Every GOP solution involves cutting taxes & gutting effective government programs....UNLESS that program puts campaign cash back into their coffers via their corporate donors.
2
Thank you Paul, this is a very interesting observation. I've been wondering "where does the money (spring 2020, covid-19) come from".
Macroeconomics wasn't my study - but ofteh you make things clear and understandable!
Wouldn’t it be nice if this were true. Maybe it is but I do worry what that making this the driving philosophy is potentially dangerous. It needs to be balanced by some concern.
2
The deficits associated with WWII were temporary. Everyone could reasonably expect that they would mostly go away in peacetime, and it didn't much matter whether we paid off the debt or outgrew it. The deficits we have now are permanent, and permanently increasing faster than GDP -- until and unless the Republican Party as we know it ceases to exist.
2
Dear Prof. Krugman,
It is good to see the obvious stated so clearly
if so belatedly.
But it was obvious at the beginning of the Obama administration to anyone who had paid any attention to the standard works of macroeconomics. The plain sad fact is that mainstream economists behaved with an appalling lack of integrity in allowing Obama's ignorance of elementary economics to control his response to the financial crisis. They in fact did not convey C. Romer's recommendation to the President, as has been widely reported. Indeed, reports say her recommendations were changed without her or the President's knowledge. As a Chicagoan, I must suspect that R. Emmanuel was involved, but I know no documentation of that suspicion.
Obama's unwillingness to openly blame the criminals who had encouraged profligate debt for their personal gain was as serious an error as the grossly inadequate stimulus, or the lack of attention to the senatorial election in Massachusetts, or the ridiculously naive 'negotiations' with the Republicans over health care.
Obama's behavior is in stark contrast to how Franklin Roosevelt handled a similar situation in 1932, e.g., his caricature of Andrew Mellon as a villain that was so important in mobilizing working class support. How different the world would be if mainstream economists or Obama had had the courage and wisdom of Roosevelt and his advisors (one suspects Louis Howe).
Thanks for reading this far.
Bob Eisenberg
4
There is no real debt, just voluntary annuities. Vestigial, we can get rid of them. ZIRP and OMF
1
And if the debt scolds are so concerned, then why are they the same people who voted to cut tax revenues? It’s as if I quit my job and now I’m “concerned” about how to pay my mortgage.
7
What this means to me, in spite of all of the economics theory is this and it's pretty simple - what Republicans have done for nearly forty years hasn't worked.
It's time to try something different, and given how sound Professor Krugman's arguments are, I would go with those.
Only reason the government and the financial elites don't want to go with this is that they may (would?) end up paying more taxes. But wouldn't it also be accurate to say that though they are paying more taxes, we would see more growth, which would more than offset any increase in taxes that the rich pay?
All this pain for the last forty years, and particularly the last ten for nothing.
Keep doing the same thing over and over and expecting a different outcome each time - that's the definition of...well, you know.
8
Len Charlap,
The federal government surpluses reflect surpluses in the general economy, of which taxes are a portion (the other ones being profits, interest, and rent in general). When the private sector is profitable it invests more in production (which is where surpluses -profits- are created), which indicates that money, goods, and services are circulating at an expanding rate. When there are no profits to be made, the opposite happens (stagnation and/ recession). Buying toxic assets after 2008 only served to socialized the losses of private banks. The general economy did not benefit as it devalued, wages continued to stagnate, and jobs deteriorated.
I’m for taxing profits at rates higher than 70% as it happened after 1945. What I am saying is that your idea invalidates history. ARRA and TARP didn’t do the trick after 2008 as the economy remained stagnant until 2014. We had a recession in 2014-2016. Tax cuts for the rich inflated their profits, but they are running out of steam.
What has made a difference after the 70s when government stimulus ran of steam is China where the source of profits is located. But it is slowing down because its rate of profit has been falling steadily for several years. Many corporations are cutting investments there. The role of the FED is limited there although has some consequences.
What you are describing is correlation of symptoms, but they are not cause effect necessarily. Several symptoms coincide (fever, weakness, headaches)
2
Symptoms don’t explain themselves. More money circulating only means production expansion, which indicates rate of profit going up. Government stimulus were not used to invest productively in the last 10 years. Low investment And the rate of interest hovering just above zero are coterminous and reflect low profitability, which is mostly coming from overseas in the form of value transfers and extraction. See Apple , clothing chains, and other corporations benefiting from the global value chains (cheap labor from Asia).
Money and printing money despite their overwhelming empirical presence fall in the realm of phenomena (just like services, goods, and other products of human labor). What is essential is the labor time used to produce them. Not manna from heaven or money from the FED
2
to "True, the rate of return on investment is surely higher than the interest rate on safe assets like U.S. Treasuries." I reply, yes that is true. It is also irrelevant. A rate of return on investment higher than g does not imply that increased government debt reduces balanced growth welfare.
I assert here https://angrybearblog.com/2016/03/dynamic-inefficiency.html
that if you give a reason why the return on safe assets is lower than the return on investment, you conclude that an increase in the steady state debt to GDP ratio causes higher welfare for each generation.
I think your case (and Blanchard's) is stronger than you think. I think there is no model in the literature in which the expected return on risky assets are greater than the return on safe assets, yet welfare can be measured by measuring expected average consumption.
2
This is exactly why those of we on the Left were adamantly opposed to Paygo . It’s nothing but a device to derail Progressive initiatives and force punishing austerity on a already beaten down electorate.
Nancy Pelosi should have forcefully and emphatically rejected it and set the tone for a Progressive resurgence . Instead she plays right into the hands of a hostile GOP who ignore deficits in pursuit of their barbaric agenda and cry chicken little when Democrats come in to clean up their mess .
It’s almost as if they deliberately play good cop bad cop and the only thing that matters is serving the desires of the wealthy elites .
Gee I wonder how Trump was able to exploit the vacuum created ?
8
I'm no expert. All I know about macroeconomics is that it's hard to teach, and I don't know why that is either.
But I do know revenues cannot cope with debt if revenues are hidden offshore and in unmarked Swiss banks. Nothing works if the wealthiest people and corporations—although, since corporations are people, I guess that's redundant—do not pay taxes, and even get subsidies and refunds.
The GOP gives the treasury away and guts the IRS. We join the third world in draining public wealth into Switzerland.
Has Blanchard figured in the maxim we live by now—privatize profit, socialize debt—has he figured in corporate welfare, the myth of supply side, and tax evasion?
5
Both federal debt and GDP are nearly $20.0 trillion.
Will an annual 5.0% growth in GDP, $1.0 trillion, ever cover an annual, $1.5 trillion, tax cut which is 7.5% of GDP"
Is not rolling over the outstanding federal debt simply dumping the cost of the current generation excesses on the next generation.
An increasing debt is great so long as GDP is increasing faster as demonstrated in Fig. 1 but that ain't been happening since 1980c.
@Martin Byster. The $1.5 trillion tax cut was the 10 year total. Current deficits are about 4.5 percent of GDP, just about the same as GDP growth.
2
I am not an economist, and looking for clearing my understanding of the concept, ‘public debt is different from private debt, in that public owes to itself.’ How about the debt owed to Chinese, Japanese, Saudis and Indians, e.g., who have purchased our treasury bills? Doesn’t that has to be paid.
Of course, the members of the ‘public’ as an entity change over time, so we can be the beneficiary of today’s debt, that will be paid for by someone else! Isn’t that passing the buck.
1
@DataData&MoreData
I second the question -- I remember hearing that the debt had shifted (under GWB, if I remember correctly) to where we owe more to entities that aren't 'us' than we do to 'us' -- does that matter? Thanks!
1
@DataData&MoreData - Some data for you
1. The federal debt has been paid off exactly ONCE in all of our history in 1835. That was followed by the Panic of 1837 which ushered in our longest depression (not just a recession) which lasted 7 years.
2. In fact, EVERY time we even just paid the national debt down by 10% or more, we fell into a terrible depression. Here is the data:
The federal government has balanced the budget, eliminated deficits for more than three years, and paid down the debt more than 10% in just six periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30. The debt was paid down 29%. 100%, 59%, 27%, 57%, and 38% respectively. A depression began in 1819, 1837, 1857, 1873, 1893 and 1929.
3. It worked the other way, too since we have only had 6 depressions so every single one of them was preceded by a period of balanced budgets during which we paid down the debt.
4. In 1946 the gross debt was 121% of GDP, while the public debt, the debt owed outside the federal government, was 109% of GDP which is over 40% larger than it is today. That debt was NEVER paid down, let alone off. In fact from 1946 to 1973 we INCREASED the federal debt by 75%
5. The period 1946 - 1973 has been called the great prosperity . In it, GDP growth averaged 3.8% and real median household income surged 74%.
6. The federal government will run out of money the day after the NFL runs out of points.
12
@Len Charlap Thanks a lot Eue opening data you provided. It seems to convey the message that the country should keep on piling debt, as long as GDP is growing, or else recession may follow.
But, my original question, seconded by KPL, didn’t get addressed. In all the instances you gave, most of the federal debt was likely owned by Americans, and not foreign governments. Now, bulk of national debt is owed to foreigners, because we don’t save enough. So the comparison with that era might be a little risky.
