Paul Krugman is a very smart man. He has won the Nobel prize in economics for work on impressive sounding stuff like economic geography, and liquidity traps. He is also an opinion journalist for the New York Times. He comments from a proudly progressive perspective, and does so very successfully. The topics he covers include the causes of the financial collapse, inequality, the national debt and much, much more. His arguments are quickly recycled in discussions across the land, both electronic and personal. The problem is, when he weighs in on topics outside of his particular branch of alchemy, he is almost always wrong. This is infuriating because his work is taken as gospel by many otherwise intelligent people. Therefore, I’ve decided to start this series. It is perhaps presumptuous of me to try to take on the Krugster, but hey, if I wasn’t into Quixotic pursuits I wouldn’t be writing opinion pieces on the internet.
Last month Krugman released a column entitled “Nobody Understands Debt“. The column adds nothing to understanding. The message is that the national debt is no big deal, and we should be spending more to deal with unemployment. This is absurd. Thankfully, He provides all the ammunition we need to prove him wrong in the column. He says governments can happily live with high levels of debt pointing out that “Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years.” He links to an older post with a helpful graphic, reproduced above. He “marvels” at how over-blown our current “debt panic” is.
With this particular post Krugman is either entirely ignorant of history, or just lying to his readers. Britain got away with its first period of massive debt because as first movers in the industrial revolution and victors in the Napoleonic wars they had a financial and military hegemony we can’t imagine. The US got closest to that kind of dominance after the second world war, which is the other period of high debt to GDP he references in the opinion piece. In each of their respective periods of victory, Britain and the US moved quickly to pay off their debts. In the second period of massive debt, Britain had to ration food for a full decade after World War II. With the Suez Crisis of 1956, Britain’s debt ended the country’s ability to act independently on the world stage in the most humiliating way possible. Krugman’s “Massive Debt’s just fine!” message is completely disproved by his own example. My sense is that he knows this, but doesn’t care.
Krugman makes much of the fact that we hold a lot of our own debt. This can cut both ways, however. We are not as insulated as he portrays us, but if we were we would have little incentive to clean up our fiscal act. This is not a good thing. Unsurprisingly, Krugman doesn’t bring up the most sterling (yen-ish?) example of an excessive debt-to-GDP ratio maintained by patriotic savers. The current Japanese ratio is over 200%
High savings were sustainable when the population was younger, wealthy, and growing. Instead, Japan is old, stagnant and saving less every year. That investors have repeatedly failed to short Japanese debt since the early 1990s doesn’t mean that Japanese debt is a good bet tomorrow. The country will eventually find itself in a financial catastrophe when the public stops lending money at floor-scraping 1.5 percent rates. Consider this alarming fact: If its interest rates doubled to 3 percent, interest payments would suddenly consume half of government revenue.
Japan may be able to continue like this for a while because 95% of their debt is held by patriotic locals. Nobody else wants it, for obvious reasons. Almost 50% of US debt is held by foreign investors. Ironically, the mess we’ve made of the international economy has been helpful over the past couple years. US government debt is still seen as a slightly better bet than everything else. The problem that Krugman doesn’t acknowledge is that it is an only slightly better bet, and that this won’t last.
Too sum up, Britain and the US were able to withstand excessive debt to GDP ratios after the Napoleonic Wars and after World War II. They were able to do this because they had bombed all their potential financial rivals into rubble. Europe today is in fiscal disarray, but it is not a smoking ruin. If Europe doesn’t fall apart, it will emerge as a tighter, more stable fiscal union, under stronger German influence. It will emerge as a ferocious competitor as a reserve currency and as a destination of international investment. When less people want our debt, the sky-rocketing interest rates Krugman laughs about in the beginning of the opinion piece will be a reality.
Debt matters. With this column Krugman ignores Europe. He ignores Japan. He ignores the history surrounding his own data sets. Either Krugman doesn’t understand debt, or he just doesn’t want you to. Paul Krugman has no idea what he’s talking about.
Rob Morris likes the drug war even less than he likes Paul Krugman’s commentary, and he talks about it here.