Monday, January 2, 2012

Okay, I'm nobody


"Nobody understands debt," Krugman says.

He says people are wrong to worry about reducing the budget deficit. He calls this a "misplaced focus". Sure.

He says people are wrong to think budget deficits will "send interest rates soaring." "[T]hose rates," he says, "have dropped to historical lows." (Seems to be correct. But Krugman is just patting himself on the back here. Not doing economics.)

He writes:
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.

"In particular," Krugman says, "the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history."

That's true. But Krugman does not explain it. He does not make clear the reasons that our economy grew like gangbusters after World War II despite (or, because of) all that government debt. Nor does he make clear the reasons that our economy failed to grow like gangbusters for the last 30 years because of (or despite) all that government debt.

He does not explain it. The reader is expected simply to embrace Krugman's dismissal of the significance of debt, and assume that we can have gangbusters again despite all that government debt. Or, because.

I agree: We can. But that's a far cry from actually having gangbusters growth again. And again: All of that growth of government debt, since Reagan or before, added to demand and should have pushed economic growth to gangbusters. Instead, economic growth just gets worse and worse and worse. And Krugman does not explain it.


Government deficits *DO* boost the economy. The reason the government deficits don't work for us is that private debt drags the economy down.

At the end of World War II the government had a lot of debt. But there was hardly any private debt. Private debt wasn't dragging us down, so government debt didn't hurt us.

Now, since the 1970s, the protections we put in place after the Great Depression have been preventing another Great Depression that would have wiped out private debt and let the economy grow again.

Since the 1970s private debt has been dragging the economy down. And since the 1970s government debt has been increasing in the effort to give us gangbusters. But every time they rescue the economy with government debt, private debt grows faster again. The plan to rescue the economy has failed because it has not rescued us from our own debt, private debt.

The way out of this dilemma is to reduce private debt.

Since the 1970s, Krugman's plan to "ensure that [government] debt grows more slowly than their tax base" has failed because private debt hinders growth.

So now: Who doesn't understand debt?

8 comments:

Gene Hayward said...

Very nice articulation, Art. I have been trolling left, right, center econ blogs trying to understand this "debt" issue that Krugman has raised. I know this is your niche and I have NOT seen ANY of other mainstream econ blogs mention the "Govt debt vs Private debt" dichotomy/cunundrum to much extent. Thanks for the clarity.

Jazzbumpa said...

I'll apologize in advance for the tone, but not the content of this comment.

So now: Who doesn't understand debt?

You are just patting yourself on the back here, not doing economics.

The way out of this dilemma is to reduce private debt.

You do not explain it. The reader is expected simply to embrace your assertion of the significance of private debt.

That's true. But Krugman does not explain it.

He does not explain it because that is not the point of the article. You are criticizing Krugman for writing about what he wants to write about, rather than what you want him to write about. This is neither substantive nor relevant.

Having high govt. and private debt at the same time results from a negative trade balance. There is no way around this. You could forgive all private debt today, and we'd be back on the same course tomorrow because our trade balance would still be negative.

That might not be the ultimate root cause, but it is a layer deeper than the private debt problem, and must be addressed in order to solve the private debt problem.

Going after debt, per se, is treating the symptom.

Cheers!
JzB

The Arthurian said...

Thank you, Gene. It means a lot.

Jazz --

me: So now: Who doesn't understand debt?

you: You are just patting yourself on the back here, not doing economics.

I know! Ain't the irony wonderful?!!

Greg said...

"Having high govt. and private debt at the same time results from a negative trade balance. There is no way around this."


This is true. Its simple sectoral balances stuff. One sectors surplus will be offset by another sectors deficit. It must hold its an accounting identity.



" You could forgive all private debt today, and we'd be back on the same course tomorrow because our trade balance would still be negative."


And to this I say ....So what? It should not be a policy goal to have a zero trade balance. There is no reason we cant be a net importer since Germany, Japan, China and Korea are hellbent on being net exporters. Someone has to be a net importer why not us? Id rather let them build my stuff for me than have to build it myself. It frees me up to do other things. Imports are a benefit exports are a cost.

The Arthurian said...

Hi, Greg. I definitely agree with your opening remarks.

You quoted Jazz: "Having high govt. and private debt at the same time results from a negative trade balance. There is no way around this."

...and you replied: "This is true. Its simple sectoral balances stuff. One sectors surplus will be offset by another sectors deficit. It must hold its an accounting identity."

I do really like the 'sectoral balances' approach. And I am willing to let Jazz get away with using the words "results from" because in fact we have high govt debt, high private debt, and a negative trade balance. Given those three conditions, those two words are appropriate.

However, our trade deficit did not exist until the 1970s.

And government debt (relative to GDP, at least) was falling until the 1970s.

But private debt (relative to GDP) was increasing since the early 1950s or before.

Chicken or the egg?

Private sector financial costs, increasing since the end of WWII, made the U.S. economy less competitive in world markets. One might argue that trade deficits result from private debt.

Greg said...

"Private sector financial costs, increasing since the end of WWII, made the U.S. economy less competitive in world markets. One might argue that trade deficits result from private debt."


I dont know if I would use "result from" , that makes it sound as if its a causal relationship. Private debt could have been used to buy all American products and there would have been no trade deficit. We could raise tariffs and stop all importing and still have high private debt. There is no reason why high private debt must lead to trade deficits. It all depends on what you buy with your credit.

The Arthurian said...

Too hypothetical, Greg. You cannot change the past by imagining it differently.

Private financial costs DID increase the cost of U.S. products.

And we DID trade with other nations.

You object to my use of the words "result from" but you have no objection to Jazz's use of them???

Greg said...

In Jazzs case they do "result from" because the sectoral balances makes it so. If you run a trade surplus you WILL by definition be a deficit in one of the other (or both) sectors. It cant be any other way. They are tied together

Private sector debt is not tied to importing in any way, but you are correct that it was thru credit that we bought all the stuff that China built. Thats the difference Im getting at. Im not trying to rewrite history just get causality straight.

High private debt levels are bad and will end badly, on this we agree. But there is no reason that increased private debt LEADS to trade deficits.