Thursday, January 5, 2012

Professor Krugman, Debt DOES Matter

I used to like to go to work, but they shut it down
I got a right to go to work, but there’s no work here to be found
Yes, and they say we’re gonna have to pay what’s owed
We’re gonna have to reap from some seed that’s been sowed
—Dire Straits, Telegraph Road

In his latest installment of I Never Met A Dollar I Couldn’t Borrow And Spend, Paul Krugman again argues for more government debt to finance a never-ending orgy of government spending.  For the good Professor, government debt is different than other debt because, in his world, governments don’t really have to pay it back.

That’ll come as news to the Chinese.

First, as I’ve tried repeatedly to point out in this space, the only money government can spend—whether directly, or in paying back money it borrowed from elsewhere—is money it takes from its citizens.  There can’t be any “stimulating” effect, because the money the government purports to inject into the economy is money the government took out of the economy in the first place, a fundamental point even Krugman concedes, albeit while continuing to deny the obvious policy implication. 

And one really need only look at federal spending over the last five years to see that it doesn’t work.  We have gone from about $2.7 trillion for 2006 (19% of GDP), to over $3.5 trillion for 2010 (24% of GDP) and $3.8 trillion for 2011, yet we face the same question Ronald Reagan immortally posed back in 1980:

Are you better off than you were four years ago?

The fact is we have increased federal spending by a trillion dollars—36%—over the last five years, and the economy remains at best stagnant; virtually zero growth, and unemployment stuck for three years running essentially at (or above) 9%.  Of course, the Krugmans and Obamas of the world never say exactly how much spending is enough, conveniently allowing them when it predictably fails to fall back on the saw that we just haven’t spent enough yet.

Leaving aside the debate over the long-dead John Maynard Keynes, Krugman’s main thesis is that government debt isn’t a problem because governments don’t have to pay that debt back.  First, he says, the federal debt is one we largely owe to ourselves, which is itself a dishonest semantic game, and in any event irrelevant.  The federal debt isn’t one that the United States as a political entity owes to itself and thus it simply cancels itself out, as Krugman implies; it’s a debt the United States owes to, among others, specific individual Americans.  In other words, it’s not a debt we all owe to all of us, but a debt we all owe to some of us.  But whether the creditor is an American citizen or the Chinese government, there’s a larger question of who we want to be as a people:  Do we really want to borrow money with the specific intention of never paying it back (what in some places is called “stealing”)?  Is that how we want to conduct ourselves? 

Somehow I thought we were better than that, and I think men like Jefferson and Franklin did, too.

But it doesn’t matter to Krugman, because at 100%+ of GDP, the federal debt is actually less than the debt incurred to finance World War II, and what a great thing that was.  What Krugman doesn’t tell you is that the immediate post-war period and right now are the only times in our history that the federal debt has ever exceeded 100% of GDP.  Other than those two peaks, federal debt since WWII has hovered around 50% of GDP—roughly half the current level—and for the 140 years prior to the Great Depression it fluctuated between 0% and about 40%.  The fact is that debt levels of the current magnitude are new and essentially unique in our experience.  The E.U. and Japan have already shown us the ultimate consequences of this kind of debt/spending, and it isn’t pretty.  When Krugman has to hold up Great Britain as his poster child for the economic benefits of excessive government debt, he basically makes the point for me.  

But the real reason Krugman says governments don’t have to pay back debt is that, as he tells it, all they really have to do is keep growing the tax base.  In other words, as long as there are more people to pay taxes tomorrow than there were yesterday, government revenues grow, yesterday’s debt gets serviced (i.e., the interest gets paid), and it’s all OK. 

Alex, who is Charles Ponzi

The problem is that Krugman’s underlying premise that the tax base will in fact forever continue to grow is deeply flawed.  The Social Security Administration has concluded that very soon there will be too few people contributing into the system to continue to support it at current taxation and benefit payout levels.  That alone suggests that the group of payors—the tax base—isn’t growing fast enough.  But let’s consider the broader numbers.  A March 31, 2011 Congressional Research Service report tells us that the 2008 fertility rate of 2.08 per female is below replacement level (the birth rate statistically necessary for a population to sustain itself), and that other than 2006 and 2007, U.S. fertility rates have been below replacement level every year since 1971 (contrast that with the immediate post-WWII era, when the rate peaked at 3.77 in 1957, well above the replacement level).  What this means is that for the last 40 years, without net immigration, the population level—which ultimately must impact the size of the tax base—hasn’t even treaded water.  This is much of the problem in Europe, where declining populations have left fewer and fewer taxpayers to support the ever-increasing government debt/spending edifice.  Further, that same CRS report tells us that not only is the indigenous population getting smaller, it’s also getting older and poorer; not exactly the recipe for an ever-increasing tax base.

The tax base growth upon which Krugman depends must, therefore, come from immigration.  Well, is our net immigration comprised of hoardes of wealthy people who earn incomes likely to support significant additional tax liability? 

Um, not exactly. 

According to the CRS report, the leading regions for net immigration are North America (read: Mexico, Cuba, El Salvador, Dominican Republic) and Asia, which combine for nearly 70% of the total.  Hispanics (25.3%) and Asians (12.5%) had significantly higher poverty rates than did non-Hispanic whites (9.4%).  This isn’t a comment on immigration policy, but simply highlights the statistical reality that the immigration driving U.S. population growth is comprised largely of people who are less likely to add to the tax base than they are to draw from the system. 

Krugman ignores this reality.  What happens when there’s no longer enough base growth to service the debt?  Does Professor Krugman expect those who are owed the money—whether it’s the Chinese or ordinary Americans holding savings bonds—to just eat the loss?  Not bloody likely.

Krugman also misses—or deliberately ignores—the fundamental point that this is ultimately about liberty.  Every dollar the federal government spends is a dollar it must forcibly take from its citizens.  Every government program is yet another set of rules whereby the federal government tells you what you can and cannot do.  Every time we increase spending and increase government, we give up just a little more liberty, and at some point—if we’re not already past it—the Beast will be so large we can never get it back.

What then, Professor?

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