Finally, you have ignored 2008 recession, which didn’t follow your dictum!
1
David Leonhardt's column is useful. He writes ".... debt can bring enormous benefits, by allowing governments to invest in education, transportation, scientific research or other programs that often don’t yield much of a profit for private companies — but can substantially lift economic growth."
In the 1950s, GOP Eisenhower's term, the marginal tax rate on the highest incomes was 91%.
Ike's federal govt invested in our history's biggest infrastructure project, the interstate highway system. This created huge economic growth across the US --new home building, car buying, schools and shopping centers.
Grads could move ahead with their economic lives without huge debt becasue tuition for state universities was free or low cost, supported by taxes--not a big profit center. This wasn't deemed too left wing, and was a big creator of the middle class, upwardly mobile and secure.
Consumer demand lifted business profits.
Also about 1/3 of workers were unionized and had influence, thus pay and benefits increased even for non union employees as a norm. With guaranteed pensions for retirement, freeing up families from elder support.
Now, the international GINI Index shows the US lagging most modern democracies in upward moblity.
Our media must publicize concrete real life details of our past successes, for the public not for economists.
Our for-profit news sticks with 24/7 Trump scandals.
Where are the PBS documentaries on this successful period in our history?
7
The government should be able to borrow as much as needed during a crisis (e.g. war, recession, etc.). But it is irresponsible to borrow during good times for non-investment spending that is likely to generate return going forward (e.g. infrastructure, education). Right now real interest rates are lower than GDP growth (so we can outgrow our debt as PK correctly points out), but it is not clear that we can sustain GDP growth at levels exceeding interest rate in perpetuity (interest rates were lowered artificially by massive purchase of gov bonds and mortgages by Fed). It is a very risky strategy.
2
@Alice - When in the entire history of the US has the federal debt or deficits ever hurt our economy?
3
Interesting that we can be at ease about debt, but the discussion on effects on growth do not go far enough. Growth is the enemy of sustainability and global warming. Recent data https://rhg.com/research/preliminary-us-emissions-estimates-for-2018/ indicates that in 2018 we turned the corner on several years of reduced emissions only to see them rise again (another indication that absolute decoupling is not happening anywhere close to what we need it to be). What's more is the data indicates the rise in growth was mostly fueled by increase in consumer consumption.
As much as I respect Pauls expertise and contributions, I continue to be disappointed in his apparent disregard of the importance of global warming.
2
@Tdub You raise a really important point. The debt will not shrink relative to GDP absent growth or inflation or both. I suspect inflation is a function of growth. But in our enclosed ecosystem (earth) we really cannot have endless growth, at least not like we currently do with a positive net influx of greenhouse gases. Indeed our survival might require a net reduction of such gases. In such a case, the theory of an endless shrinking debt will not work unless we do two things: protect ourselves by becoming greenhouse gas neutral/negative and getting our ever-increasing commerce off-planet. I suspect people like Elon Musk (Space X) and Jeff Bezos (Blue Origin) have already seen this future.
1
@Lizardbelly - For the foreseeable future, the solar system is for all impracticable purposes, infinite, Why shoud we restrict ourselves to one planet?
Per aspera ad astra!
2
@Len Charlap - Of, course, I meant to write "for all PRACTICAL purposes."
1
The problem seems to be that the factions involved do not seem to be able to agree if federal debt is good or bad....once that is decided we may be able to see a solution....Also, doesn't borrowed money need to be payed back at some point? Why can't we all just dismiss our debts and pretend they don't exist? Finally doesn't simply printing 20% more dollar bills devalue each dollar by 20%? Weimar Republic anyone? When does the runaway inflation begin to impoverish the general population? So many questions without answers.....
1
@Lucifer
Well, except that Professor Krugman has answered these questions many times over in previous columns. Are you new to his column?
He has repeatedly pointed out that government debt is not the same thing as private debt. When the government has debt, it owes itself; when you or I own debt, we owe someone else.
So if you or I don't pay our debt, we set off a chain reaction where everyone ends up without the money they are owed. The government, however, only owes itself, so it is a closed circle.
As for "Weimar," P. K. has also repeatedly pointed out that cries of inflation are greatly exaggerated. For one thing, the value of U.S. money is by fiat and is not tied to something like gold. The value of U.S. money is largely based on confidence in the U.S. government, and as long as that holds, there is no risk of 'wheelbarrows full of money to buy bread.'
Finally, what "runaway inflation" are you talking about? There is certainly none of that happening here, despite the hysterical cries that it could happen any day (another favorite point of P. K.).
And the entire point of this column is that as long as the interest rate on debt is lower than G.D.P., the debt is basically covered by the fact that tax base has more money than the government owes, not by any sort of runaway printing of money.
I'm not an economist, so it is likely I've not gotten all the details here right, but as a longtime P. K. reader, I know he has long had the answers to your questions.
4
@Lucifer
Doesn't borrowed money need to be payed back? If a family has $40,000 income and borrows $400,000, it better repay the debt before retirement. But a country does not retire. If a country has $40,000 income and $400,000 in debt, but the income grows at 3%, in 25 years the income would have grown to $80,000, in 50 years to $160,000 and in 75 years to $320,000.
Why can't we all just dismiss our debts and pretend they don't exist? There are holders of national debt like pension funds and insurance companies who expects to be repaid.
Doesn't simply printing 20% more dollar bills devalue each dollar by 20%? Not if there are 20% more people wanting to make 20% more transactions, etc. A growing economy needs a growing supply of money and if you constrain money supply, that can cause a recession.
Weimar Republic anyone?
Money supply in and of itself is not the issue, it is faith in fiat money. Weimer Germans rushed to exchange their pay money into goods within the pay day.
When does the runaway inflation begin to impoverish? If inflation is defined as higher price for the same good or service, than we get some inflation every time we raise wages for firefighters. But they also need to keep up their purchasing power. That is why a 2% inflation may be just right.
And what does a 2% inflation mean? It means the price of your house doubles in 35 years and a dollar in your mattress losses half its purchasing power in 35 years.
2
@Lucifer - " doesn't simply printing 20% more dollar bills devalue each dollar by 20%?"
NO!
There's this little equation:
P = (MV)/S
where P is prices , M is the amount of money in the economy, V measures the frequency that money changes hands usefully, and S is the dollar amount of the amount of stuff, goods and services, we can produce in some time period.
A word on V. If the government gives Scrooge McDuck a Billion for advice on the comic book market, M increases by a Billion, but if Scrooge puts the bucks in his basement, and forgets about it, that doesn't affect P at all. That Billion has a V of 0. Also, if Scrooge lose a bet to Daddy Warbucks, and the Billion moves from Scrooge's basement to Daddy's, that is a change, but the V does not change because it is not a useful change. It doesn't affect commerce.
Inflationistas, like Lucifer cannot understand an equation with more than 2 variables. To them it looks like:
P = M.
You print more money, you debase the currency, prices go up. End of story. Of course this might happen if S and V remain constant, but in point of fact, the causes of most, if not all excessive inflations since WWI has been S getting too small--shortages.
In the case of Weimar, there was a huge shortage of food. Over a million Germans died of starvation during and right after the war. Food prices went thru the roof. Reparations in kind took livestock & steel away. Only then did the government decide to print too much money to help people out.
4
Okay, I'm very good at personal finance but I am having a tough time extrapolating from that to this economic theory. Let's say I have a $100,000 line of credit. If I use none of it or only a little, my credit report says my credit is great. If I use more, even 1% more, my credit rating goes down.
With lower credit ratings come higher interest payments, no matter the source of the debt. It then costs me more to service my debt. With a then-higher amount of debt, my credit rating falls farther.
I realize that governments take in far more money over time that I ever will, but don't higher interest rates mean that more debt must be serviced?
1
@Barbara PK's argument is partly that your credit rating will hardly be affected if your income is growing much more than your debt. The evidence in the case of US debt is that the Treasury has not had to offer buyers higher interest on its bonds when it has sold them. And, unlike you, the US govt can print more dollars when it needs to...
1
Between your column and Blanchard's speech (to the extent I understood it), my view on debt was radically changed today. But I continue to question the viability of anti-tax sentiment both because it could increase debt and debt payments faster than they are diminished by growth and inflation and because it has resulted in a wholesale negligence of our national infrastructure. Is that wrong-headed after today?
1
@Lizardbelly I agree with you.
During the ups and downs of a business cycle, there should be deficit spending (increase debt) during a recession and there should be budgetary surplus (paying off debt) when we are near full employment such as the past two years.
But instead the GOP reduced taxes for corporations and higher income individuals while offering modest middle class tax relief that will soon expire. In effect, they transferred more purchasing power to those with less propensity to spend while squeezing the purchasing power to those living paycheck to paycheck those with higher propensity to spend. That should be bad (recessionary) for the economy.
The GOP countered that the tax cuts will increase domestic investment by corporations and lead to higher growth and wages. But that sugar high lasted only in 2018 and now we could be headed for slower growth in 2019.
1
@MTA Completely agree! Cheers.
