Whenever Paul Krugman breaks out the numbers on his blog or in his column, it’s always worth looking at his underlying data/assumptions to find out what he’s up to. As a former NYT ombudsman once pointed out, there’s usually a little slicing and dicing going on.
Today Krugman starts with a reasonable-enough premise — we shouldn’t get carried away drawing comparisons between Greece’s budget crisis and our own mounting deficits — but he just can’t resist fiddling with the numbers for dramatic effect. Here’s the chart that’s been making the rounds:
Ok, let’s start with what we know. As things stand in 2010, the U.S. and Greece are in the same boat, deficit-to-GDP-wise (with a number of obvious differences: The U.S. can print its own currency, has better prospects for growth, etc.). After that, one has to rely on projections. Here’s where Krugman manages something remarkable: On the one hand, he criticizes colleague David Leonhardt (who has a piece up today comparing the U.S. and Greece) for relying on projections “based on the assumption of unchanged policy.” Krugman corrects the error in his own analysis by using projections that assume most of Obama’s policies will be implemented going forward.
But for Greece, he commits the same error for which he faults Leonhardt. He uses the IMF’s projections for Greece’s future debt-to-GDP, but subtracts out the effects of the austerity measures Greece agreed to in exchange for its bailout. In other words, Krugman has matched the worst-case scenario for Greece with a more optimistic scenario for us. It’s not surprising that the resulting comparison looks so lopsided.
Now, I’m not naive enough to think that Greece will do everything asked of it to shrink the size of its deficit — the challenge is just too daunting, and the moral hazard left in the wake of the bailout leaves Greece with little incentive to enact the most painful reforms. But it’s also unrealistic to pretend there will be no changes, and it’s downright tendentious to compare an unchanged fiscal picture of Greece to a picture of the U.S. in which Obama has defied political reality and gotten his way on everything, with all of his policies –including tax hikes and regulations — having static and predictable effects on the deficit.
Let’s re-run the numbers. For Greece, we’ll only subtract out half of the projected effects of the austerity measures, and for the U.S. we’ll use the Auerbach-Gale “extended policy baseline” — which assumes that Congress will act like Congress and thwart the administration’s deficit-reduction plans in key areas. Greece is still worse off, but the differences suddenly aren’t so stark:
Krugman obviously has a point, which is that the U.S. is in better shape than Greece and isn’t going to spontaneously generate serious doubts about its ability to service its debt. But we are walking a finer line than he lets on. The more credible concern is that an external event, such as a wave of sovereign defaults, leads investors to think twice about the safety of all sovereign debt, including ours.