AIER: Paul Krugman Is Wrong on Gov Debt

The American Institute for Economic Research has up an article on why economist Paul Krugman is wrong when he says that government “debt is money we owe to ourselves” and therefore not anything to worry about.

Krugman’s Zombie Idea: We Owe It to Ourselves

Paul Krugman coined the term “zombie ideas” to describe “policy ideas that keep getting killed by evidence, but nonetheless shamble relentless forward, essentially because they suit a political agenda.”

Krugman has revived one of his favorite zombies: the notion that high government deficits aren’t dangerous in the way that an individual incurring heavy debt is because the national debt is “money we owe to ourselves.” He doubled down on his claims in response to an article comparing the dangers the debt poses to future generations to climate change.

Krugman has repeatedly written on this topic at his blog (see here and here). It was a common refrain of his during the Eurozone crisis and in the aftermath of the Great Recession when there was a bipartisan push to cut future deficits to prevent future Greek-style debt crises.

As with most myths, there is a grain of truth to the claim. National debt does differ from the debt individuals and households incur in a few notable ways. Individuals have a finite lifetime to incur and repay their debts. Governments don’t; they can pass debt onto future generations. So long as people are willing to lend it money and the government can service debt as it comes due, government debt can persist in perpetuity. And to the extent that the debt is owned by domestic citizens, the money that is used to repay the debt needn’t leave the economy.

That said, this grain of truth doesn’t eliminate the ocean of evidence against Krugman’s claim that worrying about the burden the national debt might impose on future generations is nonsensical. Here are some reasons why this argument is fundamentally flawed.

A large share of the national debt is owed to foreigners

For starters, it’s not the case that the national debt is entirely owed to “ourselves” (i.e., that it is exclusively owned by US citizens). Nearly one-third of the US debt ($6.636 trillion of the $22 trillion in debt) is owned by foreign governments and international investors.

This isn’t necessarily a bad thing. The willingness of foreigners to lend to the U.S. government has helped keep Treasury rates at historical lows, making it cheaper for future taxpayers to repay the interest on the national debt. If the US government is running deficits to finance justifiable initiatives (say, fighting World War II) and spending programs that will boost future growth, we should welcome funds from investors regardless of their nationality.

Nevertheless, it undercuts Krugman’s case that repaying the debt won’t burden future taxpayers and the future economy on net because the money will “stay in the U.S. economy.”

The fallacy of “we” and the reality that future taxpayers really do “foot the bill”

A bigger problem is that Krugman commits what Don Boudreaux calls the “Fallacy of Us, We, and Our.” Even if the entire national debt is owned by US citizens, there is no real sense in which “we” owe the debt to “ourselves.” The individuals incurring and benefitting from the debt are entirely different from the individuals who must bear the burden of repaying that debt.

Once we move past the intellectual sleight of hand of using collective pronouns like “we” and “ourselves” to describe all Americans across time, we get a much clearer picture of who gains and loses from the national debt.

Current taxpayers and citizens clearly benefit; they receive the benefit of increased government spending without incurring the full cost of those expenditures. Future taxpayers and citizens, who will have to repay the debt as it comes due, are clearly hurt. They have to pay higher taxes to repay the debt incurred and owned by the prior generation.

This insight remains true even if the older generation sells them its bonds before they pass. As James Buchanan astutely noted decades ago, future generations first have to buy these bonds from the prior generations. And, in order to buy them, they must first reduce their consumption. It is that reduced consumption — not the higher taxes they’ll have to pay when the debt is retired (since, by assumption, that money will flow right back to them as bondholders) — that is the true cost imposed on future generations from government debt.

Government debt “crowd outs” private investment and creates deadweight loss

The “we owe it to ourselves” argument also glosses over two of the most important arguments for why deficit spending is not a free lunch for taxpayers or the future economy.

First, deficit spending crowds out private investment…

Click here to continue reading at AIER.org.

