It’s not about the debt!

In another iteration of his never-ending quest for more government spending, Paul Krugman reminds us today that “Nobody Understands Debt”—at least nobody but him, that is.

His discussion of how a family’s debt is not a good metaphor for a nation’s debt is a good one.   And he is right about the larger point that our economy is not being dragged down by debt or by the current deficits.  Yes, debt is not the problem.

But Krugman fails again (surprise!) to tell the whole story.  The problem is not current debt.  It is future liabilities.

After World War II, the US had enormous debts.  As Krugman notes, we simply outgrew them until they became irrelevant.  But what we did not have at that time was the enormous entitlement programs that we have today, nor did we lack the capacity to keep dependency ratios down through high fertility.   There was a lot of economic malaise in the immediate post-war period, which almost cost Truman the election.  But, before long, we used our industrial capacity to start making refrigerators and automobiles instead of bombers and tanks and, more importantly, we started making babies.  Lots of them.

But now those babies are getting old, entering retirement, and getting sick.  But expectations have changed.  Boomers not only want to retire, but they want to make unbridled medical expenditures until they finally die.  Unfortunately, they were too busy worrying about their own life satisfaction to produce enough children to pay the taxes that would finance these medical expenditures (it is no accident, by the way, that the most troubled developed economies in the world are, generally, those with the lowest fertility rates).  And they have been ever-willing to leave painful decisions on cost controls for future generations to manage.

People like Krugman point to the past to argue that government debts have never been our problem.  That is true.  But in no time in the past did the fiscal future look so grim.   I can stomach, indeed even agree with, the notion that austerity is a bad approach to deal with downturns in the business cycle.  But when this counsel comes from people who year after year beat the drum for larger entitlement programs in the name of “social justice,” they lose their credibility.

Krugman understands debts and business cycles more than a lot of people, yet his true aim is not sensible policies to dampen business cycles.  His passion remain a construction of a European, cradle-to-grave welfare state financed by an ever-shrinking number of productive citizens.   He remains true to this vision even as those profligate welfare states are crumbling right before his eyes.