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The Northerner Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-01-09 03:22 AM
Original message
Krugman: Deficit hawks trying to scare people with big, out-of-context numbers
Edited on Tue Dec-01-09 03:22 AM by The Northerner
On ABC's This Week, host George Stephanopoulos asked Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, about the argument that the nation's rising debt level may lead to "a major weakening of American power." Krugman responded:

KRUGMAN: You know, first thing to say is people are putting their money where their mouth is, which is the bond market. Things were fine. You know, the U.S. government is able to borrow long-term at 3.3 percent interest rate. So, obviously, you know, the market is not convinced.

Now, the market has been wrong. But, then if you do the arithmetic, these numbers look huge. The American economy is huge. The debt burden, even after five years, is going to be well below as a share of GDP well below levels that lots of industrial countries have reached in the past, including ourselves after World War II, when we were able to handle that just fine. <...>

We're not going to hit 100 percent (of GDP in debt) until a decade from now. And countries have gone above 100 percent. I mean, if you actually ask about the interest cost, particularly inflation-adjusted interest cost, you know, we're now paying 1.2 percent real interest rate on federal debt. Even if you add 50 percent of GDP in debt, which I don't think is going to happen, that's still only a fraction of a percent of GDP in additional debt service costs.

Washington Post columnist George Will, a vocal deficit hawk, pushed back: "But even unreasonably cheerful assumptions about economic growth and interest rates, we're apt to be spending in 10 years $700 billion a year servicing our debt."

Read more and watch the video at:
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IrateCitizen Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-01-09 11:17 AM
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1. You can't compare the US after WWII with the US today
Then we had over 50% of the world's industrial capacity and an expanding economy based upon export-driven growth. That, more than anything, allowed us to pay down our debts and become the world's largest lender (a role we took over from the British).

Today we have a much smaller share of the world's industrial capacity (and that is shrinking), along with an economy based upon consumption. The mammoth trade imbalance needs to be factored into this, as well as the fact that we are now the world's largest borrower (China has taken over our previous status as lender).

George Will may be a horse's ass, and he, like most other "deficit hawks" suddenly changes his tune when the subject of "defense" spending comes up, but that doesn't mean that Krugman is necessarily right on this issue.

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phasma ex machina Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-01-09 05:26 PM
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2. It becomes clearer to me that America's post WWII economy was the spoils of winning a world war. nt
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IrateCitizen Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-01-09 10:52 PM
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4. Well, sorta.
I think it had more to do with the fact that none of the fighting took place on the American mainland, so while all of Europe, Russia and Japan's industrial capacity was significantly bombed out and blown up, ours came through untouched.

It also helped that the British Empire was undoubtedly in the final stages of its decline as the world power, and we were closely allied with that world power. Therefore, the transition of global influence proceeded without much difficulty. Of course, there were problems in the confrontations and competitions with the Soviets as the Cold War unfolded, but the threat of mutual nuclear destruction seemed to keep both sides in check.

The more I've learned about American History, I feel like, as a nation, we kind of fell ass backwards into global imperialism. It's something that has inhibited our ability to maintain it as well. Please note that I'm not making a value judgment on it, I'm just saying that the way in which we acquired our global empire left us, compared to European colonizers, soft. The US has always had a certain sphere of influence, especially within the Western Hemisphere. But we never were able to establish something on the order of the British Empire, the key pieces of which kind of fell into our collective lap. It's also why, from a realist perspective, I feel like we need to get the hell out of the places we're becoming stuck in -- because we really are not willing (thankfully) to do the kind of long, bloody, violent, brutish work that is required to maintain a foreign occupation, especially in a region with a violent, tribal history such as the Middle East. And that doesn't even begin to assess the capital costs to maintain this imperial enterprise.
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JohnWxy Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-01-09 07:06 PM
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3.  our low tax rate has something to do with our debt.
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