Krugman: Don’t Worry About Debt; It’s Like a Ponzi Scheme
In a column titled “Nobody Understands Debt,” Paul Krugman gives two reasons for Americans not to worry about President Obama and the rest of the federal government running up bewildering amounts of debt.
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.
Is it me, or does that sound like another Social Securityesque Ponzi scheme? Like Social Security, it’s subject to the same assumption that the society will continue to expand both economically and with respect to population, which are arguably very closely related. The peculiar liberal death wish comes into play because liberal policy preferences, many of the very policies that have required so much government spending, contribute to stagnation in population growth. At some point, the equation doesn’t add up.
Which leads to Krugman’s second point:
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 is true, he argues, even when we don’t owe the money to ourselves, but to somebody else:
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.
Unfortunately, he’s not very clear about whom he’s defining as “America.” Following the links that Krugman provides to other things he’s written, one comes across a chart showing the nation’s foreign liabilities as 160% of GDP, versus assets of 140%. But even the “deficit-worriers,” as Krugman calls them, put the total debt, to foreign and domestic lenders, at $15.2 trillion, versus GDP of $14.5 trillion. That’s a ratio of about 105%. Yet, the U.S. Debt Clock gives $56.4 trillion, or 389% of GDP, as the debt of every person and entity in the United States.
So, what Krugman means, therefore, by America’s debt, I’m not sure, although it looks likely that he’s stating that the $56.4 trillion grand total includes $23.2 trillion in foreign debt and $33.2 trillion in domestic debt. Whatever the case, I’d wager that whomever Krugman shuffles into the deck for the additional amount of foreign debt shown in his chart has very high foreign investments.
The worry on the table, though, is the federal government’s debt, and if the economy and population continue to remain so low, it’s not going to fade into a field of rapid growth, but is going to become a problem that even Krugman-like apologists cannot deny. After all, the government’s income is only the fraction of GDP that it takes in through taxes and fees. If one is going to compare the total debt of the people of the United States to GDP for the purposes of balancing it against foreign assets, it would be more reasonable to compare the government’s debt to the $2.3 trillion it brings in through taxes. That’s a ratio of 661%.
The once respectable Nobel recipient Krugman continues to surprise me as to how he will commit all manner of simple economic errors to crank out his newspaper pundit pieces in fast-paced, lowest-common-denominator form and build the distinctive Krugman brand of in-your-face armchair economics made profitable by an insatiable progressive thirst for attractive soundbytes and social media parroting material.
Even if everything he claims about U.S.-foreign debt ratios is true (highly debatable), in many ways his argument that “debt doesn’t matter because we owe ourselves” commits the same oversights as the freshman economics student who “realizes” one day, sitting in class, that “inflation doesn’t matter because prices will simply adjust.” We could spend hours or even years discussing why this is an error, and many famous economists have, but what it comes down to in its simplest form is that there is really no such thing as a “macroeconomy” (Krugman’s “we”) and it is in fact a messy shorthand for an aggregation of billions or trillions of microtransactions occurring every day. The great Austrian insight is that these transactions are affected quite differently from each other and, due to imperfect information and the time element, inefficiencies and malinvestment can quickly build up to a massive scale and wreck what would otherwise be a healthy economy. “We” don’t owe “ourselves” – more accurately, some of “us” owe others through a long and unclear administrative process and there are lags, costs, inefficiencies, and uncertainty associated with that. The larger the debt, the larger the negative effects associated with it will be. Many are not directly measurable but are no less real.
Funny how you guys find religion on these topics only during Democratic administrations.
http://www.washingtonpost.com/ac2/wp-dyn/A26402-2004Jun8
“You know, Paul, Reagan proved deficits don’t matter.”
Thanks for the link though. Will make better reading for this morning than the usual nonsense.
More intellectually laziness from Russ. Many of the contributors and commenters here have denounced the deficit spending of the Bush and Reagan administrations. In any case, hypocrisy is not a policy argument.
Let’s not pretend there isn’t a partisan-side to this. Hypocrisy is not a policy argument but the truth is the same economic policy would get different treatment from Krugman not to mention many contributors and commenter’s here (and everywhere) based on political affiliation.
The real policy argument is not the spending but where the spending is. In the case of Reagan and Bush, a lot of it was based on military spending in support of the wars in Afghanistan & Iraq. Obama has also spent money there but has also increased the size & role of government in other areas such as healthcare.
