Home > debt > Krugman considers Baker (with graphs)

Krugman considers Baker (with graphs)

Paul Krugman has a column on Dean Baker’s post David Brooks is projecting his self indulgence again.  It includes a couple of interesting graphs.  Note that Krugman excludes from consideration financial debt.

Below are two series, both expressed as percentages of GDP: total domestic nonfinancial debt (public plus private), and U.S. net foreign debt, as measured by the negative of the net international investment position:

What you can see here is that there has been a big rise in debt, with a much smaller move into net debtor status for America as a whole; for the most part, the extra debt is money we owe to ourselves.

And here are the same numbers, measured as changes from 1980, so that you can see that the great bulk of the rise in debt was not financed by foreign borrowing.

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.

  1. December 31, 2011 at 9:47 am

    “But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.”

    Ah, yes… hope springs eternal in the young turk’s breast and, apparently, the not so young breasts as well. Either way, how can anybody believe that the fundamentally corrupt, intrinsically self-destructive socioeconomic game, AKA Plutonomy, and the idiocracy that spawned and perpetuates it is sustainable or worth sustaining?

    Have you discussed the realities and alternatives with your children?

    • January 3, 2012 at 7:08 am

      Taking shots at the Rich is not necessarily clever or right. For instance taxing the Rich reduces their capacity to invest in new endeavors or explore new products. Redistributing money to the poor redirects their spending to higher priced products. When a consumer changes their purchasing pattern from the store brand yogurt to the French brand, the economy does not grow it just turns greener in different parts of the field. But when a wealthy consumer decides to cash out some bonds and purchase a Chevy Volt to be more “green” a new industry with high margins is stimulated. This wealth creates potentially more growth. New businesses like automobile circuitry emerge to support the new needs of electrical vehicles. Clearly, the places the Rich spend their money is more likely to prompt new business growth than expenditures by the poor. Poor consumers only sustain industry (peas to asparagus). A wealthy consumer is more likely to purchase products with higher margins and greater profit potential. This type of spending has the potential to create more jobs, generate greater profits and overall create a better economic life for the poor than an handout ever will. The obvious answer is rarely the right answer.

  2. January 3, 2012 at 11:30 am

    Dear Rand,

    Hope for investment impetus from the rich springs eternal in the breast of the true believer. Profit at historic highs has done little for the economy, yet we love profit. We take shots at the rich because they have been telling us variations of this same nonsense for thirty years and more and we don’t see the promised land. In fact, we see the wholesale demise of the planet even as the new salvation gadgets get so much press.

    Taxing the rich is no different than borrowing from the rich, except in the latter case you get to pay them interest and have the privilege of letting them run your government.

    “Clearly, the places the Rich (capitalized, I suppose, for the same reason God is capitalized) their money is more likely to prompt new business growth than expenditures by the poor…. ” If only we ignore what we see out the window, this is perfectly reasonable. But we live in a real world, and the divinity of the Rich is a hypothetical explanation that does very well to justify the status quo, but not so well in dealing with the actual facts on the ground.

    We all (Rich and poor) need a sustainable planet, new infrastructure, useful work for all, and some of the poor need peas and asparagus. Ignoring the obvious is rarely the right way forward.

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