Olivier Blanchard and Paul Krugman are in the stratosphere of economic knowledge, thought and philosophy, but the national debt that the United States is incurring seems to be for the purpose of enriching the already rich, with the socially destructive effect of increasing income disparity and polarization. Can this type of debt be anything other than destructive of the nation's social and economic prospects?
3
@John Mardall - Where do you think the money we need to conduct domestic commerce comes from? Do you think it falls like manna from the skies? In point of fact, it is created by the federal government (thru the FED) and gets to us, to people, businesses, and state and local governments by deficits spending. The debt represents the algebraic sum of all the money the federal government has sent to us.
Thus it not only is not destructive, but it is crucial to the economy of the country.
2
@John Mardall I disagree.
We can look at total federal spending and put it into four baskets. The biggest basket is Social Security, the second largest is Medicare, the third is defense and all the rest is less-than-a-fourth of the total. So more than half of federal outlays is for Social Security and Medicare related. Without these, income disparity would be worse.
Debt issuance, like credit, are instruments in the accumulation of capital, which tends to concentrate and centralize in few corporations. What Len does not tell us is that debt issuance needs to be backed up by actual production, not manna from heaven. When production is expanding faster than debt only means that the rate of profit is also expanding. A capitalist is not going to expand production otherwise. Look what is happening to Apple: it is cutting production (actually orders from Chinese producers like Foxconn). After all money is a representation of value, which is none other than labor time expended in production. Money is not mysterious as Len purports to attribute with magical powers. The dollar is a dominant currency used to extract and transfer value produced somewhere else globally, but Len does not mention that. Why is that profitability in Asia is falling? Debt issuance is only a bet that production in the future is going to pay for it. And yes devaluation may have to happen in some cases to accomplish this feat. What was 2008 if not that?
We should just accept the truth that debt only matters to the scolds when it is Democratic debt. They all seem to disappear when republicans run up the tab.
These same scolds howl at the moon about leaving our children and grandchildren some debt. Debt that always manages to get managed. But these same people don't seem to care a fig about leaving our children and grandchildren with an uninhabitable planet. An planet that is not going to sustain human life for very long at the rate we are despoiling her.
2
"Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto." -Arthur Vanderbilt
Krugman via Blanchard is the truest yet of taxes, debt and understanding how evil the tax cut was the Republicans took for themselves.
Simply put, there is good debt and bad debt. The current tax cut put the United States into bad and worse debt because it underfunds the health and welfare of a nation - ours.
The good debt is when tax money pays for infrastructure, human services, protection, education you name it. That is what we call a healthy society.
The current tax cut is choking the life out of the world's most prosperous nation ( since existence) only to line the 1% pockets with money they do not need.
I want two people to come back right now to straighten us out - Jesus (not the christian right one) and John Adams (had to pick one framer, that's my choice). Not necessarily in that order.
1
@Daniel - The reason the recent tax cut was bad for the economy has little to do with the federal debt.
The reason is that we need money to conduct commerce. This money is created by the federal government and gets to us by deficit spending. BUT the money must be spent so that it is useful. If we pay Scrooge McDuck a mil for advice on the comic book market, and he puts the money in his basement and it sites there, that money is not useful at all.
The money must get to the people who need and will spend it, will USE it, not to the people who do not need it who will spend a lower percentage and use the rest in dangerous financial speculation, not in domestic commerce.
Also if we cut poor Joe's taxes by $1,000, he will use the money, but if we pay him $1,000 to help fix a bridge, he will still use the money, AND we get the bridge fixed. That is why deficit spending is a better way for the federal government to get us the money we need than tax cuts.
4
There’s a strong argument made by some observers that growing government debt is needed to keep the economy humming, and that attempts to balance the budget have always, throughout our history, led to depressions (depressions, not recessions). See the discussion led by Len Charlap in this space on February 8, 2018:
http://tinyurl.com/y8ejv3mw
4
@Ron Cohen
Ron, you might be interested in this piece: http://www.rweconomics.com/Thayer.htm
1
So does this mean we shouldn't worry about adding $5.7B to the debt and just give Trump his wall?
5
@Matt - The point is that there are better ways to get the money into the economy. If we used it, for example, to fix roads, that would improve safety and lower the cost of transportation and stimulate the economy.
4
@Matt I know your tongue is in your cheek, but no, we should always worry about wasteful government spending.
(And about the messages we send to the rest of the world, of course...)
The problem - as it nearly always is in the United States of Greed - is simple.
Republicans are a borrow and spend party, which is fundamentally reckless and destructive.
Democrats are a tax and spend party, and I say that in a completely positive way because that is the only fundamentally sound approach to good government.
Tax and spend is a complement; it's the responsible thing to do; to pay for what you spend instead of charging it to a credit card.
Borrow and spend is economic suicide....which is just what the Grand Oligarch Party did with their 0.1% Tax Cut Law.
The Republican psychopaths demonize debt only when Democrats have power, and then run it up like drunken psychopath when they have power.
As for those ignorati who hallucinate that President Obama was at fault for running up the national debt, the root cause of the debt increase was the Bush-Cheney Tax-Cuts of 2001 and 2003 combined with GOP deregulatory anarchy which caused federal revenues (i.e. tax income) to collapse from the Bush-Cheney Depression.
So yes, national debt may not be the bogeyman, but it's abundantly clear that modern Republicans are the absolute masters of economic malpractice via recession/Depression creation, borrow-and-spend nihilism, abandonment of public infrastructure investment and record income inequality creation.
Republican political and economic nihilism is profoundly destructive to the American experiment and should be rejection in every voting booth.
14
@Socrates - The idea that the federal gov has to pay for things, good & bad, with taxes or borrowing is just plain wrong.
The gov doesn't need your money. It can (thru the FED) create as much as it needs out of thin air. Just think about where money you pay your taxes with came from in the first place. Unless you have a printing press in your basement, it originally came from the federal gov.
But there's a catch. If the gov needs to create too much money to do the things we want it to do, we may not be able to make enough stuff to soak that money up & will have too much money chasing not enough stuff, i.e. excessive inflation. This is rare & is usually caused by shortages, e,g, of oil.
But that's easy to solve & where taxes come in. Taxes allow the gov to take back the excess money & prevent inflation. The purpose of taxes is to adjust the amount of money in the private sector. The more we can produce, the lower taxes can be.
So the way to run things is to spend money to facilitate production. Tax cuts do this, but in an inefficient way. If we cut Daddy Warbuck's taxes, he does not need to spend the money; he uses it for financial speculation. If we cut poor Joe's taxes, he spends the money on stuff--food, house paint, etc.etc. This promotes production of food, etc.
Even better if we pay Joe to fix a bridge, the money still gets into the economy, AND we get the bridge fixed.
Just remember, the federal gov will run out of money when the NFL runs out of points.
2
@Len Charlap
I always appreciate your interest and passion in national debt explanation, but are there no limits to Republican borrowing and spending ?
Certainly there must be limits to excessive borrowing as we have repeatedly witnessed over the decades in various regions throughout the world.
Taxing AND spending seems like the wiser path.
@Socrates - Please read what I have written again especially the last line. The trouble with the Republicans is they spend money in the wrong way and because they haven't the faintest idea of what they are doing.
It is dangerous to look at other countries since financial conditions vary so much. Greece cannot print its own money. Venezuela and Zimbabwe had a one product economy and so on.
And there are examples on the others side. Japan's debt ratio is around 250%. They have 2 or 3% unemployment, negligible inflation, high prosperity. During England's most prosperous period, after the Naponianic wars, its debt ratio was well over 300%.
Here is my "just remember" sentence for this comment.
Just remember the finances of the US government are NOTHING like your personal finances unless you have a printing press in your basement.
Cheers!
2
I'm not very comfortable with this new attitude to government debt. If governments don't balance their budgets when times are good, then when will they ever balance their budgets?
While US government debt is usually regarded as risk free, there is no law of nature that says that has to be the case. Plenty of third world governments have defaulted on their debt. If the US starts spending like a third world country, then markets will eventually price US bonds like junk.
Another issue is that Social Security and bond sales are both promises to pay out money in future, and those promises could compete with each other. Excessive bond sales will make future defaults on social security more likely.
Finally, having unused borrowing capacity available can be very valuable in a crisis. If Greece had been able to borrow they might have been able to save their economy with a Keynesian stimulus program. They were unable to do this because they had borrowed too much in the past. They were left with no option but to go through an EU austerity program from which the country will never recover.
I think Dr Krugman is under pressure from his liberal political friends to justify a spending binge for things like 'Green New Deal' and 'Medicare for all.'
3
@Schrodinger - Read my reply to the comment right after yours. As for bakacing the budget, the abswer is, I fervently hope NEVER.
The federal government has balanced the budget, eliminated deficits for more than three years, and paid down the debt more than 10% in just six periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30. The debt was paid down 29%. 100%, 59%, 27%, 57%, and 38% respectively. A depression began in 1819, 1837, 1857, 1873, 1893 and 1929.
3
@Len Charlap ....One problem with your theory is that the Fed is supposed to be an independent central bank. The Congress and the President cannot print money (not sure about coins!) , and in theory they can't order the Fed to print money because the Fed is independent.
