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Monday, January 02, 2012

Paul Krugman: Nobody Understands Debt

We should be doing more to help the unemployed:

Nobody Understands Debt, by Paul Krugman, Commentary, NYTimes: In 2011, as in 2010, America ... continued to suffer from disastrously high unemployment. And ... almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.
This misplaced focus said a lot about ... how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about...
Perhaps most obviously, the economic “experts” on whom much of Congress relies..., the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while they’ve been waiting, those rates have dropped to historical lows. ...
But Washington isn’t just confused about the short run; it’s also confused about the long run... Deficit-worriers ... see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. ...
Second — ...the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. ... If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. ...
Now.., you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy... But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of GDP for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan. ...
So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

    Posted by on Monday, January 2, 2012 at 12:25 AM in Budget Deficit, Economics, Politics, Unemployment | Permalink  Comments (130)


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