Paul Krugman needs to drop his unhelpful gamesmanship with public debt
OK. So I think it’s time for my quarterly criticism of our leading “conscience of a liberal”, that gatekeeper of our leftmost pole of acceptable mainstream opinion, Paul Krugman.
He’s written two new posts on perhaps the most important topic in today’s political economy – public debt. Krugman’s continuing problem is that he utterly fails to draw the simple logical conclusions that would provide the quantum jump we need to move out of our quagmire. He offers tweaks but no real opportunity. His goal is to make more public debt palatable; the true progressive’s goal, in contrast, must be to make the very concept of public debt a triviality.
In his first post, he poses this hypothetical:
Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh).
This is almost certainly false in any reasonably realistic real world condition and his “common sense” ascertain has greatly adverse political consequences. Suppose the old folks received newly minted cash instead of bonds. Given the normal economic state of things – unused resources and high un / under employment – why would we think the under 65’s would be made poorer? The money would be spent, after all, and would provide quite a few jobs. The over 65’s consumption would rise but the under 65’s wouldn’t likely fall and would probably even increase due to the rise in jobs. This is a critically important point as so much of our politics is limited by the illusion that everything has a cost. (I wrote a post on this very subject the other day.) Krugman is accepting a zero sum logic which has no basis in a high productivity economy where potential supply, except during times of war, is almost always greater than the monetary ability to purchase. Suppose the money was given instead to contractors to build a new train system. Would non-contractors be worse off for it? Highly implausible. Unless the global system were operating at close to maximum capacity, which it so obviously isn’t, the idea that the increased consumption of the contractors would somehow eat into the existing consumption of others is unreasonable in the extreme.
But is a bond different than currency? The only difference one can think of is that it usually tends to carry an interest rate. Krugman highlights the transfer nature of this phenomenon but again doesn’t draw logical conclusions.
Suppose that instead of gifting seniors with debt, President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?
The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed.
OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.
Krugman is obviously correct that society as a whole is not poorer for this transfer arrangement. But why not go to the logical conclusion that debt is just not the right word for intra-societal transfers; that it’s completely illogical to suppose society can ever be in debt to itself. If we accept this seemingly obvious truth, then decisions to distributionally favor one group over another via transfers is clearly seen as something purely political. Suppose again that in the real world of unused resources, we decide to build a train system. Fine and good, everybody’s happy and no one’s consumption declines – most actually see an increase. Why then entangle this new spending with a politically motivated wash transaction of “debt” or taxes, i.e. the requirement that one group (something more like B through Z in the real world) make future transfers to another (A)? It makes no sense; a real world activity – building a train system – is strangely intertangled with an unrelated politically motivated decision to transfer resources from one group to another. This illogical ideology has horrible consequences in our warped political universe, the result usually being that that the train system isn’t built in order to avoid the (completely unnecessary) transfers.
Krugman sort of, kind of argues that debt is not really a problem but he argues it to support a conclusion that ever more of it should be accepted; an unhelpful politically futile idea that completely misses the fantastically powerful reality that there is no such thing as societal debt.
In the second post, he ventures into the world of foreign debt. His conclusion is:
… that when we’re trying to assess the burden or lack thereof of debt, foreign ownership of government debt doesn’t really matter. What does matter is our net international investment position, the value of the overseas assets owned by all domestic residents minus the value of all domestic assets owned by foreign residents.
His first sentence is correct but he falls flat on the second, which doesn’t make sense, at least if one looks at it from the perspective of the vast majority of the country – say the bottom 80% which owns just 7% of financial wealth. The question then becomes something like whether it makes a twit of difference to a worker if the employer is a foreign or domestic corporation, or whether the mortgage on the home is held by JP Morgan Chase or UBS, or whether the currency is held largely by foreign or domestic tycoons. I’d say it makes absolutely no difference; the worker’s “net investment position” is always exactly the same – insignificant or negative, endless labor is required every day until old age, and insecurity reigns. The problem is class and not nationality.
In summary, the problem isn’t public debt be it foreign or domestic. Societal debt just doesn’t exist – only transfers, inequality, and power. The real problem is the strongly repressed ability to exercise collective action, call it democracy. Societal debt can’t exist; Krugman has to know this but won’t go there. There’s no law of nature that those of letters B through Z need to incur transfer burdens to the A’s of the world; it’s purely political. To argue in favor of these transfers, as Krugman basically does, is exactly the opposite of what a progressive should do.
Krugman needs to drop his unhelpful gamesmanship with public debt.