Another issue I have is haven't some countries tried printing money to fund their governments? Hasn't that ended badly every time it was tried?
@Schrodinger - The FED is hardly independent since its important officials are all appointed by the President and confirmed by the Senate. Also the FED returns all of its profit to the Treasury.
In addition when I was young besides FED notes as currency, there were Treasury notes, i.e. the Treasury could print money, A simple act of Congress could return to that situation.
The point is that if the government wants to create money, it can find many ways to do so.
I do not know of any government that has tried to entirely fund their government by creating money. As I said it we want the government to do so much stuff that the economy cannot produce enough stuff to prevent inflation, then the government should use taxes to take back some of the money. The purpose of taxes is to adjust the amount of money in the private sector.
PS There is a loophole that allows the government to mint commemorative coins in any denomination, say a TRILLION dollars. So if we didn't want to use more standard methods, the government could mint a few of these.
2
The obsession with debt by Republi-cons is a lot less irrational than it seems when you realize that it is really just a means to destroy Social Security and Medicare.
If the wageslaves must suffer unemployment as a result of austerity, well, that is just collateral damage
10
Dr. Krugman (and Olivier Blanchard) are right about a lot here, but some rather elephantine issues are still being ignored.
What might those elephantine issues be? Well, people like my husband, people like me, college graduates from the years 2009-15, and all of those senior citizens who should have retired during the years immediately following the Great Recession and are still working physically demanding menial jobs.
The vast majority of those among us who lost the most to the Great Recession are still losing. While the jobs numbers look solid, they still don't include older workers. Those are still applying for jobs online, never to be called, not even for a phone interview.
Those who are working in the gig economy for Uber and Lyft have a finite number of years before they get displaced again, this time, by self-driving vehicles. Even if they aren't, working a 60-80 hour week to earn far less than needed to meet one's most basic needs is backbreaking and not sustainable over years.
Back in 2010 the conversation should have been about the future of work and universal basic income. Obviously, we're not even close to being ready to talk about it. Maybe some progressive candidate will bring it up in the 2020 election, like Sanders brought up Medicare for All. It's probably the only way Americans will start thinking about a future without work. It's coming, and we're nowhere near ready.
---
Things Trump Did While You Weren’t Looking [2019]
https://wp.me/p2KJ3H-3h2
11
@Rima Regas
Yes, yes, yes, and yes. I'm one of those turning 65 but doing just fine - and retired.
The debt argument is predominately a bait-and-switch tactic used constantly on the right - to maintain what seldom gets mentioned - half the yearly deficit (debt spending) going to our mostly useless military for 'our protection' fear mongering and all of its tendrils.
The fear-mongering works and enough of the minority red state public buys it (or blue state contracts) - and it never changes.
Which leads to more military and more wasteful spending and lots of political posturing.
And no, I'm not talking about leaving Syria which costs us relatively nothing in the grand scheme - but how did we get there and why?
Oh, how quickly Bush 2's image is rehabilitated and all the wasted trillions/destabilization (requiring more military/Pentagon/spooks/etc) is forgotten.
Bait-and-switch and don't expect the mainstream media to waste much airtime on it - too much spectacle to cover and no attention span by the public.
So, yeah, lets talk about how we MUST cut SS/Medicare.
Please folks - the debt argument is fine but regressive and belies the underbelly of our real fiscal problems - lack of progressive taxation and stupid spending.
Period.
6
Rima -- older workers aren't going to be hired any time soon. Why? Because potential employers aren't to hire people who are a year or two years away from collecting Social Security and Medicare.
@sharon5101
Workers in their 40s and 50s are quite a ways away from retirement.
3
I may be very naive when it comes to economics, but I would rather see the monies spent on interest payments go toward fixing the problems here at home (roads, health care, etc). My issue is that the availability of debt is too easy and the ongoing thinking that debt pays for itself thru "trickle down" has been shown over and over again not to work.
6
@Paul
I believe "trickle down" is a false notion that tax cuts for the rich are what "trickles down" into those of us who are not, and that, evidence consistently shows, is a scam by Republicans to attempt to justify constantly rewarding their wealthy patrons by reducing the taxes they pay. If anything defeats our ability to repay government debt, it is that treacherous technique. It is then coupled with the hysterical criticisms from the same people who just pocketed the tax breaks that now, because of the higher debt caused by lowering government revenue, we need to reduce spending on social welfare, infrastructure, education, etc. (never on the defense budget). Blanchard and Krugman are exposing this fraudulent scheme, identifying the positive benefits that flow from increasing expenditures on those items just mentioned as that will be (and has in the past, been) proven to increase economic growth sufficient to pay the debt created from those expenditures.
2
For those people who think the the debt ratio (debt/GDP) is the important figure to look at, just note that after both WWI and WWII, the debt ratio decreased drastically. In fact it was only 16% in October of 1929. AND THEN WHAT HAPPENED?
The difference was that after WWI we DECREASED the debt in dollars by almost 40% from 1920 to 1930 while after WWII, we INCREASED the debt in dollars by 75% from 1946 to 1973 and had Great Prosperity.
7
"debt displace(s) unemployment at the heart of public debate" ... "debt obsession led to less, not more, public investment" ... take your argument to its logical conclusion. What do we get for the debt -multi-$trillion war games naturally exploding the political instability of the Meddle East (sic), multi-$trillion tax give-away to rich and corporate sectors? Your analysis is spot on, but you forgot the punchline, while perhaps the level of debt doesn't matter so much, it does matter what it's spent on. It's the universe's largest game of three card monte and we're all the suckers
5
Aarrgghhhh....even the charts don’t help!!
Try this:
1. We need money to conduct commerce.
2, As the economy grows we need more money.
3. Money can come to the private sector from 2 places--the federal government or from a favorable trade balance.
4. Money comes from the federal government in 2 ways--spending (fiscal) or from the FED to the banks (monetary).
5, The FED has sent a lot of money to the banks with little effect. The money has sat in the vaults of the banks or been lent to the Rich who use it to speculate.
6. Net federal spending is measured by the federal deficit, i.e. the deficit measures the net flow of money to people, businesses (not banks) and state & local govs. But we need spending with high velocity money.
7. Thus in order to get the new money the private sector needs, the federal deficit must be larger than the trade deficit. We have a large trade deficit. We need a large deficit.
8. If the above is correct, periods of negative deficits, surpluses, which pay down the federal debt should lead to a bad economy. They have. There have been 6 such periods in US history which paid down the debt 10% or more. They have ALL ended in a real gut wrenching depression. In fact this accounts for all of our depressions.
9. On the other hand, in 1946 we had the largest debt ratio in our history. The public debt ratio was 47% larger than today. We had deficits for 21 of the next 27 years. We increased the debt 75%.
And we had Great Prosperity.
3
Has Krugman been reading the comments I have been posting for the last 10 or 20 years? I guess it took Blanchard to get him to realize that the Great Prosperity of 1946 to 1973 contradicted Keynes admonition for austerity at the Treasury in the Boom.
I wonder of he will eventually comes to gripes with the even more striking historical contradiction to Keynes, namely that ALL 6 times we have paid the debt down 10 % or more, we have fallen into a terrible depression.
I must admit that it is very satisfying to see him write, "Because it’s becoming increasingly doubtful whether there’s any right time for fiscal austerity. The obsession with debt is looking foolish even at full employment."
It seems, however, that K still will not learn what MMT says. MMT economists have been saying this stuff for years. It enabled them to predict the crisis of 2008 when the Keynesians missed it.
He still claims that the MMT says that "debt never matters" which is just plain wrong. For example, MMT says that in the very rare case there is no slack in the economy, when something is preventing the economy from expanding, that we should not increase the debt. Also if we have a huge trade surplus providing money to the private sector, it is O.K. for the federal gov to have surpluses and pay down the debt.
As Stephanie Kelton put it, MMTers are not deficits hawks or doves, they are deficit owls.
Nevertheless I find this column much better than K's usual muttering about a looming debt crisis
7
@Len Charlap
I've been reading your comments for years, Len, and I must admit when I saw Blanchard's synopsis I thought of you.
3
Of course the problem is not the debt, but the ongoing stagnation. If productivity and GDP can grow forever at 3% annually you can issue as much debt as you can. The thing is that the area that has produced a great portion of value and the engine of growth (China) in the last 3 decades is slowing down along with other emerging markets. Even Apple is catching up with that. Many corporations realize now they have overproduced relative to consumption (both productive and individual). They are not extracting as much value as they used to. Now they are cutting back and low investment will continue to feature. Even Blanchard recognizes that
2
MMT does not say "debt never matters". Currency user debt always matters, and currency issuer "debt" can matter because coupon outlays can matter. But Washington can never run out of dollars.
There are quotes around federal "debt" because it does not arise from borrowing. Exchanging one federal liability (a treasury) for another federal liability (a sum of dollars) is not borrowing. Borrowing by currency users - true borrowing generating true debt - is the exchange of a financial liability (debt) for a fiancial asset (dollars).
