Paul Krugman: Washingtonâs deficit obsession has been utterly, totally wrong-headed.
- Thread starter Max E.
- Start date
I hate it when people who do one job expect you to believe they're good an a different job.
"The Arithmetic of Near-term Deficits and Debt
Amid all the debt hysteria, itâs worth taking a look at the actual arithmetic here â because what this arithmetic says is that the size of the deficit in the next year or two hardly matters for the US fiscal position â and in fact the size over the next decade is barely significant.
Start with interest rates. What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.
Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.
Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.
These are not, to say the least, make or break numbers. So what are we talking about here?
America does have a long-run fiscal problem, driven by the combination of rising health costs, an aging population, and the unwillingness to raise taxes to pay for the programs we already have. If we donât come to grips with that problem, bad things will happen. But what happens to the deficit in the medium term is almost irrelevant to the question of whether our long-run finances will get under control.
Yet S&P (and others) obsess about those medium-term numbers, without ever explaining why. Maybe they think thereâs some critical level of debt â but they donât know that. Maybe they think that fiscal austerity over the next decade will somehow guarantee good behavior further out â but that didnât work in the 1990s. Or maybe theyâre just pulling stuff out of regions I canât mention in the Times.
The point is that while S&P may try to give the impression that itâs just doing the math (incompetently, too!), the math doesnât at all support its position."
http://krugman.blogs.nytimes.com/2011/08/06/the-arithmetic-of-near-term-deficits-and-debt/
I'll go ahead and say that, sure.
Are banks lending at all? Sure they are. But no where near at the level needed to continue expanding credit in this country - which is the only way it will expand at all.
As for asset prices deflating, what planet do you live on? The only thing deflating is housing. Everything else has been rising over the last two years.
I'll throw in here.
I disagree with Krugman and admit I despise him but when I got my engineering degree I got a minor in economics. Yep, I'm a half-assed economist lol.
The one thing they really drilled into us was that a government is not an individual.
An individual lives, must run a household then then dies. Generally it is desirable for an individual to die with his debts/obligations paid off. That is a sound cultural precept and generally accepted. If people died owning money routinely it would be difficult for the system to work if their estate didn't cover the shortage.
But governments do not die. So the whole idea of having a balanced budget and trying to reduce the "deficit" is flawed. Governments are (hopefully) perpetutual so carrying a perpetual debt load is no big deal. It is not important or necessary for a government to pay off its debt.
Basic stuff but many people don't get that.
If one accepts that premise then it becomes obvious that absolute debt is unimportant. What is important is relative debt-to-GDP ratio and even that is only a benchmark of how an economy is doing. It isn't the end of the world if the debt grows large or become small as long as it is proportional to GDP.
Of course I learned this at one of the most rabidly liberal universities in the world so that must be considered.
Thank you for making that very salient point: "letting asset prices deflate". I've been saying this for God knows how long...this generational asset bubble that is not allowed to deflate, but instead is leading to the intentional devaluation of the currency to maintain completely artificial asset values is a HUGE problem.
The irony is that things are following more or less their natural equilibirum (albeit at a slower pace). Someone recently wrote about what a bitch it will be for the boomer's to try and continue to offload their overvalued real estate to the heavily indebted upcoming generations. Everywhere I look, I see property taxes on some of these ridiculously priced stucco boxes that are equal or close to a decent annual salary.
Even in the face of high inflation for essentials, I still stand by the prediction I made several years ago, that real estate will deflate (nominally and in REAL prices).