By Paul Krugman, New York Times, January, 2, 2012
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.
Isn't it fascinating just how dramatically and for how long the political class in Washington will debate the phoney economics of debt/deficit and the "right's" absolute refusal to raise taxes because most Republicans in Congress have signed that contemptible "pledge" from Grover Norquist's Americans for Tax Reform, effectively emasculating themselves from responsibiltiy for providing good and needed government.
And there was Eric Cantor, last night, on CBS's 60 Minutes telling Leslie Stahl, "It's not a game; it's about doing the right thing for the American people!" Here is an admittedly ambitious, single-minded Majority Leader in the House of Representatives climbing his way to the position of Speaker of the House, a very powerful position, while effectively doing everything he can both to block any tax increase, especially for the rich, but more importantly, to block any piece of legislation that could/might/would provide credible evidence that Obama should be re-elected.
Cantor's pledge is not only to block tax increases, but also to block Obama's re-election. Did he take a pledge for the second goal, just as he did for the first?
And Ms Stahl, for her part, did not even ask Cantor about the Pledge! After all, Cantor agreed to the interview "to cast some light on his softer, more human side" so to ask tough political questions would have to be "off topic" for the interviewer. Who agrees to such pablum terms? The CBS producers? Ms Stahl? And is Mr Cantor treating CBS the same way Grover Norquist is treating Republican Congressional representatives, with papal control?
When I was a youngster in a small town in central Ontario, occasionally the "wrestling" matches would be a summer event at the local arena. Before we were 10 we all knew that the "game was phoney and fixed" and if we spent the $2 for a ticket, we were completely disabused of any notion that this was authentic competition. It was a poor man's poor theatre, nothing more, nothing less.
Seems Washington has fallen prey to the same game...pure theatre, for the essential purpose of entertaining the poor masses, only this time the "actors" are wearing the most expensive suits, the most expensive hair cuts, while occupying the most luxurious office suites (see Cantor's on 60 Minutes) all the while gaming the public with deceptions fit for the small town wrestling ring in the 1950's.
What a long way we have come in the last half-century!