January 2nd, 2012

Pay no attention to that debt behind the curtain

Regular readers of this blog know that economics is not my field of expertise, although I’m familiar enough with the subject to know that common sense doesn’t get a person very far, and that there’s a great deal of argument among so-called experts about what should be done in the current economy.

I also know that Paul Krugman is a disingenuous, self-serving egomaniac. How do I know that? Not from reading his economics posts, but from a lengthy bit of research I did in 2003, a year or so before I became a blogger, on the subject of Krugman’s explanation of and apologia for the anti-Semitism of Mahathir Mohamad of Malaysia (I recall that he wrote a subsequent column on the brouhaha as well, and for some reason I can’t locate it right now). Coming to that conclusion didn’t take any knowledge of economics at all—just research, reading comprehension, and logic.

I could write a very long paper on what my research uncovered, but that’s not the point of this post. For now, suffice to say that I started out having no particular opinion about Krugman except that I knew he’d won a Nobel for economics, and had written some popular books on the subject that I’d heard were pretty fair and fairly good. But when I delved into the story behind Mahathir’s remarks, the more I learned the more I was stunned to discover that Krugman had misrepresented nearly everything about them except the actual quote. For example, Krugman said that Mahathir was using the remarks to shore up his domestic flank, but it turns out that Mathahir was actually retiring from politics. Krugman also failed to mention Mahathir’s lengthy history of anti-Semitism, and Krugman’s deeply entwined relationship with Mathahir and Malaysia.

There was more—much more. But the point was that, on a subject that was much more accessible to me than economics, many hours of research convinced me that Paul Krugman was a man who played fast and loose with the truth, and who would double down on his misrepresentations when accused and challenged. That hardly makes him unique, but it does make him suspect.

Which brings us to the subject of today’s post—Krugman and the debt. I would not be paying attention to Krugman except for the fact that, when he writes about economics, he still has clout and influence (including among certain people whose intelligence I respect, and who know more about economics than I do).

I have my usual difficulty evaluating what he’s saying about the economy vs. what his critics write about what he’s saying. Case in point: this recent column of Krugman’s. Cut away all the gratuitous and mean-spirited slams (Krugman’s trademark) at conservatives and you get this kernel:

…U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

When I read that, I thought it made no sense on the face of it. How can Krugman compare debt owed by government to debt owed to private US companies abroad (which is what he appears to be doing)? I’m certainly not the only one raising this question. A commenter named “SteveinCH” remarks, in response to a post by Owen Gray at The Moderate Voice about Krugman’s column:

And here we have a great example of why Paul Krugman is so dangerous to the US economy. I first saw a version of the argument that Owen links to over the holidays. Although I hate linking to Krugman, the link can be found below.


Now, why is this such a dangerous argument? Because it massively misrepresents the story and I rather suspect Dr. Krugman knows this to be true. To show you why, let’s refer to the 2010 census data.


Now, let’s focus on government investment outside the US and foreign government holdings inside the US. The private holdings are not income that accrue to the US government so they are irrelevant for Dr. K’s argument.

US government assets abroad are about $560 billion. Most of that is reserve assets (the stuff that notionally backs our currency). Most of the reserve assets don’t pay interest (things like gold and SDRs). The securities holdings of the US government abroad are less than $100 billion.

Now foreign governments hold $4 trillion of US government securities. Foreign corporations hold another $1 trillion of US securities. So the ratio of instruments the US is paying debt on versus receiving interest on is somewhere between 8 and 50 to 1, nothing like the charts Dr. K uses.

Then again, maybe Dr. K believes public and private assets are the same and money paid to US corporations is actually paid to the government. At least his math would work then but you’d think it might be worth owning up to that assumption.

As to why he’s dangerous, it’s because people like Owen and many others simply link to his work, never understanding how disingenuous he’s actually being.

Here’s another critique of Krugman, this one by an economics professor at George Mason University. It focuses on a different point, but one that also involves public vs. private sector considerations:

When government spends money, resources that would otherwise have been used to produce valuable private-sector outputs are instead used to produce public-sector outputs. The values of these foregone private-sector outputs are a genuine cost of government projects regardless of government’s funding method, regardless of the merits of the government projects, and regardless of the nationalities of government’s creditors. And the private-sector outputs that are never produced because resources are instead used to produce public-sector outputs do not miraculously appear – they are not miraculously ‘unforegone’ – simply because the obligation to pay for public-sector outputs is deferred to the future or because the holders of the debt instruments are citizens of the same country as the taxpayers.

The argument in the above paragraph isn’t unique: it is elaborated in great detail in many of the works on public finance by another Nobel laureate economist, James Buchanan.* It’s discouraging that Mr. Krugman seems to be unfamiliar with Buchanan’s contributions.

My guess is that Krugman is not unfamiliar with Buchanan’s contributions. My guess is that he disregards everything that does not fit into the message he wants to deliver. In this, again, he is hardly unusual—for a columnist, that is. But Mr. Krugman should finally own up to the fact that he long ago stopped being an economist at all, and morphed into a polemicist in economist’s clothing.

21 Responses to “Pay no attention to that debt behind the curtain”

  1. Tesh Says:

    Ah, but are there Nobel prizes for polemicists?

  2. neo-neocon Says:

    Tesh: yes, but they are in literature and peace.

