Krugman on Why Politicians Don't Get Debt

For much of 2011, politicians have been squabbling over how to pare the U.S.’s deficit. But Paul Krugman says they’re misguided in doing so.

“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans,” the Nobel laureate economist writes in his New York Times column. “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 — and the people who talk the most understand the least.”

Krugman says that deficit hawks “see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.” And that, he says, is flawed logic. For one thing, he says, governments don’t need to pay back their debt — “all they need to do is ensure that debt grows more slowly than their tax base,” he writes.

Secondly, Krugman says the national debt is “to a large extent, money we owe to ourselves”. That’s how it was when debt skyrocketed to finance World War II — which was followed by an economic boom — and its how it is today, despite the belief that most of the U.S. debt is owned by foreigners. “It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt,” Krugman says. “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. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.”

Krugman says that debt does matter. But, he adds, right now other things should matter more. “We need more, not less, government spending to get us out of our unemployment trap,” he says. “And the wrongheaded, ill-informed obsession with debt is standing in the way.”