The bottom line is … when the economy is going well such as it was during the Reagan, Clinton & early GWB years, no one complains about the deficit. When it isn’t … partisans attack.
Please don’t say “nobody,” although I understand that you are likely using it as a rhetorical device. I have consistently advocated against deficit spending, regardless of where the spending was taking place, and I am aware of a number of libertarian and conservative commentators who have done the same.
I would also point out that evidence of past reckless spending doesn’t excuse future spending and actually bolsters the case against it. For the limited purpose of educating people about history and making them wary of trusting certain political parties, I am supportive of having those discussions, but it in no way justifies any future policy action.
Dan,
You are correct. I should have made clear that I meant a majority of the electorate – those that don’t vote along strict party lines – who vote based on their current economic situation. My primary point was that the old adage “it’s the economy, stupid’ from the Clinton campaign is the main driver of ‘partisan’ rhetoric. Of course libertarians advocate against most all spending. And when you say ‘deficit’ spending you are referring to ALL spending since any federal government spending is by definition ‘deficit’ spending. Isn’t it?
Finally, no political party can be trusted. If history has shown anything, it has shown that.
Krugman is a capital J, JOKE.
When Bush was running $150 billion deficits he was writing columns predicting the end of America if they continued. In 2012, as we begin our 5th straight year of $1.5 TRILLION deficits and have just passed 100 Debt-GDP all he can do is whine “More Please” like that sweet faced kid in Oliver!
Oh, and Krugman in 2009 labeled Europe “The Comeback Continent”. Real prescient guy. Nobels come cheaply in the 21st century.
I am reminded of a famous cartoon from the 1930’s concerningthe deficit. The cartoon pictures FDR, and his minions, holding hands and dancing in a circle, while they chant “We owe it to ourselves”.
I don’t have a ready reference to show what potion of our debt is foreign owned, but we all know we rely heavily on China and Japan. About 15 years ago, they Japanese decided to give us a taste by witholding their bid on our debt until the last few minutes of the auction. I recall that their point was made.
Posted by msteven
“And when you say ‘deficit’ spending you are referring to ALL spending since any federal government spending is by definition ‘deficit’ spending. Isn’t it? ”
I think “deficit spending” is generally understood to mean spending more than you receive. An argument can be made that as long as you can pay the “vigerish” you are not in deficit. That is the theory when you take a mortgage. It is now difficult to obtain a mortgage, the same may be true of government obtaining loans.
Government always speaks of its “assets”, as though there was a bidding war for the Grand Canyon, or any Air Force base.
The trouble with “being able to meet your obligations” is that you may be taking cash that could meet other obligations, those obligations are necessarily deferred. i.e., do we pay our debt at the expense of highway maintenance, medicare or social security. I think this is politely called “over-leveraged”.
Posted by msteven
“And when you say ‘deficit’ spending you are referring to ALL spending since any federal government spending is by definition ‘deficit’ spending. Isn’t it? ”
I think “deficit spending” is generally understood to mean spending more than you receive. An argument can be made that as long as you can pay the “vigerish” you are not in deficit. That is the theory when you take a mortgage. It is now difficult to obtain a mortgage, the same may be true of government obtaining loans.
Government always speaks of its “assets”, as though there was a bidding war for the Grand Canyon, or any Air Force base.
The trouble with “being able to meet your obligations” is that you may be taking cash that could meet other obligations, those obligations are necessarily deferred. i.e., do we pay our debt at the expense of highway maintenance, medicare or social security. I think this is politely called “over-leveraged”.
“Many of the contributors and commenters here have denounced the deficit spending of the Bush and Reagan administrations.”
Well, maybe I’m wrong about it. Can you find me a post denoucing Bush administration deficits written during the Bush administration? I found one, but it’s hardly criticism (more like apologetics):
“Pay No Attention to that Shrinking Deficit Behind the Curtain!”
http://www.anchorrising.com/barnacles/003087.html
Yes! Nothing to see here, conservatives. btw, I don’t doubt there are folks other than me that have said as much in response to posts about Obama.
Meanwhile you folks seem to miss Krugman’s point (a valid one) about the bad comparison of U.S. deficits to the debts of an overspending homeowner.
Warrington, I always find your comments well reasoned and interesting.
