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%.