Nobel Prize-winning economist, liberal pundit, and saltwater Keynesian Paul Krugman might have paraphrased Cassius in Julius Caesar and intoned:  "The fault, dear Heritage Foundation, is not in our debts, but in our selves that we are stumbling," as he groused that "nobody understands debt" in his Monday column in the New York Times.[1]  --  And "the people [in D.C.] who talk the most [about debt] understand the least."  --  High unemployment is the greatest economic problem the United States faces, he said, and the "misplaced focus" of "our political culture" is and expression both of "how disconnected Congress is from the suffering of ordinary Americans" and of "our postmodern, fact-free politics."  --  What these people don't understand about government debt is:  (1) Governments never have to "have to pay back their debt. . . . all they need to do is ensure that debt grows more slowly than their tax base."  --  (2) Government debt is, for the most part, "money we owe to ourselves," not to someone else.  --  "[A]lmost nobody seems to get" this latter point.  --  "[E]very dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners," Krugman said.  --  "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."  --  BACKGROUND:  The best book we've read on money and debt is a little-known, quirky, self-confessedly "amateur and impressionistic" volume entitled Frozen Desire: The Meaning of Money (1997 U.K., 2001 U.S.) by James Buchan, the grandson of writer and statesman John Buchan.  --  Krugman can lament that "nobody understands debt," and we can complain that nobody reads James Buchan.  --  Buchan explains that the infamous John Law, who was the richest man in all of history for about 500 days in 1719-1720, was not really the fantasist or defrauder for which history has taken him, but a man far ahead of his time who was perhaps the first to intuit that, as he put it in Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705):  "Money is not the value for which Goods are exchanged, but the Value by which they are exchanged" (Ch. 6).  --  James Buchan argues that the U.S. Constitution was a Federalist coup d'état that ensured "the triumph of creditor over debtor, money over virtue and religion, commerce over liberty" (Ch. 7; take that, Ron Paul!).  --  "The issues of paper money [the assignats] by the French revolutionaries are . . . the revolution itself," but after Waterloo the British instituted the Gold Standard, called by Keynes "part of the apparatus of conservatism" that collapsed with World War I and its aftermath (and that Ron Paul would like to bring back).  --  In Buchan's view, "economics is not a science."  --  Taken to its logical extreme, in fact, he thinks it is murder and devastation; "the sensation of beauty cannot survive in the age of money:  for any beauty must be exploited . . . The sole aesthetic sensation of modernity is nausea" (Ch. 8).  --  Henry Adams, James Buchan points out, saw America dominated not so much by money as by the pursuit of money:  "The American mind had less respect for money than the European or Asiatic mind, and bore its loss more easily; but it had been deflected by its pursuit till it could turn in no other direction," he said in The Education of Henry Adams.  --  New York City's bustle is entirely "for money," and law and money are fundamental categories by which Americans "arrange their reality"; they delight in credit and do not build to last.  --  This is what makes Americans so credulous as to believe that "money [and markets] conveys knowledge"; in fact, "markets condense not knowledge but desire" (Ch. 10)....


1.

Op-Ed columnist

NOBODY UNDERSTANDS DEBT

By Paul Krugman

New York Times

January 2, 2012 (posted Jan. 1)

http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html


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 something else:  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, by and large 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 Obama took office for budget deficits to send interest rates soaring.  Any day now!

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.

But Washington isn’t just confused about the short run; it’s also 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 been borrowing.  They see America as being like a family that took out too large a mortgage, and will have a hard time making the 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 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.

But isn’t this time different?  Not as much as you think.

It’s true that foreigners now hold large claims on the United States, 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.  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.

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 and evasion.  But these costs are a lot less dramatic than the analogy with an overindebted 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 G.D.P. for 81 of the last 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 antitax 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.