AIER: The Obama Film “American Factory” Backfires

The American Institute for Economic Research has up a short article discussing the film American Factory which was perhaps meant to be about workplace culture clashes or the diminishment of wages and benefits when there workers are not unionized. The AIER contents that it is instead a “damning snapshot of American labor entitlement.”

Higher Ground, the production company founded by Michelle and Barack Obama, has released the first of a planned seven-film series on Friday. American Factory chronicles the opening of a Chinese factory near Dayton, Ohio, where a GM plant closed in 2008. It’s reasonable to suppose that the point was to alarm us about the wiles of global capitalism. Oddly, the film might have the opposite effect on many viewers. It certainly did for me.

The documentary opens with a prayer on the day the plant closes as tearful workers see the last vehicle come off of the production line. A few years later, Fuyao Glass announced its intent to open a glass-production facility in the shuttered facility. One of our first glimpses is of a question and answer as American employees of the Chinese firm speak about the goals of the firm to prospective employees: they plan to employ several thousand people in all capacities, but mostly blue-collar work of the type that disappeared when the local GM plant shut down. One prospect asks if this will be a union shop. No, he is told. The plan is to be non-union…

nitially, the woman who has been living in her sister’s basement has moved into an apartment. She extols her reacquired independence. Other employees bemoan their non-union pay and conditions but seem contented; they or friends and family have lost houses, have seen communities torn apart, and know firsthand the double impact of the so-called Great Recession and increasing competition from China. But even that wears off over time.

The work is sometimes dangerous, and the pay is lower than many of the workers have previously received, and before long thankfulness is replaced by myopia. Despite the company’s warnings, there are rumblings about unionization, and a United Automobile Workers agitator is caught walking through the private workspace with a “Union Yes” sign held aloft. The ineffectiveness of American managers to quash the unionization efforts leads to their sudden termination, and the Chinese CEO threatens to close the plant if it continues.

The same workers who, a short time before, were deeply appreciative of their unlikely bounty then begin to badmouth the company. Some are meeting secretly with union officials. Ultimately employees hold a vote, and the result is somewhat surprising.

There are two particularly telling moments in the film. In one, a Chinese manager teaches a class on how to deal with Americans, whom the Chinese line employees are training. Americans, he explains, need constant encouragement. It’s a hilarious and somewhat cringeworthy section…

 

Click here to read the entire article at AIER.

 

AIER: The Real Problem Is the Politicization of Everything

Kai Weiss at the American Institute for Economic Research has a nice, short article on the problems of over-politicization and the solution thereto – The Real Problem Is the Politicization of Everything. Unfortunately, at least one of the sides will reject the idea of a less-intrusive state.

…This is a problem the great C.S. Lewis also saw when he mused that we should focus on “a household laughing together over a meal, or two friends talking over a pint of beer, or a man alone reading a book that interests him.” Meanwhile, “economies, politics, law, armies, and institutions, save insofar as they prolong and multiply such scenes, are a mere ploughing the sand and sowing the ocean, a meaningless vanity and vexation of the spirit. Collective activities are, of course, necessary, but this is the end to which they are necessary.”

So what is a possible way out of this conundrum? A multitude of proposals have been made to detoxicate today’s climate, and it would frankly be pretentious for me to claim to know the solution. Nonetheless, one surefire way, as friends of liberty will quickly point out, is to get politics out of our lives. As Kristian Niemietz notes, “The most obvious antidote to a dysfunctional, adversarial political culture is just to do less politics.”

What does that require? It necessitates a dramatic reduction in the size and scope of the state, the building of a wall between the state (so long as it exists) and the rest of our lives, and the restoration of the conviction that society works best when it is left alone. In other words, we need desperately to resurrect the vision of classical liberalism and draw lessons from its modern heirs in the libertarian tradition…

To regain civility in human interactions and finally treat other human beings as human beings again, we would do well to get politics out of human affairs.

Click here to read the entire article at AIER.org.