3
The problem is not the ration of debt (or any other fraction of GDP and so on) but the growing disparity as to who the debt is actually being paid to.
More and more it is being shoveled away and up to the rich as their tax burden goes down and down. (in some cases net zero) All other costs of administration or government then gets downloaded to the tax payer as well. (especially as everything gets privatized)
Essentially it is a capitalist system for the costs ( to you ) and a socialist system for the profits ( to the top 1%). Of course the military grows exponentially as well. (inclusive of more and more privatization within that sector too)
We need to go back to a 70% high end tax bracket(s)
11
Debt is a claim on future value, which is only created by labor. Value being produced socially, but privately appropriated (mostly corporate monopolies). GDP being assumed as the empirical manifestation of value (and represented by money) and interest a portion of how fast it grows or is capitalized (or how profitable it is). The problem is that claims on global GDP is 5 times its current value. Thus the stagnation we see and the low interest rates. When Apple loses more than 200 billion dollars in a couple of months tells you how unrealistic those claims are. But don’t confuse price and value. Very different things, although related
2
As I drove from Westchester to central NJ to see relatives I was once again amazed at the sorry state of roads and bridges in both states. I've always been surprised that the closer I get to NYC the more potholes there are and the worse maintained are the roads.
And then there is our relatively terrible cell phone reception that is terribly inconsistent with conversations often cut off when you drive through a dead spot- please let me never break down at such a spot.
And don't get me started on our airports.
So many other countries do a much better job of these things, but when you have a government excessively controlled by corporations and the investment class everything seems to be focused on profits for the next quarter.
The long view just doesn't seem to matter.
24
@alan haigh....Isn't it interesting that the closer you get to Democrat run New York City the worse the potholes are. From your comment in sounds like roads in Republican run areas are better.
1
@Schrodinger Not necessarily. Come to Ohio.
2
The debt is not an economic or efficiency issue. It is an ideological issue. Everything is about how labor should transfer its output through work and consumption to capital and the wealthy.
For these transfers, capital gets to tell labor how they should live just like in the days of feudalism.
Capital has made an implicit deal with the government elite to buy the debt in exchange for lower taxes. For the people, it is a bargain with the devil.
4
The debt scolds seem much for concerned with repealing the New Deal and the Great Society than they do about high debt levels. The policy that Ryan etal supported was low tax rates for the very rich and next to no help for anyone else. It was on of the great cons of the Republicans from the Reagan era on.
Democrats cann't allow themselves to get caught up in worry too much about the debt. They need to get people to explain why and how the Federal budget is nothing like a family's budget.
14
I am much more worried about the unprecedented concentration of wealth in our nation and worldwide than I am about debt alone. Beyond the obvious depressing effect on consumption it concentrates political power leading to a virtuless cycle of policy corruption such as we are currently experiencing. This coupled with debt incurred solely to further benefit the few at the expense of the many could be our undoing.
13
Just like "thugs" and "illegal immigrants" are code words for racism, "debt" and "deficits" are code words for a small government that restricts its activity to diverting wealth to the rich, directly by policy and indirectly through defense industry spending. "American first" is a code word for withdrawing from international affairs; curiously this is extremely beneficial to Putin's plans. The same 'dark money' political operatives pushing the codes for racism are pushing the codes for 'redistribution' upward. The Russians have used their own code words with the American public, to a great return on their investment in politicians and social media.
13
Debt AND Deficits don’t matter, when the GOP are in charge. And they are the unsurpassed experts in economics, both In theory and practice. See: Kansas and Oklahoma. A cautionary tale for any sentient person, a disaster for most people, a race to the bottom. On meth, opioids and Jesus.
21
@Phyliss Dalmatian, the debt of currency users like Kansas and Oklahoma bears no comparison to the "debt" of a currency issuer like the US. For the federal government, dollars are financial liabilities (IOUs, tax vouchers); for states, corporations and households, dollars are financial assets.
4
It's silly to think that there is insufficient capital for investment. It's obvious that the world is awash in capital. If there were some pressing need for some investment, corporations would be investing, not paying out humdreds of billions in buybacks and dividends. Governments can invest in any necessitites, if it pleases them, they could even cut back on stupid crap like huge navies and massive armies.
Can we just drop that nonsense?
7
It seems quite clear to me that it is a serious mistake to try to debunk the “fix the debt fixation” rather than taking advantage of this fixation to justify increasing the progressivity of the tax system in order to fund Social Security, Medicare, defense, infrastructure, and countless other government programs that people care about without increasing the national debt. Republicans continually beat the Democrats over the head on this issue, and they win every time. It’s time for Democrats to take this issue head on and explain the truth to the electorate, rather than pretend that government is free. We cannot have the government we want without paying taxes, and Democrats look like fools and lose elections when they pretend otherwise. Been there. Done that. It doesn’t work! Democrats are going to continue to lose elections so long as they continue this line of nonsense, and there is little hope of being able to enact a sensible tax system until the Democrats turn this issue against the Republican by arguing that we have to fix this problem by making the tax system more progressive. http://rweconomics.com/Deficit.htm
14
@George H. Blackford
Your blog states the following:
1. Government programs and services must be paid for.
2. We pay for government programs and services by collecting taxes and borrowing and printing money.
3. If the government tries to fund its programs and services by continually borrowing and printing money instead of by collecting the taxes needed to stabilize the national debt relative to income it will eventually lead to an economic catastrophe.
Literally none of that is accurate.
1. & 2. say government is provisioned by taxes and/or borrowing and printing money. Money itself is debt (it says "Federal Reserve Note" and a note is an IOU), so really taxes and borrowing are what you say funds the government.
All you've got to do then is answer a simple question: Where do people get the dollars to pay taxes or lend to government if government doesn't spend them out into the economy first?
Logically, government spends first, then asks for some of those dollars back in taxes. Taxes are necessary, then, not to fund government, but to make the money valuable. Dollars retire an inevitable liability.
See http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html for the complete story.
The last significant reduction of "debt" was the Clinton surplus. The previous one was in 1929. All seven such significant "debt" reductions since 1776 were followed by Great Depressions. Smaller government "debt" is what leads to economic catastrophe.
8
@Demockracy
With regard to 1) through 3) you say that “none of this is accurate.” I find this rather interesting. Are you suggesting that:
a) The government does not have to pay for the programs and services it provides?
b) The government can pay for things without borrowing or printing money if it doesn't collect taxes?
c) If the government does not collect the taxes necessary to keep the national debt from increasing continually relative to income and only pays for things by borrowing and printing money that it will not eventually lead to an economic catastrophe?
If you are not suggesting a) through c) why are 1) through 3) not accurate?
As for “All seven such significant ‘debt’ reductions since 1776 were followed by Great Depressions,” see http://www.rweconomics.com
1
@George H. Blackford
That is, as for “All seven such significant ‘debt’ reductions since 1776 were followed by Great Depressions,” see http://www.rweconomics.com/Thayer.htm
1
When acquaintances worry about our national debt, I unlimber my vast knowledge of economics (Econ 1 - hey, I'm a English Lit major, OK?).
I ask how much they paid for their first house. Like my wife and I, the answer is about 100% of their salary at the time. I ask, why did you take on that debt load? They answer, they were confident their salary would increase over the years.
So, I ask, you were practicing deficit spending to build infrastructure, expecting higher revenues to offset the debt investment you've made. Well, yes, they say.
So, I ask, debt used to build a long-term asset is OK? But not debt to purchase short-term wants, is that right? Well, yes, they say.
So, I conclude, extrapolate that concept to federal, state, or local planning. Building long-term assets - and incurring debt - with solid expectations of a growing revenue stream makes sense. Some examples could be education funding, job training, social programs such as income assistance and healthcare and infrastructure. But acquiring debt and cutting revenue streams just make things worse. Examples might include tax cuts, whether for high-income individuals or corporations, or expanding funding to include payments to for-profit schools and health insurance companies. Hmm. they say. You're a liberal, aren't you?
27
@Jim Propes
And what bank finances at a 100% income to debt ratio?
2
@Jim Propes - There is a HUGE difference between the federal government and state or local government.
The federal government can create money out of thin air. It will run out of money the day after the NFL runs out of points. Furthermore we need money to conduct commerce and only the federal government can supply it.
Think about it.
3
Remember when decreasing maximum tax rates would free up wealth for “job creators” to expand employment opportunities?
When that fallacy was revealed, Ryan and company explained the deficit problem was actually the result of overspending on welfare, Social Security, Medicare and the like. Once those burdens were trimmed, then the economic miracle would commence. Never any concern for the accelerated depreciation schedules, extravagant expense deductions and other loopholes structured for innumerable special interest groups.
6
What's impressive about Ryan and the other Republicans in 2009 was it was the Republicans and their W Bush tax cuts that took us from the zero deficit of Clinton to a whopping $1.4 Trillion deficit that W Bush gave to Obama.
And then when Obama is gone, the Republican 2017 tax cut just took the deficit from $600 Billion to $1 Trillion.
But today's economy is not the same as 2009.
Today we have a good economy.
Today's deficit is caused by more tax cuts for the rich. Just go back to Clinton highest marginal tax rates and the deficit problem will be solved.