What I meant was, at the Federal level, the budgets passed are always where expenditures exceed income – and have been for a long time regardless of political party. I myself do not think there should be a balanced budget amendment because I feel it should be unnecessary to constitutionally require the Federal government to have a balanced budget. Sometimes, unforeseen circumstances occur and having debt does not always indicate reckless financial irresponsibility.
Russ, you are the one who missed the point – being that if the President happened to be a Republican, Krugman’s column would have a different message and history has shown that. I will acknowledge that I think Krugman is correct when he writes that stable, responsible governments should be willing to impose modestly higher taxes when the situation warrants. And the same goes for lowering taxes.
I didn’t miss that point; no one made it until now. And Krugman did worry about rising interest rates related to deficits during the Bush administration (he’s also correct now in saying that it didn’t happen so why all the concern all of a sudden).
http://www.nytimes.com/2003/03/11/opinion/11KRUG.html
Russ,
I can acknowledge that borrowing is sometimes both useful and necessary. WWII, for instance.
To my mind the difficulty arises when adding to the debt becomes a “normal” way of financing the budget.
“Modest increases” in taxes, year after year, become a largeincrease just to cover yesterday’s expenditures. As the bumper stickers read “I an spending my grandchildren’s money”.
Certain factors we take for granted, such as inflation (we will pay it with cheaper dollars) have held true for so long we think of them as immutable. Of late, we are learning that might not be the case.
When debt reaches 50%, half of our taxes are going for yesterday’s expenses, and only 50% of our taxes are avaialable for current expenses (think of it as “house poor” in the micro economy).
Among high income earners, population is shrinking. Industry is shrinking. The taxes may not always be there in the quantities we forecast. It is well known that “government cannot pick a winner”, why are they gambling our taxes on themselves? They do so because it has always worked in the past. As they say in the mutual fund ads “Past performance does not guarantee future performance” When Japan went into a slump in the 90’s, China stepped up to buy our debt. What if China falters? The oil states? As every real estate person knows, your lender owns you. I suppose we could have a little war with China and cancel our debt. Perhaps that is why we are not having a little war. Can we afford to back Taiwan?
Russ,
I’m curious whether you actually read the post of Andrew’s to which you linked. It’s clearly supportive of eliminating the deficit.
As to Krugman’s “insight” about the difference between government debt and household debt, well, it’s dumb. On the first point, that government debt doesn’t matter if the economy grows quickly enough, well, the same is true of individuals. A great many people consider it worthwhile to live in deficit during college, with the expectation that their future income will cover the interest and then some. Granted, government seems to think that it can live the life of an undergrad in perpetuity, but that’s hardly a difference of kind.
As for the “we’re only borrowing from ourselves” line, if he’s going to conflate the government’s debt with the total debt of every individual and entity in the nation, then there’s no reason that oughtn’t apply to every other entity in the entire society, including the individual household. He tries to fudge this point by acknowledging that the debt becomes an issue of distribution, but that’s not quite the distinction that he thinks it is.
Posted by Justin Katz
“A great many people consider it worthwhile to live in deficit during college, with the expectation that their future income will cover the interest and then some.”
Perhaps the “macro economy” might take note of the situation in the “micro economy”, college graduates cannot pay their student loans.
One of the difficulties with economists, is their wiilingness to reason from circumstances to explanatory “facts”. In other words, the government’s system has worked, we cannot say we do not know why; so, let us review history and find “facts” that explain the current circumstances. This ignores the iron rule of history “if things did not happen as they did, does not mean they would not have happened at all”. If Lincoln had not been elected, would there not have been a Civil War?
The system has worked, not because it is well thought out and basic principles have worked. It has worked because, since WWII, why have had a wildly expanding economy. There was that blip in the 70’s when interest rates hit 19%, I don’t recall what the government had to pay, but it exceeded 10%. Some may call it a “technical default”, others would say it was a “monetary default”, but in April of 1979, the Tresury found itself unable to redeem the notes held by “Individual Investors”. It did manage to pay foreign and “institutional” investors. So, who took that one in the neck?
P.S. Since Treasury Obligations are loaned between banks to cover their “reserve” requirements, if those obligations had not been met, a few banks might have “failed” in the technical sense.
Progressives:
One simple question-show me just one country with a Debt-GDP ratio permanently over 100% (which we just passed in September) which has not either crashed or (Japan) imploded.
Just one.
