Explaining Southern California's economy

Debt: It's not as bad as you think

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The National Debt Clock, a billboard-size digital display showing the increasing US debt, is seen on the corner of Sixth Avenue and West 44th Street on August 1, 2011 in New York City.

Paul Krugman does another one of his simple, straightforward Econ 101 columns in which he helpfully ridicules the idea that we're headed down a debt-paved road to ruin. He zeroes in on the tendency of commentators to compare the finances of families to the finances of governments:

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 G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

Borrowing from yourself, as a government (yes, the government is a representation of its people), does seem to be a difficult concept for folks to grasp. Krugman points out that the attractiveness of U.S. debt to foreign countries seeking a safe investment haven seems to be driving this. We owe all that money to China! 

Which is colossally distracting. Krugman counters this with the need for continued government spending to get growth and income expansion going again. At that point, the increase in the "tax base" will eliminate concern over the debt that we amassed to drive the increase. 

Debt scares people, because it can indeed get individuals in trouble. But governments have the luxury of thinking about it in entirely different and far less frightening ways. That is, when the governments are actually, you know, thinking

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