KRUGMAN: National debt is nothing like a family debt

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about the allegedly urgent issue of reducing the budget deficit.

This misplaced focus said a lot about our political culture, in particular 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, they have no idea what they're talking about ? and the people who talk the most understand the least.

Perhaps most obviously, the economic "experts" on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Barack Obama took office for budget deficits to send interest rates soaring.

And while they've been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts ? that is, you might think that if you didn't know anything about our postmodern, fact-free politics.

Washington also is confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem's size.

Deficit-worriers portray a future in which we're impoverished by the need to pay back money we've borrowed. They see America as being like a family that took out too large a mortgage, and will have a hard time making its 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. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second ? and this is 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.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of GDP, than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds.

The debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history.

But isn't this time different?

It's true that foreigners now hold large claims on the U.S., including a fair amount of government debt.

But every dollar's worth of foreign claims on America is matched by 89 cents' worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors.

Now, the fact that federal debt isn't at all like a mortgage on America's future doesn't mean that the debt is harmless. Taxes must be levied to pay the interest, and you don't have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance. But these costs are a lot less dramatic than the analogy with an in-debt 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 past 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.

Of course, America, with its rabidly anti-tax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

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.

THE NEW YORK TIMES

Source: http://www.modbee.com/2012/01/05/2013214/national-debt-is-nothing-like.html

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