Krugman: Nobody Understands Debt

[웃 910]

Nobody Understands Debt

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 they’re talking about — and the people who talk the most understand the least.

Perhaps most obviously, the economic “experts” 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 they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

But Washington isn’t just confused about the short run; it’s 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 problem’s size.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve 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 don’t — 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 — and this is the point almost nobody seems to get — 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 didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ 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 that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t 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 that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s 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.

http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html?src=me&ref=general

[Ban Hammer 12,841]

someone needs to tell s&p they got it all wrong then!

Edited January 2, 2012 by charles!

[I AM NOT THAT GUY 5,715]

Krugman is projecting his own shortcomings on others. Padded room time for this loon.

[Mr. Big Dog 10,747]

someone needs to tell s&p they got it all wrong then!

The market has been saying that loud and clear. Worth remembering that S&P doesn't exactly have a history of getting it right.

Edited January 3, 2012 by Mr. Big Dog

[Neonred 3,446]

Hey, it's a NY Times article. What did you expect them to say?

[SuperDuper! 230]

Nobody Understands Debt? Yes, they do. And here is the YouTube to prove it.

The bottom line to understanding debt: "Spending got us into this mess. More spending will not get US out of it."

ps, send this link to that Krugman cat, so he can go take a powder.

Peace.

[mawilson 2,133]

God, I hate this guy.

Nobody understands debt except one genius, Krugman. Everybody else got it wrong.

What a douche.

[Pooky 3,348]

His title for the article had it right.

Then he tried to contradict himself with a whole load of drivel.

In this case, as in the economy, less is more

[slim 1,514]

I wish they'd ask Mrs. Johnson's 3rd grade class to balance the budget. They'd have it done by the end of the year.

[luckytxn 2,263]

So Krugman is saying that inflation will cure the problem. Now it is true that most of the debt is to ourselves but look at how much is spent servicing that debt. Could that money have been used for something else more worthy? It is nice for the politicians to promise everyone everything to keep power in their hands and not pay for it now but eventually it has to be paid.

Now just think what the economy would be like if the Feds would balance the budget. The market would be mystified at first but it would probably take off if it seemed like it was going to stay that way.The rest of the world would ####### if it looked like the U.S. was finally going to become fiscally responsible.