nominal dollars, not as a percent of GDP--which tells you what damage a certain "deficit driver" is truly causing the economy. Absent all other factors, and given a return to "normal" economic conditions--i.e., a healthy, growing economy, full employment etc.--the Bush tax cuts are manageable, however regrettable they are. In other words, who really cares if future deficits are solely attributable to the tax cuts? Those deficits would not ruin the economy, which is Dean's larger point.
...
written by Ar, December 04, 2012 4:17
The point Krugman is making with the graph, "we face a substantial long-run deficit largely created by those tax cuts" is true and is not supported by Dean's graph. It would have been better as &#xGD;P, but the impact continues after 2012 and after 2016 when the impact of the downturn is behind us.

Krugman using someone else graph also says "it is not just me saying this."

While Dean is not wrong, it seems like deciding that he has found a nail because he has a hammer.
I swear I wan't swearing
written by Arne, December 04, 2012 4:20
That &#xGD;P should be Percent of GDP.
there's no going back to 2007
written by Brian Dell, December 04, 2012 8:18
If we can go back to the CBO's deficit projections from 2007 or 2008 then why not go back to the CBO's projections for potential GDP in 2007? If it is conceded that the markdown in potential GDP projections is a recognition that "the money's gone" then presumably a significant part of the historical deficit projection is of little contemporary value as well.
Wow Brian
written by Emersberger, December 05, 2012 10:57
Derailed growth is what caused shyrocketing deficts. Restoring growth through adequate stimulus will make them easily manageable again. That is what "history" shows. The "contemporary value" of that is hard to miss - unless you want to miss it.
Deficits
written by Mike, December 05, 2012 1:01
Too much time is spent discussing budget deficits. The government borrows money from us (as investors) at essentially the risk-free interest rate and invests it predominantly in us. We - as tax payers - pay the loan back to ourselves as investors years later. The worst case scenario is the bond isn't repaid, which would be culmination years of under-taxation.

The trade deficit is far more dangerous. When you look at the trade deficit, it is really driven by our reliance on foreign energy and deficits with Asian exporters. We need a national strategy towards reducing foreign energy dependence

We also need a policy to increase exports and decrease imports. Manufacturing isn't the only solution. There is a lot more we could do with entertainment, media, tourism, etc. The trade deficit is about $500 trillion a year. A few more multi-billion dollar movies and video games obviously won't close the whole gap, but it could knock 10% off it.
Correction
written by Mike, December 05, 2012 1:09
* 500 billion not trillion. The deficit isn't THAT bad.
...
written by Mcwop, December 05, 2012 2:58
@Mike

I would add that running trade deficits means we have to run federal deficits. Those federal deficits are our private sector surplus.
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written by fabian59, December 07, 2012 1:40
I’m a bit taken aback by Dean’s criticism of the graphic that Paul Krugman used in his blog, as I usually feel that Dean is on target with his critics and analyses. Personally, I think that the Center for Budget and Policy Priorities (CBPP) does excellent work, and felt that their analysis of the Congressional Budget Office’s recent 10-year projections that underlie the graphic used by Krugman is very revealing. To me, it basically shows that if it wasn’t for the Bush tax cuts and unfunded wars that the country would be in a much better fiscal situation within just a couple of years.
We need a hybrid graph
written by Ben Harnke, December 12, 2012 11:02
The problem with Dean's graph is that conservatives take one look at and see clear evidence of Obama's out of control spending. They say, "see look, there's proof right there, right around when Obama took office the deficit skyrocketed." And then you have to get into all kinds of arcane economic discussions about why deficits increase during a recession. With the Krugman graph, there's no arguing. The factors contributing to the debt are clear and it's clear Obama could have played basketball his whole first term and the deficit would have skyrocketed anyway.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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