The Corner

Flip-Flopping: Krugman Edition

There is nothing wrong with changing your mind after realizing you were wrong. I have changed my mind on several things myself, such as the “starve the beast” theory. (As it turns out, the lack of revenue from lower taxes doesn’t stop government officials from spending more, and as we saw in the past, more revenue from economic growth just supplies more reason for Congress to spend even more money than they did before. Don’t get me wrong; I still want lower taxes, but I don’t believe that lower taxes alone will shrink the size of government. We need spending cuts for that.)

As it turns out, Paul Krugman has changed his mind a few times too. For instance, via Tyler Cowen’s Marginal Revolution, I learn that there was a time when Paul Krugman was very alarmist about the level of unfunded liabilities and the illusion of fiscal health of this country. That’s Krugman in 1996:

Generous benefits for the elderly are feasible as long as there are relatively few retirees compared with the number of taxpaying workers — which is the current situation, because the baby boomers swell the workforce. In 2010, however, the boomers will begin to retire. Every year thereafter, for the next quarter-century, several million 65-year-olds will leave the rolls of taxpayers and begin claiming their benefits.

The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension. Mr. Peterson, the chairman of the Blackstone Group, a private investment bank, informs us that ”the combined Federal cost of Social Security and Medicare, expressed as a share of workers’ taxable payroll, is officially projected to rise from the already burdensome 17 percent in 1995 to between 35 and 55 percent in 2040. And this figure does not include the many other costs — from nursing homes to civil service and military pensions — that are destined to grow along with the age wave.”

But aren’t Social Security and Medicare basically pension funds, in which workers’ contributions are invested to provide for their retirement? Hardly. A private pension fund that planned to pay the benefits these programs promise would be accumulating huge reserves. In fact, the so-called ”trust funds” are making barely any provisions for the future. In another spectacular statistic, Mr. Peterson notes that if Medicare and Social Security had to obey the same rules that apply to private pensions, the reported Federal deficit this year would be not its official $150 billion, but roughly $1.5 trillion.

In short, the Federal Government, however solid its finances may currently appear, is in fact living utterly beyond its means. While the present generation of retirees is doing very nicely, the promises that are being made to those now working cannot be honored.

He even agreed that  slowing the growth in benefits and raising the retirement age were sensible policy options:

Both Mr. Morris and Mr. Peterson offer plans to avert the crisis ahead. The details differ, and Mr. Peterson’s proposal is more completely fleshed out, but the general thrust is clear: slow the growth in benefit levels, gradually raise the retirement age, impose limits on expensive terminal medical care that prolongs life for only weeks or days and — last but not least — raise taxes moderately now, rather than massively later. We need not dwell on their sensible proposals, however, because there is not the slightest prospect that they will be put into effect — or indeed that we will do anything serious about the looming crisis until it is almost upon us.

Apparently, Krugman also changed his position on the impact of devaluation on the economy, according Tyler Cowen.


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