By PAUL KRUGMAN
Published: January 1, 2012
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.
Paul Krugman
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.
