In today’s New York Times, Paul Krugman argues that deficits don’t matter, and the exploding long-term debt projected by the Obama White House is manageable:

The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.

With all due respect to Mr. Krugman, that historical comparison is misleading. It’s true that neither country faced a financial crisis, but that was in large part because global investors were confident that both would be admitted into the EU, which has strict rules on annual deficits and national debt (both far below what the White House projects for the US in 2019).

Nevertheless, while they were able to avoid a financial crisis by joining the EU, it wasn’t pain-free. In addition to inflation, Italy had to cut spending and raise taxes. As a 2006 study of Italy’s reforms by the Chicago Federal Reserve reported:

[P]ublic officials throughout 1996 increasingly stressed a commitment to the fiscal discipline needed to enter the EMU, and in the fall of 1996, a carefully crafted fiscal package of spending cuts and tax increases (including a one-time income tax surcharge explicitly labeled “euro tax”) was approved.

Krugman also blurs over the long-term threat of inflation to the US economy, or that investors will lose confidence in our currency:

Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.

That’s also deceiving – interest rates are low right now in large part because the global recession has dramatically cut the demand for capital (so investors – i.e. the Chinese – looking to lend money have fewer potential borrowers). Nevertheless, those financiers do have worries about U.S. solvency, as anybody who listens to recent statements by Chinese officials knows.

Make no mistake about it: The 10-year debt projections will force the government to either raise taxes, cut spending, allow painful inflation or – most likely – some combination of the above (with an emphasis on tax increases if Obama wins a second term, and more spending cuts if a Republican is elected in 2012). And, as Krugman concedes, the growth of entitlement spending beyond the 10-year horizon is totally unmanageable – which makes the current proposals to create a new Federal health care entitlement even more out-of-sync with financial reality.