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Paul Krugman: Bond Vigilante?

Wednesday, 29 Feb 2012 | 5:27 PM ET

Paul Krugman runs this chart showing that the national debt would be higher under every Republican candidate for president (other than Ron Paul) than it would be under Obama.

And he is outraged!

Now I understand that it is annoying to have the Republicans spouting off about fiscal prudence and railing against debt while they put forth plans that would grow the national debt. But if we take a step outside of partisan politics for a moment, shouldn’t we welcome the debt-accumulating plans of the GOP contenders?

We know that the U.S. government has no solvency constraint when it comes to borrowing. Even if the invisible bond vigilantes ride in and kidnap all those people who want to invest in safe assets, the Federal Reserve can lend the Treasury every dollar it wants to borrow. This counts as “debt” but that’s just a matter of book keeping—the Treasury owing money to the Fed.

Is Krugman afraid that all this GOP public debt will cause inflation?

If so, what is the mechanism? His chart measures where debt will be nine years from now, in 2021. As he’s explained himself, even if we somehow manage to duplicate January’s job growth every month from here on in, we won’t reach full employment until 2019. It’s hard to imagine much upward pressure on prices while Americans continue to attempt to repair their household balance sheets.

And yet, bizarrely, in the very same post Krugman complains about “tax cuts for the wealthy.” Please explain, Professor Krugman, what economic problem is being caused by the wealthy having too much to spend?

The truth of the matter is that taxes are too high. Savagely high, in fact. There's no excuse in our current economic circumstances for taxes to be as high as they are. Over-taxation is destroying the spending power of the private sector. Consumer spending drives job creation—businesses hire when they anticipate profiting from increased demand. The states are being bankrupted by the declining income of their residents. The need for a dramatic cut in taxes—say, a 100 percent payroll tax holiday, set to last until 2021—is stunningly obvious. If payroll tax cuts don't do it, we can start knocking down every other tax we can find. Cut, cut, cut until every last man and woman in American who wants to work finds a job.

Government spending is also too high right now. We are diverting too large a share of the real resources of the American people to the projects of politicians. We have too many fighter planes, too many aircraft carriers, too many bases in unknown foreign lands whose only purpose is to...uhm (birds chirping, awkward silence), too many federal law enforcement officers, too many subsidies for corporate America, too many people employed in bureaucracies whose biggest contribution to the economy is preventing it from functioning better.

Slash, slash, slash spending and return the command and control of the economy to the marketplace.

And yet Krugman is worried about Republicans running up the national debt.

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