Krugman Claims Government Has $10 Trillion 'Cushion'

     “A trillion here, a trillion there and soon you’re talking about real money.”

     That’s New York Times columnist and Nobel Prize winning economist Paul Krugman’s philosophy about government spending. Never mind about the taxpayers who will foot the bill.

     “Good Morning America” consulted Krugman Dec. 2 on the topic of how much money could be spent to fix the economy. Co-anchor Chris Cuomo added up the “taxpayer money” spent so far on bailouts for the Troubled Asset Relief Program, AIG, Citigroup and FDIC debt back up. The total was $8.5 trillion, according to Cuomo.

     That figure did not include proposed bailouts for the automakers, state governments or an additional $700 billion stimulus plan.

     But according to Krugman, the U.S. government has a lot more “running room.”

     “How much money can the government actually spend in rescuing the economy? The answer is a lot. It’s not unlimited. A trillion here, a trillion there and soon you’re talking about real money. Vast countries with stable governments, which is us, can borrow up to 100 percent, more than that of GDP, and you work that out – we probably have $10 trillion of running room if we have to use it. I don’t want to get there, but uh, we’ve got a long ways to go,” Krugman said.

     But Gary Wolfram, the William Simon Professor of Economics at Hillsdale College and Business & Media Institute adviser, told BMI that such spending would result in higher taxes and less growth or serious inflation.

     “The ability to borrow depends upon the willingness of others to lend. Professor Krugman is probably correct that there is a relationship between the willingness of savers to lend and the size and stability of the borrower's economy. However, as Adam Smith pointed out, at some point lenders lose faith in the ability of the borrower to pay its debt and that sets a limit on how much a government can borrow,” Wolfram said.

     “The recent inability of AIG or Citigroup to borrow should give us warning that there may be a sudden drop in confidence of lenders to what may at this point appear to be a stable and capable borrower. While it is unlikely that this could happen to lenders to the U.S. government, it is not impossible,” Wolfram continued.

     Wolfram also pointed out the trillions in spending the government has already committed for Medicare and Social Security: “At least $50 trillion in spending on Medicare and Social Security that will have to be borrowed unless taxes are increased or benefits are reduced. The immense borrowing for the bailout will add to the pressure from these unfunded liabilities. In the end, this could be a good thing if it results in a correction of the structural imbalances in Social Security and Medicare. If this is not the case, then we are in for either higher taxes and less economic growth or a bout of inflation that will be difficult to rein in.”

     Another BMI adviser criticized Krugman’s claim. Don Boudreaux, chairman of the department of Economics at George Mason University, said all government spending takes those resources away from other possible uses. So only those “who trust government to spend money more wisely than private persons are untroubled by this result,” Boudreaux said.