Debt, Deleveraging and... More Debt

Krugman of 18 November introduces his new 32-page PDF, Debt, Deleveraging, and the Liquidity Trap, and offers an informal summary of the paper as well.

In this post I review excerpts from the "informal summary." The excerpts are in white boxes here, and my remarks (as always) are on the parchment.

Sharply rising debt, it’s widely argued, set the stage for the crisis, and the overhang of debt continues to act as a drag on recovery.

Absolutely. And I would say that as long as debt is the problem, debt must be our focus, and debt is the problem we must work to resolve.

...despite the prominence of debt in popular discussion of our current economic difficulties and the long tradition of invoking debt as a key factor in major economic contractions, there is a surprising lack of models – especially models of monetary and fiscal policy – of economic policy that correspond at all closely to the concerns about debt that dominate practical discourse.

See it? Halfway through this excerpt, Krugman's eye drifts from debt to models of debt!

Even now, much analysis (including my own) is done in terms ... which by definition can’t deal with the consequences of the fact that some people are debtors while others are creditors.

Really? That's just sad.

You'd think it would be intuitive. This reminds me of something Maynard said:

...it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school...

You knew, didn't you? Being a debtor is not the same as being a creditor. You know "the consequences" are different. If economists don't know it, maybe that's because they are looking at models.

Okay. To the crux of the matter. First, Krugman sets the stage:

In the current policy debate, debt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics. Households borrowed too much, say many people; now you want the government to borrow even more?

Krugman rejects the critics' view. Then he adds:

It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt.

Well, okay, so he needed a model to see it. At least he can see it now: The distribution of debt matters. The consequences are different. Good job, Paul.

But then we get to Krugman's next thought:

And this means that all debt isn't created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.

"All debt isn't created equal." This is Krugman's justification for increasing the federal deficit?? It's pathetic.

And... who are these "some actors" that can cure problems created by the excessive borrowing of other actors? Why, the federal government of course!


I don't do models. I don't know how to make a model. But I know how to look at the numbers and see what they show. It ain't rocket science. Maybe it ain't even economics. But the math is simple enough. And the math tells me... My eyes are on debt in the previous post, and my good eye tells me that the apparently monstrous federal debt is nothing, compared to the size of our private debt.

Krugman knows debt is a problem. But his model tells him it's okay to make the public debt bigger. My simple arithmetic says Don't make the small debt bigger. Make the big debt smaller! For the overhang of debt continues to be a drag on recovery, and debt is the problem that we must solve.