Krugman Challenges McCain on the Cause of the Federal Deficit

Paul Krugman certainly understands more about economics that John McCain does and he’s a whole lot better at looking at the raw data:

One thing I’ve written about a number of times, but becomes especially worth emphasizing now that John McCain is the presumptive Republican nominee, is the myth of runaway federal spending under the Bush administration. McCain has said on a number of occasions that he doesn’t know much about economics – although, straight-talker that he is, he has also denied having ever said such a thing. But one thing he thinks he knows is that the Bush administration has been spending like a drunken sailor. Has it? Consider the actual record of spending. Never mind dollar figures, which grow because of inflation, population growth, and other normal factors. A better guide is spending as a percentage of GDP. And this has increased, from 18.5% in fiscal 2001 to 20% in fiscal 2007. But where did that increase come from? Three words: defense, Medicare, Medicaid. That’s the whole story. Defense up from 3 to 4% of GDP; Medicare and Medicaid up from 3.4% to 4.6%, partially offset by increased payments for Part B and stuff. Aside from that, there’s been no major movement. Behind these increases are the obvious things: the war McCain wants to fight for the next century, the general issue of excess cost growth in health care, and the prescription drug benefit. So the next time Mr. McCain or anyone else promises to rein in runaway spending, they should be asked which of these things they intend to reverse. Are they talking about pulling out of Iraq? Denying seniors the latest medical treatments? Canceling the drug benefit? If not, what are they talking about?

Mark Thoma provides graphs of various Federal spending categories relative to GDP from 1962 to 2007 as well as from 2001 to 2007. If the combination of defense, Medicare, and Medicaid rose by more than the increase in overall spending (as shares of GDP) – then the rest of the budget is not running away as McCain would have it.

Also note that the increase in the deficit has been larger than this increase in Federal spending as BEA reports that the tax revenue to GDP ratio, which was 20.9% in 2000, had declined to only 18.9% by 2006 (BEA has yet complete its accounting of tax revenue for 2007). McCain wants us to believe that the Bush tax cuts led to more tax revenues. But the facts say otherwise.

So what are to make of McCain’s misstatements? Is he really this stupid? If so, why should we elect him to be the next President of the United States? Or is he as dishonest as George W. Bush and Dick Cheney? After all, Bush-Cheney won in 2000 and in 2004 by lying to us. If we as voters continue to be equally stupid as we were in the last two Presidential election, maybe the McCain strategy will work.