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?