A deficit of insight about debt

last updated 8 January 2015

Paul Krugman

The New York Times

Politicians and pundits who harp about the deficit being dangerously high are deeply confused, said Paul Krugman. They often compare America and its debt to a family with a mortgage it cannot afford. This is a “really bad analogy” in two ways. Unlike a family, the government doesn’t have to pay back debts as long as they “grow more slowly than the tax base.” Our debt from World War II, which was bigger than today’s as a percentage of GDP, “was never repaid”; it “just became increasingly irrelevant” as the postwar economy—and with it, tax receipts—boomed. And while an indebted family owes money to someone else, U.S. government debt is mostly “money we owe to ourselves.” Countries with “stable, responsible governments” manage debt by imposing “modestly higher taxes when the situation warrants it.” Unemployment today is a far bigger problem than the deficit, and we need to spend to fix it. But Washington’s “wrongheaded, ill-informed obsession with debt is standing in the way.”