It’s Official, Paul Krugman Can’t Do Math

This fool continues to prove that having a Nobel is actually a sign of stupidity rather than intelligence:

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

Oh, you mean you’ve found a way to repeal the laws of mathematics?  You mean exponential curves really don’t run away from each other in a hyperbolic blowoff in each and every case, and that this outcome isn’t guaranteed by literal middle-school mathematics?

Well I’ll be damned.

Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

So let’s see if I can put this into stark relief.

There is this general economic principle called “a balance sheet.”  It’s called that because surprise, surprise, it always balances.  For every debit there is a credit, you know.

Now here’s what Krugman says:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Oh well, how’s that worked out in point of fact?

Let’s remember the premise, and let’s in fact expand that: So long as your debt grows slower than your improvement in output it’s not a problem. 

This is a postulate.  It is true for a family, it is true for a company, and it is true for a nation.  It is always true because so long as you grow debt slower than you grow production your “coverage” improves no matter how you look at it.  Improving coverage tends to lead to lower rates over time, absent intentional manipulation and fraud, because lenders see that you’re becoming more able over time to pay down your debt.  This induces them to charge you less, all things being equal, as it’s less likely you will default.

Now why were we able to grow output faster than debt for a while after WWII?  That’s pretty simple, actually: We literally bombed into dust the production capacity of virtually the entire civilized world, except for our factories and facilities.  We also managed to kill a hell of a lot of competitors for jobs.  This is not the “broken window” fallacy, which puts forward the (easily demonstrable as false) claim that breaking “things” means more work — it is the axiomatic fact that destruction of productive capacity elsewhere leads you to have the best competitive position for a while until your former competitors can come back online.

But eventually they do come back online and then the game is over. Attempting to act as if that didn’t happen leads to an ugly outcome.

Remember my wee chart?  You know, my favorite one?  Let’s look at how things have been in the economy as a whole over the last 30 years:

Oh darn.  Up until the crash there was not one single three month period where GDP (output) grew faster than outstanding debt did in the economy as a whole.  In other words Krugman’s claim that we can do this today is a outrageously false statement, as he cannot point to one single three month period from 1980 to 2009 where what he claims is “good debt” — by his own definition — actually happened in the economy as a whole.  His “example” cited, WWII, is one that left America as virtually the only industrial nation on the planet through literal carpetbombing of the entire European continent and the dropping of two nuclear bombs in Japan!

You want to know why that feat post-WWII hasn’t happened again since?  Because we have replaced capital with lending.  Capital is the surplus from what you produce.  When you have an excess of capital it is formed into new ventures covered with the fruits of previous labor.  This improves debt coverage as output increases with the new industry but debt does not change — as a consequence output rises but debt does not.  That’s economically positive.

On the other hand when you borrow more than output increases that’s economically negative.  Debt coverage deteriorates and eventually you reach a point where people discern that you’ll never pay them back in good value.  This is why people tend to say that “I went broke slowly, then all at once.”  They did — they were accumulating more and more negative debt coverage right up until lenders concluded they would not pay, at which the roof caved in “all at once.”

Greece anyone?

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

Immaterial.  If you owe debt to yourself you still have to pay, and further the compounding still happens.  The only way to escape this is to “print money”, which sounds like a panacea.  It is not, as I will demonstrate.

Krugman follows with this:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.

Ah, but you see there are only three possible ways to pay that interest, right?

  1. Increase taxes.  This sounds like a great idea, but it contracts GDP.  Why?  Because GDP is mathematically “C” (Consumption) + “I” (Net private Investment, which includes savings) + “G” (Government Spending) + “x – i” (Net exports).  When you increase taxes you are covering “G” (interest payments by government) with money that the taxed would either put into “C” or “I”.  Therefore GDP must fall by one dollar for every dollar of increased taxation to cover the debt service.  Remember, Krugman’s thesis and the entire premise of his argument is that so long as debt grows slower than does GDP it’s all ok.  But when you increases taxes GDP will go down, ergo you must also decrease the amount of debt.  This means you must decrease “G” as well.  The next year you are thus compelled to increase taxes more, and decrease “G” more.  Eventually you tax literally everything that the people make and they either riot or refuse to work for nothing, at which point the tax base collapses and the government ceases to exist.
  2. Spend less so you can cover the interest.  This decreases “G” directly.  GDP decreases and if you pay down no principal then coverage gets worse, since the debt level remains the same but GDP is decreased.  Not so good either as this is a downward spiral — next year you must spend even less to restore the previous coverage, which decreases GDP even more.  Eventually you’re spending all government revenue on interest at which point the government ceases to exist.
  3. Print money.  This looks like a “freebie” way out.  It’s not.  Increasing the denominator simply makes each unit of currency worth less.  So you still get a $50,000 a year salary but unfortunately all the things you wish to buy go up in price.  Due to economic inefficiency (all transference of things is inefficient to some degree) the common man sees his purchasing power destroyed by this process.  That is, in REAL terms “C” decreases.  But wait!  This means GDP (in real terms) decreases which means that debt must decrease in real terms too according to Krugman!  Now we’re back to the same spiral downward that inevitably leads the government to cease to exist!

There’s no way out of the box by “increasing spending”, “increasing taxes” or “printing money”; as the chart above shows Krugman’s claims may be correct but his implementation has never worked — not then, not now, not ever and it won’t this time either.  Shifting money from one pocket to another does nothing and increasing the debt load means that more and more of the tax revenues go to interest instead of government spending on programs.

This inevitably leads to either collapse or devaluation and in either case the citizens and government ultimately get screwed.

The good news is that the premise of “devaluation” is out the window because banks don’t like this idea very much.  They’re very uninterested in lending you $500,000 to buy a house and getting back that $500,000, plus another $250,000 in interest over some period of time, but having those repaid funds buy a toaster oven when they get them back!

That, I assure you, is not part of their business plan.

The only solution is to stop the compounding and accept the economic damage that we have accumulated by being serially stupid through our listening, as people and as government officials, to people like Krugman.

This means no more deficit spending and a tax structure sufficient to actually pay down the national debt to extinction over time.  That, in turn, means accepting both a major contraction in the size of government and, temporarily, GDP so as to clear that debt or defaulting it.  Since defaulting it is impermissible under The Constitution without an amendment this leaves us with paying it down, unless you think you can get the States to ratify a change to Amendment XIV.

At the same time we must realign our economy to address the other distortions we have taken on in our attempt to hide the economic damage.  Tax, trade, immigration, medical care, education and energy policy are the big ones, all of which I’ve covered in detail both here and in Leverage.

It would be nice if Krugman, before shooting off his mouth with statements that have a basis in fact (you’re fine so long as you increase output more than you increase debt) would actually look to see whether the nation has managed to do this at any time in the last 30 years on an aggregate basis.  If he had, he would have recognized, using nothing other than the Fed Z1 and BEA GDP series, that it had not and thus his claimed tonic was a crock.

And so, once again, is Krugman.

Discussion (registration required to post)

I have just one question: Why does Paul Krugman hate poor people so much? The mathematical facts are quite clear that the very policies for which Krugman advocates do the most damage to those who are poorest and at the same time, further enriches the wealthy. Isn’t this precisely what Occupy Wall Street is railing against? Well, there’s your answer as to why Obama and his liberal cronies like Krugman keep stabbing you all in the back while claiming to be for ‘the little person.’