Saturday, February 6, 2010

Should the Deficit and National Debt Worry Us?

In continuing comments on Paul Krugman's February 5 column, I now turn to this statement that he makes:

...there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

As reader Bill Ott reminds us, we still are dealing with devastating numbers. I will quote what he sent me, and I think you will agree that once again, Krugman is not being an economist, but rather a partisan political shill:

My view is that this is a huge deal. The current $450 billion interest payment would normally reside in the hands of tax payers instead of investors. I guess the immediate needs of tax payers will have to wait for the less immediate needs of large investment companies. I realize that Krugman does not believe the "Broken Window Fallacy" so to him it is just money we pay to ourselves. Even assuming the Broken Window Fallacy is completely and totally false, there is still money sent to foreigners in that interest payment.

Does Krugman have any idea of how much capital leaves the country to foreigners? That is $450 billion x .23 = 103.5 billion. With $103 billion you could buy the output of the entire state of Utah! Or that is $103.5 billion / 300 million = $350 per person per year going entirely to foreigners. So every American loses $350 of REAL SAVINGS each year. I find it sad that the $350 of interest per year could provide a small nest egg for the individual Americans and tens of thousands of US jobs in the aggregate when it goes to funding jobs and economic opportunity for the citizens of China, Japan, The Arab Emirates, etc.

This dovetails nicely with the point I made in an earlier post about equating government borrowing to business borrowing. In Krugman's Keynesian view, there is no structure of production, only an amorphous blob known as an "economy." Whether or not spending is the result of borrowing or just printing money, the only thing that matters is spending.

In that view, government borrowing literally has no different effect than does business borrowing. Any serious look at the two will reveal a huge difference that supposedly an economist, of all people, should understand.

(Thanks to Bill Ott for his comments. If any readers have comments that point out things I have missed, please send them my way!)

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