Nobody Understands Debt By PAUL KRUGMAN Published: January 1, 2012 http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit. This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what theyâre talking about â and the people who talk the most understand the least. Perhaps most obviously, the economic âexpertsâ on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while theyâve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts â that is, you might think that if you didnât know anything about our postmodern, fact-free politics. But Washington isnât just confused about the short run; itâs also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problemâs size. Deficit-worriers portray a future in which weâre impoverished by the need to pay back money weâve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways. First, families have to pay back their debt. Governments donât â all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation. Second â and this is the point almost nobody seems to get â an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didnât make postwar America poorer. In particular, the debt didnât prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nationâs history. But isnât this time different? Not as much as you think. Itâs true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollarâs worth of foreign claims on America is matched by 89 centsâ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation thatâs already deep in hock to the Chinese, youâve been misinformed. Nor are we heading rapidly in that direction. Now, the fact that federal debt isnât at all like a mortgage on Americaâs future doesnât mean that the debt is harmless. Taxes must be levied to pay the interest, and you donât have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest. And thatâs why nations with stable, responsible governments â that is, governments that are willing to impose modestly higher taxes when the situation warrants it â have historically been able to live with much higher levels of debt than todayâs conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan. Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves. So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.
that guy is a propagandist. 1. after wwII we were banker and manufacturer to the world we became 50% of the worlds economic output. 2. we had a govt which was less than half of the size of the gdp as it is today. 3. our govt spent on infrastructure like obama promised to do - instead we got porkulous and govt slime.
Before I test your second assertion, please clarify which method of measuring the size of government you prefer: http://www.elitetrader.com/vb/showt...=measuring+the+size+of+government#post3403753
lets see... "Government spending in the United States has steadily increased from seven percent of GDP in 1902 to 40 percent today." http://www.usgovernmentspending.com/spending_brief.php The chart shows that there is a big blip up during wwII otherwise we see a steady rise... and here we have this quote.. President Roosevelt and the New Deal cranked up federal spending, and total government spending rose up to 20 percent of GDP. So the new deal got to 20 percent of GDP and now we are at 40 percent. Note: regarding you question... lets look at your middle choice and see where that leads us. The total current spending calculation.
here is another link.. pretty much showing that as you spend more govt expenditures become far less productive. http://www.deptofnumbers.com/blog/2011/02/gov-expenditures-gdp-fraction/
Ahh, you linked to the chart also, thank you. Ok, so what's the right rate? No way to answer that unless you do a comparative examination. For example, if I say I run the marathon in x minutes, you don't know if that's a good or bad time, except by knowing what the "universe" of marathon times is, right? So, how are we doing in relation to our peers? Is a large change in our rate realistic?
He's not a MMT'er (yet?? if ever??) but he should have been whatever position Goolsbee had in Obama's cabinet.
Krugman is crazy in my opinion. Just about everything he says seems designed to hasten the financial collapse of the US. Krugman is the poster-boy for Tax and Spend. He has never seen a tax he doesn't like and he is constantly cheerleading for increased debt. These days a Nobel Prize mostly indicates that someone is incredibly stupid and destructive...like a degree from Harvard.