Posted by Warrington Faust…
“To my mind the difficulty arises when adding to the debt becomes a ‘normal’ way of financing the budget.”
I think we agree here. Of course war spending is almost never paid for, exactly what we saw in the Bush years where increased spending was coupled with large tax breaks for the wealthiest.
For progressives the case is much stronger for deficit spending in a recession to prime the pump when private capital is not being invested and consumer spending is moribund. Progressives also see the case for deficits in promoting infrastructure as a investment with future dividends.
Justin Katz posted…
“I’m curious whether you actually read the post of Andrew’s to which you linked. It’s clearly supportive of eliminating the deficit.”
Not quite the same as what I asked… whether anyone authored a post “denouncing Bush administration deficits.” I think we can agree the diary is cited was entirely about the “good short-term news” and hardly critical of the administration’s spending policies.
Like I said that’s as close as I could find. Perhaps there was another, but I’d say there’s little question that you folks gave the Bush administration a pass on fiscal conservatism when compared with the attention paid to deficits under Obama.
“One simple question-show me just one country with a Debt-GDP ratio permanently over 100% (which we just passed in September) which has not either crashed or (Japan) imploded.”
Well, if we’re permanently in a recession we’ve got bigger worries than the debt ratio. As for the question, I’d have a hard time naming any capitalist country that hasn’t suffered recurring boom-bust cycles irrespective of their debt to GDP. Kind of an unfair question, no?
Justin wrote…
“On the first point, that government debt doesn’t matter if the economy grows quickly enough, well, the same is true of individuals.”
That’s hardly an argument against the idea that debt in a recession should not be our primary concern. Quite the contrary.
That’s quite a stretch, but I am aware of at least one comparison with individuals… borrowing from one’s 401k. Not the same at all as borrowing directly from a bank and often a logical choice when faced with temporary loss of income or other shortfalls.
You know, probably the most puzzling part of this is Justin’s categorization of U.S. Treasury bills as a Ponzi scheme. Hard to take that seriously with it’s implication that pretty much any financial product is likewise a Ponzi scheme.
Granted, it does make almost as much sense as using the comparison for SSI.
Russ,
If you have $10,000 in your 401(k) and you loan it to yourself, how much money do you think you have afterwards?
(Interested readers can check the comments here, bit.ly/yG5Js9, to see where we’ve been through the discussion of how you can’t double your money by loaning it to yourself once before)
I’m more interested in Russ’s continued inability to pick up inferences, or even to read what’s plainly written. He habitually responds (incorrectly) to one discrete point of a post and then appears to assume that the person he’s addressing has expounded on the point, incorporating other discrete points, and then (Russ) goes farther and farther away from any semblance of the statements on the table.
To quickly address two things, because it’s Friday night:
I’d remind you that you went on, from your question, to characterize Andrew’s post as “Nothing to see here, conservatives.” That’s either dishonest or illiterate.
Regarding the Ponzi scheme:
* A Ponzi scheme uses new investors money to pay prior investors.
* Social Security uses the money paid in by current employees to pay the benefits “earned” by retired employees.
* Krugman’s argument is that government debt doesn’t count as real debt because it will take in enough future revenue to dwarf the payments.
It’s not meant to be a simile, but the principles are similar.
“If you have $10,000 in your 401(k) and you loan it to yourself, how much money do you think you have afterwards?”
Oo, oo, I can answer!
I still have $10,000 because the number “$10,000” goes into the Accounts Receivable column of my 401(k)’s balance sheet.
“I’m more interested in Russ’s continued inability to pick up inferences, or even to read what’s plainly written…”
Got nothing else? Go with the personal attacks. Nice one. Didn’t bother reading the rest of it.
“If you have $10,000 in your 401(k) and you loan it to yourself, how much money do you think you have afterwards?”
Again, it’s a bad analogy but of course you have the same amount, $10,000, just in a different form. Not sure why you folks think this stuff is so profound.
“Interested readers can check the comments here, bit.ly/yG5Js9…”
Ah, yes, I remember that one. That was where you argued that t-bills aren’t stable financial products owned by ever major bank and government in the world but are actually more like IOUs scrawled on a piece of paper. Ummm, OK.
Either you are not remembering properly, or you never understood the issue in the first place. The problems aren’t T-bills owned by banks. The problems are the ones owned by government which represent money that has already been spent.