4
Mr. Krugman's argument really boils down to: As long as Debt/GDP does not increase, then no harm is done.
This is essentially true, but there are provisos:
1. rg. Remember that government cannot just turn GDP growth up at will (despite what some leaders will tell you on the stump.)
3. Interest payments are a transfer from taxpayers to bond holders. This will tend to send money up the food chain (or out of the country) which some progressive minded people might not think is a good long-term strategy.
4. High debt can be something of a lever for a foreign country. It can also be a reverse lever, but it can certainly destabilize some aspects of foreign relationships.
5. Interest payments represent tax revenues that cannot be spent on social priorities such as infrastructure, education, etc.
My argument would be that governments should only run debt in a Keynsian counter-cyclical context OR to invest in infrastructure which has long-term payoffs (not pork-barrel infrastructure.)
7
@Brian - WHile some of your points make a bit of sense, it is important to keep in mind that the largest holder of U.S. government debt is ... the U.S. government. Money collected every pay period by Social Security is used to purchase government bonds because of the investment limitations on the Trustees. So the vast majority of the interest payments are not much more than accounting transfers.
6
Dear Professor Krugman, thanks for trying to teach us macro-economics in language even a person such as myself can understand...a poor boy from Jersey who had a decent chance at higher education. All the talk of debt reminds me of a lesson Walt Disney apparently learned early on, after he found himself in debt to the tune of $1 million after completing Snow White. When asked why he didn't fear this monumental amount of debt he simply pointed out that when he started no one would have loaned him a plug-nickel to draw a mouse cartoon. "Full faith and credit" means everything and is why the current White House occupant is well on the way to destroying the American experiment.
7
Dear Professor Krugman: If you want the public to really appreciate why debt doesn't matter, you need to explain the reasons in the simplest possible terms. You have done it beautifully before --- when I read in your columns that one man's debt is another's asset, that the government needs to borrow to create safe assets for corporations to invest in, that we have never really paid off our WW2 debt but that inflation took care of it for us --- a light went on in my head; suddenly I thought I understood why debts aren't always a bad thing. For most of us non-economists, the idea that "debt is bad" is deeply ingrained in our thinking, constantly reinforced by our everyday experience. To make the average man see your point, you need to explain the basic issues ad infinitum ad nauseum; you can't count on him having read your earlier columns or blog posts. Economic illiteracy is very real when it comes to macroeconomics. The kind of economics the public knows nowadays tend to be Freaknomics stuff like why sumo wrestlers fix their matches, not stuff like why the nation should not be obsessed over debt reduction.
35
The idea that the federal gov has to pay for things, good & bad, with taxes or borrowing is just plain wrong.
The gov doesn't need your money. It can (thru the FED) create as much as it needs out of thin air. Just think about where money you pay your taxes with came from in the first place. Unless you have a printing press in your basement, it originally came from the federal gov.
But there's a catch. If the gov needs to create too much money to do the things we want it to do, we may not be able to make enough stuff to soak that money up & will have too much money chasing not enough stuff, i.e. excessive inflation. This is rare & is usually caused by shortages, e,g, of oil.
But that's easy to solve & where taxes come in. Taxes allow the gov to take back the excess money & prevent inflation. The purpose of taxes is to adjust the amount of money in the private sector. The more we can produce, the lower taxes can be.
So the way to run things is to spend money to facilitate production. Tax cuts do this, but in an inefficient way. If we cut Daddy Warbuck's taxes, he does not need to spend the money; he uses it for financial speculation. If we cut poor Joe's taxes, he spends the money on stuff--food, house paint, etc.etc. This promotes production of food, etc.
Even better if we pay Joe to fix a bridge, the money still gets into the economy, AND we get the bridge fixed.
Just remember, the federal gov will run out of money when the NFL runs out of points.
13
You’re one of my heroes, however, regarding runaway inflation, I think you may be overlooking how the usd has always slowly drifted toward being the world’s reserve currency, and while that has graced us with special privileges in terms of global appreciation, it is by no means a permanent arrangement. Will we always quote oil in usd? Will the turbulence in asset markets compounded with an imminent retirement boom lead investors to trade their dollars for bitcoin instead? You sounded very different when Ireland and Greece were being buried in debt. (You’re still my hero! But seriously though...)
1
@Solomon
Greece and Ireland were very differrent cases. Greece was burried in debt to a very high % of GDP, maybe over 100%. Also tax collections there were but a fraction of what they should have been due to massive evasion. But most importantly, they were in the Euro zone and could not depreciate their currency. So the EU forced Greece to deflate to cut wage rates to the point where they could be competitive for what exports they could sell to be able to pay back the Euro component of their debt. Ireland was only in trouble due to an unwise political decision to guarantee the debt of failing banks and recovered much faster than Greece as I recall. EU forced austerity was an economic and political disaster for Greece. Let's see how the EU handles Italy, the next basket case.
7
@Howard S
Good points, but consider that some of the "Greece factors" you highlight could apply to the US at some point. A prolonged recession can increase Debt/GDP. Political pressures could cause the federal government to not bail out weaker states (as some austerity hawks advocated in 2009). And an administration could weaken the IRS such that tax evasion becomes a national sport.
Best not to have a high Debt/GDP level to avoid being boxed in at some future point.
1
@Brian - There are several fallacies in your argument.
First, oil is and will continue to be denominated in US Dollars because our economy is huge and the political system stable. Maybe not its current president but the system is stable. China, the world's second-largest economy, is not opaque and thus no one knows its actual strengths and weaknesses.
Second, retirees will not convert their assets to Bitcoins unless they are, as Dr. Krugman has described the cryptotouts, "unsuspecting, fast buck artists, organized crime laundering money and libertarian derps."
Third, no serious person (especially Dr. Krugman) advocates a high debt to GDP ratio.
5
Seems to me increasing the gov't debt is not good but after the big tax cut for the rich it's a disgrace to talk of abolishing programs aimed at helping the middle class and working poor
4
Yes, Dr. K., we recall those times of yore, when the Very Serious People were quoting from Ayn Rand's fairy tale, and we remember that the whole discussion was to conceal the Capital Strike by elites, as bragged about by Speaker Boehner in his Sept. 15, 2011 speech in NYC:
https://www.huffingtonpost.com/robert-s-mcelvaine/capital-strike_b_965407.html
and:
https://www.nytimes.com/2011/09/16/us/politics/jobs-speech-by-house-speaker-john-boehner.html
saying "Job creators are on strike," until they get their personal and corporate taxes lowered.
No infrastructure, nothing, until 1%-ers get what they want, verified by McConnell's declaration that his first priority was making the Democratic POTUS a one-termer.
And it all came on the heels of the plotting by Gingrich, et al in the Capital on Obama's 1st inauguration day:
https://www.huffingtonpost.com/2012/04/25/robert-draper-anti-obama-campaign_n_1452899.html
All of this is who the GOP'ers are, and the Orange Jabberwock sock puppet in the White House is their newest Frankenstein, saying he's acting at 'his advisors' behest as he pointed to Bill Shine (of Faux Noise Mahina fame), et al during Tuesday's off-the-record interview with press poobahs.
GOP'ers are deeply un-serious people, who hire deeply un-serious professionals to be their hacks.
57
I realize that you are an American economist writing in an American newspaper on (primarily) the US federal debt and in that context your arguments re: interest rates and growth rates make much sense. But because you are influential and because the NY Times is also, please add context to your argument.
Many sub-national governments (state / municipal / provincial / territorial) do not meet the criteria of having interest rates lower than local growth rates. The same can be said, with very few exceptions, for many of the national governments of the world. Unfortunately, politicians and policy makers controlling these governments still have the ability to borrow vast sums. This debt, borrowed at the inverse of your beneficial model will probably, in many cases, result in the long-term impoverishment of their constituencies rather than their ultimate enrichment.
3
@Kevin - Well-managed states with appropriate tax rates such as California pay interest rates that are lower than growth rates. It is only poorly managed states - usually those with Republican governors and legislatures such as Kansas - that have cut taxes so that they faced either having a high debt/GDP ratio or cutting services such as funding of public education.
10
Shouldn't interest rates be high enough to encourage savings? And the corollary, higher interest rates provide income on investments such as savings that retirees depend on.
Environmental studies indicate that our rising populations, our increasing standard of living in developing areas, and our rising GDP are destroying the planet. Resources of all kinds are being obliterated. Shouldn't these realities be part of every economic discussion?
When will economists design an alternative; or can they?
6
Terrific column Doctor Krugman. I'd add two additional points. The first is that the period Blanchard looks at was a time when public investment was relatively high and fiscal policy followed the basic Fischer/Keynes proscription of counter cyclical public spending - more debt when the economy is down and less during an expansion. That may explain why economic rates of return have over time been higher than the real interest rate on debt. But since fiscal policy post 2008 has been pro-cyclical and public investment has plummeted, that relationship may not prevail in the future. Interest rates on debt may start to exceed the real rate of return on investment do to the wasting of public infrastructure.
