Debunking Mr. Krugman’s Debt-GDP Defense
Paul Krugman just did a piece defending deficit spending. He argues that while $9t seems like a big number, it’s very manageable as a percent of GDP. In his words:
“Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II.”
A chart like this seems to support his case at first:
There are two glaring flaws with Mr. Krugman’s argument, however. The first is that total US debt has increased dramatically, and is far higher than any other time in history. At the end of WWII, consumers didn’t have $50k credit card balances and underwater mortgages worth 20x their annual salary. Companies weren’t nearly as highly leveraged as they remain today.
Is GDP Indicative of a Country’s Ability to Pay off Debt?
Krugman states, “What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion.” (added 8/24/09 for clarity).
But does GDP really indicate federal tax base? How much does a debtor country’s GDP really say about their financial health? Fifty years ago, GDP included our strong manufacturing base. Today it includes massive government entitlement programs, war, and financial products that provide zero real value to the economy. In 2007 financial services represented 40% of corporate profits in America. Will medicare, social-security, the War on Terror, CDS, and CMBS increase productivity and pay the bills? Hell no.
Examine this chart showing Government Spending as a % of GDP:
The trend is clear. Government spending has steadily increased as a percentage of GDP. The picture will worsen considerably as baby-boomers retire, putting pressure on Medicare, Social Security, pensions, etc. QE and bailouts have really only just begun.
Inflation seems inevitable with this much debt, and a full pipeline. We’re reflating the bubble temporarily, and if it works, the Fed’s job is to reign in all the money that “saved” us. They won’t, can’t. Those who think we’re going to get out of this mess by cutting expenditures and raising taxes will be proven wrong, I think. See Flaws in the Deflation Case for more on that.
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This guy claims to be debunking Krugman’s post here. It is spreading fast on twitter and at first read it makes sense, until you read it again and think about it.
On his first point I think he’s just plan silly….he’s confusing macro economic matters with micro economic issues…in other words PK is talking about Federal Debt and this guy is talking about credit cards and home loans.
The rest of it is a little wonkish and I Hope PK will debunk the fake debunker because this is spreading fast on twitter!
How is credit card debt and underwater mortgage debt not macroeconomic when taken in the aggregate?
The point is stupid simple: America is consuming far more real value and resources than it produces, and is going into debt in order to do so. This is not sustainable.
Unfortunately PK is an ideologue not an intellectual. I was all for his initial attempts to take on the Bush/Obama administration’s blatant favoritism toward the financial industry to the tune of billions of taxpayer dollars and the billions more being stolen every day by the steepening yield curve the banks are enjoying right now. But after having dinner with Obama, he suddenly changes his tune. Only a fool will miss the significance of the chart showing total consumer, business, and government debt at excess of 350% of GDP. Totally eclipsing the mark in the 250% set in the Great Depression. Debt at these levels is going to be a millstone around our neck until dealt with.
It matters, too, what the debt bought. In WWII, it bought freedom for much of the world and placed the United States at the apex of the free world. What are we buying with our debt today? Not jobs, not a manufacturing base, not new markets, not good will, and probably not more than a temporary reprieve from the consequences of our affair with Bad Money.
[...] Right now our total credit market debt stands at 350% of Gross Domestic Product or GDP for short ( source with charts). If you are unaware of what GDP means, just think of it as the total amount of revenue our economy [...]
at the end fof WW2 USA had lots of worldwide goodwill, a strong manufacturing base that was the envy of the world & an accepted & respected financial system run by real investors, businessman & brokers.
today they have none of the above. unless they start balancing their financial & manufacturing /consuming act it does not need top economists to technically analyse graphs & predict what’s in store. anybody with an iota of intelligence can predict what’s over the horizon. another serious problem is that the mainstream media seems completely detached from reality for whatever reason. maybe they are scared of the US govt. it’s a real pity considering that the USA champions free media. the people also seem to have completely lost the will to protest. if this kind of deliberate & planned wealth confiscation happened in any other country there would have been massive riots.
without any doubt the biggest damage is that the world has lost it’s confidence in the USA government & financial system. they see USA govt & financial system as a trigger happy & crooked mafia that has been on the loose for too long.
a runaway train that has now lost all its brakes.
The plot is incorrect.
This has been discussed in detail elsewhere:
http://philsbackupsite.wordpress.com/2009/02/06/