In his NY Times op-ed today he mentions that “in 1946, the United States, having just emerged from World War II, had federal debt equal to 122 percent of G.D.P.” He adds that by 1981 it was down to 33% of G.D.P.
So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.
He assumes that doubling a national economy is an infinitely possible process; having doubled it once, a nation can double it again, and again. But doubling it a second time requires twice the amount of growth that the first time did, and the next doubling requires four times as much. So his blithe assumption that we can double our economy in the next 10 years as we did in the 10 years following WW2 is a little hard for me to swallow.
The starting point of that growth makes it even more difficult to swallow, because the starting point for the “growing out of debt” that he cites was a world essentially in rubble, devastated by a world-wide war and in need of a complete rebuild. We were the only nation sufficiently intact to provide what was needed for that rebuilding effort, and we had no competition for resources. The starting point for this “growing out of debt” is a world glutted with the products of wealth and many other nations which have developed economies poised for growth and competing with ours for both markets and diminishing resources.
He finishes with, “America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation.” The “vigorous growth” is doubtful, and only an economic theorist can find “moderate inflation” to be a desirable goal. Historically, inflation means that prices for goods, services and commodities rise while wages remain stagnant, so the corporate environment thrives while the working man and woman suffers.
Perhaps Krugman would not be so blithe about debt and inflation if he were a working man paid by the hour.