The second point is that how you get into debt seems to matter a whole lot. Taking out massive public and private debt in your own country's currency seems to be a whole lot less risky than debt scolds have and continue to claim. But if that debt is in another country's currency - watch out! Over the last 40 years one economic crisis after another has been caused by unfavorable currency fluctuations and the concomitant capital flight experienced by debtor nations. A lot of the reaction to the liberal economic order that's obtained since the end of the cold war can be legitimately ascribed to populist revolts in countries that have had economic collapses caused by excessive borrowing in foreign currencies.
8
You agree with Keynes we should have less debt during an expansion. Let’s see what happened EVERY time we decreased the debt a bit (10% or more).
The federal government has balanced the budget, eliminated deficits for more than three years, and paid down the debt more than 10% in just six periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30. The debt was paid down 29%. 100%, 59%, 27%, 57%, and 38% respectively. A depression began in 1819, 1837, 1857, 1873, 1893 and 1929.
So if you want to produce another terrible depression, just follow Keynes and decrease the debt.
6
@Len Charlap
Important point to keep hammering on. Thanks for signing up for the job.
I wonder how much The Debt & The Deficit are being conflated in the comments here and elsewhere whenever either is brought up. As you point out here and elsewhere, setting out to eliminate the debt bodes disaster.
Using The Deficit to adjust how/where money flows clearly makes sense to those who demand a fairly detailed story (i.e. model) of what the (federal) deficit & debt are, change, and do.
Eliminate The Debt, on the other hand, is reactionary & faith-based (thus appealing to The Right, of course). Similarly, gold-bugs.
Keep up the good work.
2
@Len Charlap
I'm not advocating for reducing the absolute dollar value of the nation's debt. My point is that government spending should be counter cyclical...smaller deficits during an expansion and larger ones during a contraction. I guess my point would have been clearer if I had said something like new debt, or debt as a percentage of GNP. I suppose there are scenarios where you could justify decreasing the dollar value of Federal debt through running a budget surplus, but I can't think of any realistic ones offhand. In general though, it's a pretty stupid policy proscription.
rg. If we borrow too much, or let inflation rise, we will lose this trust and our lenders will demand higher interest rates, making our debt less affordable.
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@Aoy Who are these lenders who have the power to force governments to pay more?
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@Ed Walker
Market forces. Same thing that happens when your fico score plummets. Check out the interest rates on 3rd world national debt.
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On the insanity of neglecting infrastructure: Robert H. Frank's book The Darwin Economy tells of a worn stretch of Interstate in Nevada that would cost $6 million to restore if the work were done right away, but $30 million if they wait just 2 years. No sane businessperson would miss such obvious opportunities to save—especially with such cheap money available. This is criminal negligence by politicians, and surely amounts to many billions in waste across the country. All in the name of "cutting government"!
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The debt scolds have a hidden agenda. It's not debt that they worry about - if that were the case, they would have marched on Washington when Trump's tax giveaway was before Congress. What really concerns them but, they won't ever admit to, is that government spending takes care of people who need a bit of help, or who cannot take care of themselves. To solve their "debt" problem, these programs should be cut.
Why do they never complain about debt when Congress is creating loopholes that wealthy people and large businesses use to avoid paying their fair share of the cost of running the country?
Why do they remain silent when Congress is cutting tax rates to ridiculously low levels but howl from here to eternity when there is talk of upping the rates?
Why do they protest government "handouts" to the needy but not to defense contractors?
Debt scolds remind me of what Mark Twain once said about Baptists being afraid that someone, somewhere was enjoying themselves. Debt scolds worry that someone, somewhere, is being helped by a government program.
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@Charley James: "Debt scolds worry that someone, somewhere, is being helped by a government program."
Unless of course it is helping the Debt Scolds themselves and people like them.
Lee Atwater taught Republicans to use racism in a more abstract way and Debt Scolds, most of whom come from compatible ideologies, learned the lesson: it is more effective (and more popular these days) to strike at the state that assists minorities. and those in need of fairer treatment more generally, rather than at minorities themselves.
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@Charley James: Debt scolds don't like government spending during Democratic administrations because they don't want "their" taxes to support "those" people, i.e. the needy who they believe don't look like them. But they are all for tax cuts for the rich and for corporate tax cuts and increases in defense spending during Republican administrations because those tax cuts and the increased defense spending will go to the pockets of people who they think look like them.
@Charley James
I wish you wouldn't put defense spending in the same bucket with the various safety net programs. Each of these two sets of programs come from different concerns. Defense spending is for the military protection of the country from enemies who are really out there! The safety net programs are to help people in ways that eventually also help the country with better educated and healthier people. These two policies are not related. Defense spending policy has to be determined based on the threats we face from foreign enemies. Safety net programs policy has to be determined based on what's required to help those in needy situations. Both programs are paid for from the same pot of course but both should be addressed as separate issues and if necessary cause the government to make the "pot" bigger.
We know you still don't get MMT Paul but could you maybe quit mischaracterizing it? Its beneath you.
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it doesn't just matter that we have increased productivity and production
it also matters who gets the extra income caused by the increased productivity
the stable situation is not median incomes keeping up with inflation
the stable situation is median incomes keeping up with inflation plus productivity increases
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There is no direct link between productivity and wages. After all, there are still only 24 hours in a day and 7 days in a week. When productivity rises due to better management techniques, just in time inventory, efficient practices, high speed communications and improved technology, all paid for by the business, there is no logical nexus to paying employees more.
@From Where I Sit Managers learn and implement those new techniques, workers train and embrace efficient practices, perhaps even develop them - seems like the employees are increasing their value, which would be a reason to pay them a bit more...
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@From Where I Sit
The serfs, after all, should be grateful they are allowed to break their backs on that assembly line, or standing with smiles to serve the customer, or making the cold calls to try to deliver the products, etc., since the business exists and needs to provide growing profit to the owner. If we could only hire children, instead.
You provide a primer on why unbridled capitalism needs regulation.
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The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.
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@Francisco Flores. Sorry, the "debt" has been repaid before. The last significant debt reduction was the Clinton surplus. The time before that occurred in 1929. What do the seven significant debt reductions since 1776 have in common? 100% of the time, they are followed by a Great Depression-sized hole in the economy.
Why? Because government "debt" is unlike household debt. It's like bank debt. Your bank account is your asset, but the bank's liability (i.e. debt). Writing a check is assigning a portion of the bank's debt to the payee. Currency is just checks made out to "cash" in fixed amount. The amount of currency in circulation is a component of national "debt." The rest is bonds and bank reserves.
Reducing the "debt" means reducing people's savings. When their obligations come due, if they don't have savings, and can't borrow more, then asset forfeitures and foreclosures follow.
It makes no sense to complain about the "debt," and is far more sensible to complain about who owns it. Income inequality could be addressed. The Fed extended $16 - $29 trillion of credit to the financial sector when only $9 trillion would have paid off everyone's mortgage. That's the debate to have.
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What is growing in America? Private detention centers, privatizing schools, mercenaries, privatizing the postal system, Federal land lease give aways, the pentagon, Harland security contractors, not the employees on indefinite furlough. - what else? The trade war with China is making our IT and AI bth DOA. AI engineers, like the collection on the Manhattan project, are mostly foreigners, who will opt for other countries.
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@4Average Joe
Note that all of the people you just listed are heavily dependent on government subsidies. Private schools run on government-paid vouchers. Private postal services work by taking over the profitable parts of the postal system, while still outsourcing the unprofitable parts to the Post Office. Pentagon contractors are, of course, the gold standard in corporate welfare. Etc.
American capitalists love to tell us how innovative and individualistic they are, and how the government should stay out of their business because it stifles creativity. But absolutely nothing in the real world confirms that. Instead, they increasingly seem unable to imagine any way of making money except by pocketing government checks.
The American business class is going completely stagnant. They're so used to the entire universe ordering itself around their needs, it doesn't even occur to them anymore that they should have to earn that in the first place. (And if it did occur to them, they wouldn't even know *how* to earn it. Why should they? They've never had to).
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No, MMT doesn't say: debt never matters. It is just not as crazy as you when you pronounced that the US would default on Social Security obligations within ten years. You said it in... 2004. I know, crazy.
MMT says that debt can be as large or as small as needed to sustain full employment. But too much or too little is not good. But the state will never find itself in a situation where more debt would be needed to support an economy in a depression and it is unable to issue it/has to default etc.
bit.ly/bnbLd
nyti.ms/tsrS4N
bit.ly/tIZGaW
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Most of the Republican rhetoric about debt and the need to reduce it are the cover and charade of cutting spending on programs to help people. Instead of the sky is falling approach - wouldn't it better to make these program investments into the future supporting the health, financial, educational and infrastructure needs of our population?
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@I Poy Republicans aren't interested in those kinds of investments. They don't fatten the Mercers' or Koch brothers' (or other Republican donors') portfolios.
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If the returns on money you borrow far exceed the cost of borrowing, then you should borrow and get the returns. Check.
If investing in infrastructure helps more people than sending wealthy people tax refunds, then you should invest in infrastructure. Check.
If more people understood and followed simple, clear advice, we would have a better government. Hoping for a Check.
