Sunday, August 30, 2009

Growing Our Way Out

I am not a PhD economist with a Nobel Prize in the subject, so perhaps the idea of me taking on Paul Krugman is a bit nonsensical. Well, “perhaps” nothing, it is nonsensical, but that isn’t going to stop me from doing it, because I think he has nosedived into theory at the expense of logic, and is coming up with fallacy.

In a post on Aug 28th he points out that,

“…in 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.”

He goes on to point out that the debt did not shrink because we paid it off, it shrank as a percent of GDP because the GDP grew enormously. His implication, in this post and in earlier ones, is that the size of national debt doesn’t matter; what matters is the amount of debt as a ratio to the overall economy. I’m not as sanguine as he is, but we’ll accept his postulate.

That initial debt was right after the end of WW2, when much of the world was devastated by the most destructive war in history. Growth in demand for product has got to be utterly phenomenal in a world that consists in large part of rubble, so it’s hardly surprising that the GDP grew at a very rapid clip. “Growing out of debt” was pretty easy in that environment.

In a post on Aug 30th he begins a post by saying that comments had raised two objections to his breezy “grow our way out of debt” idea, one being that the “baby boom” introduced a new boost of production and the other that WW2 had left the rest of the world and our competitors, in ruins.

“Let me explain why both objections are off point.” He says, and for the second point merely rebuts with,

"What about the way the war left our competitors in ruins? Well, yes it did — but it also left our markets in ruins."

Well, that’s rather my point; a market in ruins is a market with the very highest level of demand. Growing from zero makes fast growth a lot easier than growing from an already huge economy, with markets that are full of stuff. Furthermore, growing with little or no competition from the rest of the world is a lot easier than growing with competition from a Unified Europe, and from India, Brazil, China and to no small degree Russia. Lastly, growing when the world’s natural resources are largely untapped is a lot faster than trying to do so when they are increasingly tapped out.

Finally, while I do not decry the claim the climate change presents economic opportunity and that there is job growth and money to be realized there, it is unquestionably true that climate change presents enormous challenge as well and will seriously hinder a major portion of our economy in coming years.

Just because we did it half a century ago, in a vastly different environment, is no assurance that we can do it now. I am a lot less sanguine than Dr. Krugman that we can spend like drunken sailors and blithely count on “growing our way out of debt.”

We won't mention that in 1950 that debt, at 80% of GDP, was held for all practical purposes entirely by American investors, while in 2019 a significant portion of it will be held by foreign concerns. I'm not sure what,
if any, difference that makes; but...

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