Paul Krugman's History Problem
The national debt divides America into two camps. One camp contends that the debt is a manageable, long-term problem and is not all that menacing. The other camp fears that the debt poses a serious, immediate and perhaps even existential threat to America.
Although former Treasury Secretary Paul O'Neill claimed that in 2002 Dick Cheney said that "deficits don't matter [page 56]," the first camp is mainly composed of progressives. Their spiritual leader is one Paul Krugman, columnist for The New York Times and said by some to be an economist. The tacit proposition in one of Krugman's recent columns, "Nobody Understands Debt," is that only he, Krugman, and perhaps a few of his acolytes, truly understands debt:
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.
Is it really true that governments don't have to "pay back their debt"? Not if they want to continue to sell their bonds. What Krugman may be referring to is that governments roll over their debt. That is, governments can sell new bonds to pay off their old bonds. But that depends on having buyers for their debt, which they won't have if they actually don't "pay back their debt." (Given the Obama administration's penchant for coercion, maybe Americans will soon be required to buy U.S. bonds, just as they will soon be required to buy health insurance.)
But, if there are no buyers for a government's bonds, then that government can (if it has its own currency) "print" new money to pay off its maturing bonds. And that's a big part of America's debt problem: the Federal Reserve's "funny money." Without the Fed to create more fiat money, Congress wouldn't be able to spend as it does.
As for the debt incurred by World War II, one could also say that the debt incurred by the Great War, World War I, was also "never repaid," as America has never retired all her debt. However, some of the debt from WWII was repaid, as immediately after the war Congress began to run surpluses. In fact, the total surplus for 1948, +$11.796 billion, would remain the largest total surplus for the next 50 years, while that year's on-budget surplus is the second highest in history (Table 1.1 of OMB's Historical Tables).
Congress ran seven surpluses from 1946 through 1960. And looking at Table 7.1, we see that both the gross debt and the public debt went down several times in that 15-year span. Moreover, Table 7.1 indicates that the gross federal debt at the end of fiscal 1946 was a cool $270 billion and at the end of 1960 had made it all the way up to $290 billion.
So we had a run-up in the gross federal debt of $20 billion over 15 years. And Krugman thinks we're supposed to think that that's "analogous" to today's spending, when we've seen jumps in the gross debt of more than a trillion dollars each year since 2008, which was the year the Democrats passed their first budget after regaining control of Congress. In fiscal 2009 alone, the gross debt went up nearly $1.9T.
Krugman couldn't have chosen a worse era from the last century to compare ours to, except the 1920s when Congress ran a surplus each year. And in both of those postwar eras, the economy soared when Congress did the exact opposite of what Krugman has been advising -- they balanced the budget and paid down the debt.
Congress stabilized the national debt after "the Big One," WWII. But now that today's wars are winding down, we see no such stabilization, no peace dividend. Instead, we see massive deficits for years to come. So there's no analogy to be made. And more to the point, Krugman has been calling for even more deficit spending -- the stimulus was too small, you see.
In 2010, Admiral Michael Mullen, former Chairman of the Joint Chiefs of Staff, said: "The biggest threat we have to our national security is our debt." Obviously, the U.S. military has better economists than does the civilian side of the government, not to mention The New York Times and Princeton University. What voters need to decide before Election Day is who's right: Admiral Mullen or Krugman.
Mark Steyn's recent article, "The Sun Also Sets," might help folks make that decision. Its blurb is: "Our national bankruptcy is about to enter its 'sudden' phase."
I was in Australia earlier this month and there, as elsewhere on my recent travels, the consensus among the politicians I met (at least in private) was that Washington lacked the will for meaningful course correction, and that, therefore, the trick was to ensure that, when the behemoth goes over the cliff, you're not dragged down with it. It is faintly surreal to be sitting in paneled offices lined by formal portraits listening to eminent persons who assume the collapse of the dominant global power is a fait accompli. "I don't feel America is quite a First World country anymore," a robustly pro-American Aussie told me, with a sigh of regret.
Steyn has more sense about debt than a wilderness of Krugmans. (All this year, I've had a short video up at my blog of Steyn dilating on debt. I plan to keep the video up through the election, but you can watch it here, too. There are some hijinks at the beginning, but it quickly gets serious. You might also catch Steyn's Happy Warrior columns in the print issues of National Review.)
Krugman thinks America's bigger problem is unemployment, not government debt. So consider the worst that could happen from each of these evils. If unemployment were to stay high, government would continue to feed and house the jobless. But we've been doing that for decades and it hasn't destroyed the republic. Indeed, we seem to have a permanent underclass that lives off of public assistance.
But unlike unemployment, the ultimate price of out-of-control government spending and money "printing" is not something America is familiar with. For that we have to look to other nations and to history. And what we see is national ruin. If the choice is between difficulty and ruin, then there is no choice.
Jon N. Hall is a programmer/analyst from Kansas City.