Thursday, January 24, 2013

More Voodoo Economics

Paul Krugman is not alone in wanting to hide from reality by changing the manner in which debt is evaluated. He wants to quit comparing our debt to our GDP because the proportion is now reaching 100% and is beginning to frighten people so, as I mentioned yesterday, he wants to talk about debt as a proportion of potential of GDP, which brings the percentage down to Well, it’s hard to tell, because the heading of his chart is unintelligible. The left side is labeled “(Bil of $/Bil of $)” and runs from 0.24 at the bottom to 0.38 at the top.

The percentage of potential GDP is, presumably, lower than the percentage of actual GDP. Further, since economists can create the potential GDP number out of thin air, using that number has the possibility to keep us borrowing money for decades.

The pitfall of this, of course, is that if actual GDP is that far below our potential GDP then we have not recovered from the recession, are therefor in a recession, and no one wants to admit we are in a recession. Krugman and company blithely ignore that.

Dean Baker ran into difficulty in discussing Japan in a piece unabashedly titled “The Burden of the Debt Depends on How You Measure It,” though, because Japan’s debt is already 200% of GDP and nobody can really pretend that they are functioning below capacity. So he outdoes Krugman by ignoring amount of debt altogether and simply discussing interest on their debt as a ratio to their GDP. They are, he says, in great shape because the interest on their debt is at a low rate and their interest payments are low as a percentage of GDP.

By that standard you, with your $50,000 annual salary, can buy a $20 million house, because you work for Microsoft and the interest payments on your house will be less than 1% of Microsoft’s annual revenue. They will be well over twice your entire annual salary, but Dean Baker doesn’t care about that.

1 comment:

bruce said...

So is that like paying $10000 rent with your credit card, so you effectively pay $50 per month?

The interest is manageable, so we keep piling on debt. We never talk about principle. And of course, we never talk about what happens when the interest rate goes up and becomes UN-manageable.


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