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The debt/GDP after WW II was reduced by keeping the budget approximately balanced, not of course by running surpluses. Then growth of nominal GDP shrank the ratio. But the ratio will not be reduced if tax rates are not high enough and continual deficits are run (larger than GDP growth). The post-WW II history also shows clearly that highly progressive rates do not restrict private investment or motivation of CEO's either. There is plenty of room to increase government spending and keep debt/GDP from rising, but tax rates must be raised on those who can pay. This is something that responsible economists should be mentioning all the time.
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@skeptonomist ... kind of. The flaw in this argument is the implicit belief that taxes provision the federal government (the monopoly provider of dollars to the economy). They logically cannot. Where would people get the dollars with which they pay taxes if government didn't spend them out into the economy first?
Government is the only fiscally unconstrained player in the economy. If you don't believe me witness the Fed extending $16 - $29 trillion in credit to the financial sector in 2007-8. (The figures are from the Fed's audit). No taxes were raised...and no inflation ensued.
Government spends first, then asks for some dollars back in taxes, making the money valuable since it retires the inevitable liability of taxes. What do we call the dollar financial assets it leaves untaxed in the economy? Answer: National 'Debt'!
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The debt INCREASED 75% from 1946 to 1973. Hardly seems like we had balanced budgets. You error is that you think the federal government has to pay for government operations by taxing and borrowing and the problem is where is the money to come from.
Of course the federal government (thru the FED) can create as much money as it needs out of thin air. The problem is whether we can produce enough stuff to prevent inflation which is quite a different question. The way to do that is to have federal government spending facilitate production.
Excessive inflation is very difficult to produce by government spending alone since, in general (not always) government spending stimulates production. All hyperinflations since WWI have been produced by something that constrained the economy.
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For an economic ignoramus like me, this suggests that debt as a function of GDP is the real number I should follow.
On the other hand, when the tax cut for the rich increases the deficit we hear both Dems and GOP wailing and weeping.
Is there a difference in these two measures of negative money flow in the significance for the economy?
If we borrow to build infrastructure for the future this looks, from your graphs sometime we can carry.
But if we fail to take in enough $ after a tax cut, (assuming the rich do not shower the rest of us with trickle down $) that seems to do harm to the economy?
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@Claudia: In making choices between spending money on infrastructure (for example) or cutting taxes on high income individuals (for example), shouldn't we ask whether the effects are positive for long term GDP growth? Most economists would argue that if the US built better infrastructure, there would be a short term stimulus to the construction/engineering/materials industries (and all people/entites that intetact woth those nrwly-enriched industies). Additionally, all future users of the infrastructure would benefit for the entire economic life of the infrastructure. A tax cut provides a financial benefit to its recipient. If the recipient spends or invests all of extra cash in the local economy, others will also get a benefit. If the recipient saves the tax cut or spends it on a foreign vacation, there is no benefit to the US economy. But even if the recipient buys a domestic consumer item (e.g. an American - made car), there is no lasting benefit to the US economy. Only if the recipient makes an investment (creating or expanding a business) that would not otherwise have taken place, can it be argued that the tax cut had a lasting positive effect. But for every $ of tax cut, how much does the typical recipient invest in the way I have described? If you consider Corporate Tax cuts instead, the question is that for every $ of tax cut, how much is spent on an investment that would not otherwise have taken place, versus increasing dividends, stock buybacks, etc.
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@Claudia: If your question is along the lines of "Why is debt created by a tax cut worse than debt created by infrastructure spending?" The answer is that if the debt is related to something that promotes long term GDP growth, there is less chance that the debt will contribute to a future financial problem (as the real value of the debt diminishes. If it only creates a short term bump in GDP growth, the real value of the debt does not diminish in a near stagnant economy. The government should choose options that promote long term GDP growth to mitigate any negative impacts from increasing the debt.
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@Phillip Goodwin. The reason that tax cuts are less effective at economic stimulus is that the beneficiaries needn't spend their gains. Spending on infrastructure would enter the economy, not some savings account. This is the paradox of thrift in action. Savings are good to have, but if everyone saves, no economic activity follows, and the economy tanks.
Calculating the "growth" effects is fairly difficult, and the current risk assessment bias is to very short-term returns. So infrastructure, or education get short changed if their payoff is too far in the future.
Even worse, the effects of catastrophic long-term risk (global warming!) tends to be underestimated. But then rich people don't have to suffer the consequences for their actions in court, why should nature be any different, right?
...along the lines that too much money can make one stupid.
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Although I generally agree with PK, it is interesting that the graph of Debt vs GDP cuts off at 1970. The present Debt/GDP is 106% which is a lot higher than 24%. There is a point where the debt does cause all the horrible economic catastrophes that have been predicted, and that should be addressed. Clearly we need more taxation on higher earners (reverse the tax cut) to help stabilize our economy.
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@Elwood, Japan's "Debt"/GDP is around 250%. They have 2 or 3% unemployment, negligible inflation, high prosperity. Reinhart-Rogoff said that the problems with "Debt"/GDP would cut in around 90% but that took cherry picking and spreadsheet errors. What technique do you have to confirm what looks like the same faith-based theory, albeit with some higher number?
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When has too high federal debt hurt the economy?
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"raising private investment shouldn’t be a huge priority."
Say what? I don't think Krugman really means this - anyway private investment should be a priority most times. What should not be a priority is just increasing the amount of private capital for investment. What has been limiting investment is lack of growth of demand, not lack of capital or cost of it. Supply-side economics has not worked - and this includes making cheap money available through low interest rates. Also bringing in foreign capital through trade deficits is the wrong thing in this respect. Contracting government expenditure under modern conditions results in contracting demand, which is more important for private investment than any additional private capital available. This is a lesson that should have been learned in the Depression, and as Krugman has been saying was borne out again in the 2008 recession.
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I would rather have taxes more in line with what we are spending. But looking at debt the way Dr. Krugman does suggests that it is not as bad as many say. Most of us look at economics from where we live Microeconomics rather than Macroeconomics where most of the professor's thinking is. This happens frequently with science. Common sense (small your experience) not really being correct in the big picture.
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@Anthony
Yep, federal "debt" is the economy's financial assets. Currency user fiannaces and currency issuer finances are utterly incomparable. They are only contrastable. Purely.
It's a shame that words like debt, borrowing, funding, budget, etc have utterly different meanings to a currency issuer and a currency user. It makes for much confusion. It enables much plutocratic chicanery.
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Which leads us to the question of why did the Democrats repeatedly capitulate to Republican austerity demands during the Obama years, and now the establishment Dems are still deficits scolds, thanks to Pelosi's Pay/Go?
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@Ed Watters because our party is run by the very wealthy who are concerned above all else by the taxes they pay. They worry that eventually they'll have to pay the debt because the working class has such little income anymore.
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@Ed Watters
Obama had a Democratic Congress for only a short part of his presidency, up to 2010. Even then it was full of blue dogs that did not allow a bigger spending package for infrastructure to counter the Bush II Republican Recession, and was forced to put too much of that insufficient infrastructure package in worthless tax cuts, that return a fraction of what direct government spending on infrastructure would have returned. He was faced with constant shutdown threats. I felt Obama was the worst negotiator, or as I called him, the Conciliator in Chief, I had ever seen. who walked into a negotiation having already given up the store, and who spent far to much time trying to be bipartisan, but that does not mean that indifference to his political situation is called for.
There is nothing wrong with asking for responsible governance, which is what Pay/Go basically is. Had the Republicans been operating under Pay/Go we would have raised taxes on the wealthy, eliminated all the corporate loopholes and subsidies for the carbon fuel industry, and come up with a tax plan that instead of raising the debt by 1.5 Trillion would have balanced the budget and paid down the debt. Pelosi has already said that if exceptions are called for, then there will be exceptions to Pay/Go.
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@White Buffalo Yet again here is what has happened EVERY time "balanced the budget and paid down the debt"
The federal government has balanced the budget, eliminated deficits for more than three years, and paid down the debt more than 10% in just six periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30. The debt was paid down 29%. 100%, 59%, 27%, 57%, and 38% respectively. A depression began in 1819, 1837, 1857, 1873, 1893 and 1929.
I sincerely hope we never do it again.
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"... debt obsession led to less, not more, public investment."
In reality it is almost impossible to separate short term private ROI from the value of opportunities created by long term public investments in infrastructure, education, justice, security and scientific research.
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An interest side effect of a large debt is that the bigger the debt, the more an uptick in inflation will pay it off. $20T debt means each point of inflation reduces the value (ignoring compounding) by $200B per year.
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@Scott ... It's a myth to say simply issuing money (i.e. increasing National 'Debt') causes inflation. If that were so, then the $16 - $29 trillion in credit the Fed extended to the financial sector in 2007-8 would have caused a surge in inflation. It didn't, and no indicator, public or private, says so (see CPI, MIT's Billion-Price Index, or Shadowstats).
As long as there is slack in the economy (unemployed people or factories), government can spend without competing for scarce resources with the private sector. A job guarantee, for one example, would not be inflationary (who else is bidding for the unemployed?). Government buys surplus cheese, why not surplus labor?
So... inflation predictions like this are at least incomplete.
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