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Paul Krugman, Since You Don't Like Paul Ryan's Budget Plan, Please Tell Us How You Would Rein In Government Spending

Paul Krugman: it’s your turn. Having denounced Paul Ryan’s budget proposal in your Friday New York Times column as “ludicrous” and having excoriated every prior effort by Republicans to begin to remedy our country’s fiscal woes, it is now up to you to rein in government spending. What would your suggestion look like? Let me help you out.

It is clear that you consider any attempt to slice the government pie – at least in the near term -- wrongheaded and dangerous for the tentative recovery. You have argued consistently that the Stimulus program was not too large, but rather too puny to pump up demand. 

By your standards, government spending, now cruising along above 24 % of GDP – an unprecedented peace-time level -- should have moved higher over the past two years. Consequently, the nation’s deficit of about $1.7 trillion, which is running at nearly 10% of GDP, the highest in 65 years, should actually have been higher. It’s hard to imagine.

Some would argue that soaring deficits and debt take a toll on the nation’s confidence; that voters understand that there will be a day of reckoning. As the country’s debt rises, it inspires caution; the savings rate begins to creep up, offsetting the stimulative impact of the government’s spending. 

That’s what happened in this country. After decades of declining to near-zero levels, the savings rate soared with the onset of the fiscal crisis and ramp-up of debt. Were people simply worried about losing their jobs? Or were they concerned that the country’s fiscal prospects might undermine the programs they counted on for their retirement? Are you sure you really know the answer Mr. Krugman?

A jump-up in government borrowings also constrains private investment, which is statistically associated with lower unemployment and more rapid growth. Government spending, on the other hand, correlates with rising unemployment. As Gary Becker (another Nobel Laureate) notes in a study coauthored with George Schultz and John Taylor, “when government purchases of goods and services came down as a share of GDP in the 1990s, unemployment didn’t rise. In fact, it fell, and the higher level of government purchases as a share of GDP since 2000 has clearly not been associated with lower unemployment.” There has been virtually no time in the country’s history when more government led to more prosperity. It is in textbooks that the argument lives on.

Clearly you disagree. You cannot see beyond the academic trenches; by inference, you have judged American consumers and investors insensible to the country’s fiscal plight.

How, then, would you explain the rise of the Tea Party – arguably the most energized political force in decades? If the country is ignorant of, or oblivious to the harm that indebtedness can cause, why do we have 87 new Republicans in the House, carrying out the demands of the electorate and trying to stop the spending onslaught? Is it all the work of those mischievous Kochs?

You might protest that this is a mischaracterization of your views. Perhaps you see value in trying to contain long-term spending, but consider that such efforts should be postponed until the economy is really humming. That would parallel the approach in President Obama’s recent budget proposal. Under that scheme, we would see government debt skyrocket to $14 trillion in 2015, or 76% of GDP. By reference, debt owed by the government of the U.K., which precipitated a powerful revamp of that country’s budget priorities, amounted to only 65% of GDP. Net interest on U.S. debt is projected in Mr. Obama’s budget to total $844 billion ten years out, or more than our soaring outlays for Medicare in that year. Since this estimate includes decidedly benign expectations on interest rates (consistently under 5%), the number will almost certainly be higher. (In fact, the president’s budget projections have already been shown to be overly optimistic; the CBO’s estimates show debt growing by $9.5 trillion over the next ten years, as against Obama’s $7.2 trillion estimate.)

In your world, not only are American consumers ignorant of the country’s fiscal plight, but international lenders are similarly clueless. How comforting it must be to be the only person who really understands how the economy works.

We understand that the only way that you see us getting out of this mess is to raise taxes on the wealthy. Let’s be clear: this year you would have had to raise individual taxes by 70% -- on the entire country – to close the budget gap. Of course, just targeting the top earners would have meant an even greater increase. You may not have noticed, but an rising number of people are not paying taxes. In 2007 – before the financial crisis took hold – some 33% of those filing tax returns had zero or negative tax liabilities – up from 21% in 1990, for instance. 

As to the top 5% of earners-- that group that you would like to shoulder an increased burden – they already contribute far more than the bottom 95% of taxpayers. How much more should they bear? In any case, OMB projections already include a sizeable step-up in taxes, from 14.9% of GDP last year to 19.3% in 2016 – among the highest levels since World War II. In the past sixty years, that figure has averaged 18%. It isn’t taxes that are askew Mr. Krugman, it is spending, which is too high.

On your blog, you highlight the foolish notion contained in Mr. Ryan’s proposal that spending for health care as a percentage of GDP should go down. As an energetic supporter of President Obama’s health care plan, you must surely have noticed that he claimed to push in the same direction. In fact, you blogged last year that Obamacare would “cut government spending.” Perhaps you should reconsider Mr. Ryan’s proposal.

The bottom line, Mr. Krugman, is that you have yet to put yourself on the line. It takes courage to propose that our country make tough choices; it takes none at all to deride those who do so.

Liz Peek is a FoxNews.com contributor and financial columnist who writes for The Fiscal Times. For more visit LizPeek.com.

Liz Peek is a writer who contributes frequently to FoxNews.com. She is a financial columnist who also writes for The Fiscal Times. For more visit LizPeek.com. Follow her on Twitter@LizPeek.