  3. gcotharn Says:

    I was banned from The Moderate Voice … for immoderately spotlighting historic fact. They treasured their fantasies, and did not wish them disturbed. SteveinCH, if you read this: come and visit neoneocon’s comment section. It is a fun place. They tolerate me. So far.

  4. Parker Says:

    As noted, Krugman routinely misrepresents facts and statistics and then hurriedly erects straw men when confronted by his betters. Here is a link to an excellent (and short) critique of PK that discusses his nobel and other issues:


    “Ah, but are there Nobel prizes for polemicists?”

    Those were awarded in 2007 and 2009.

  5. SteveH Says:

    “”Then again, maybe Dr. K believes public and private assets are the same and money paid to US corporations is actually paid to the government.””

    Liberals reflexively believe all private sector assets belong to the govt and are simply on loan to the citizens. They can’t fathom that not being the case.

  6. Dave Says:

    Wooohhh! Now this is a first class slime job. Bring up anti-semitism, which isn’t supported by the article, and then go off and cite – wait for it – a commenter at another blog. And, if you read the commenter closely, completely misreads Krugman’s argument (and I’m being generous here, I’m assuming a misreading not a deliberate lie). Then you go on to “a professor” at George Mason, who also misrepresents Krugman’s argument. I’ll leave it to others to go back and read Krugman and see why these objections don’t work. But the main point is that if Krugman is so far off course, why do you have to go first to anti-semitism and then only find such really weak support as to his economic arguments? This is just pathetic. If Krugman is really wrong in his column I guarantee you the Chicago School guys would be all over him.

  7. foxmarks Says:

    That Krugman has abandoned economics for polemics is a regular refrain in my corner of the econoshpere.

    The debt being argued about is a financial concept much more than an economic one. Note that everything is stated in terms of dollars, itself an abstract value that floats against other abstract values. Try converting all those debt obligations into tons of corn, millions of BTUs and man-hours of engineering and you might begin to see how the financial economy is impossible.

    $1T is about 8,000,000 man-years of engineering services ($60/hr). That’s eight million years of services over and above paying the engineers the $1T owed for the current year. Even if you could enslave those bright minds and keep them at peak output while in shackles, they still need to eat.

    Our $15T national debt represents ninety million man-years of engineering services. And the median wage is less than what an engineer earns. If you look behind the curtain, the theater collapses.

  8. neo-neocon Says:

    Dave: I believe you may have a problem with reading comprehension. And that’s putting it very, very kindly.

    I said I lack the economics chops to evaluate the pros and cons of the Krugman argument, so I didn’t try, but explained why I don’t trust him because he has been proven to be highly unreliable and self-servingly disengenous in other areas that are within my knowledge base, and which I’ve researched heavily. That is the context in which his columns on Mathahir’s anti-Semitic remarks were brought up.

    And despite your scare quotes, Donald J. Boudreaux, the George Mason ecnomics professor who wrote that letter I quoted, is in fact an ecomics professor and not “professor” at George Mason University. As for George Mason itself:

    …[T]he university was founded as a branch of the University of Virginia in 1957 and became an independent institution in 1972. Today, Mason is recognized for its strong programs in economics, law, creative writing, and computer science. In recent years, George Mason faculty have twice won the Nobel Prize in Economics. The university enrolls over 32,500 students, making it the largest university by head count in the Commonwealth of Virginia.

  9. rmd Says:

    How can Krugman compare debt owed by government to debt owed to private US companies abroad (which is what he appears to be doing)?

    He’s comparing claims on the United States by the rest of the world, with claims by the rest of the world on the United States. Both sides include both claims on government and claims on private companies; both claims owed to government and claims owed to private companies; both debt and equity.

    When government spends money, resources that would otherwise have been used to produce valuable private-sector outputs are instead used to produce public-sector outputs.

    In conditions of underful employment, resources that would otherwise have lain idle can be used to produce public-sector output, without foregoing private sector output.

  10. Don Carlos Says:

    Prof. Boudreaux’s statement is clear and conclusive. It is simply Bastiat’s Parable of the Broken Window once again. None of this is difficult “economics”. It’s simply about choices, roads not taken. Economics-like verbiage can lead to chuckleheaded statements like rmd’s
    “In conditions of underful (sic) employment, resources that would otherwise have lain idle can be used to produce public-sector output, without foregoing private sector output.” That sounds so economics, but it ignores Bastiat.

  11. Don Carlos Says:

    rmd also writes, “He’s (Krugman) comparing claims on the United States by the rest of the world, with claims by the rest of the world on the United States.” Really? Wow. No wonder there’s no difference in the comparisom.

  12. rmd Says:

    Don Carlos:

    Thanks. Should of course read, “claims on the United States by the rest of the world, with claims on the rest of the world by the United States”.

  13. rmd Says:

    Don Carlos:

    Prof. Boudreaux’s statement is clear and conclusive.

    Clear, anyhow. It clearly makes an argument that assumes full employment, and applies it to a situation of underfull employment.

    It is simply Bastiat’s Parable of the Broken Window once again.

    And what here corresponds to the broken window?

    None of this is difficult “economics”.

    True. Boudreaux takes the easiest possible line against the Keynesian prescription against recession — assume away the recession. More cogent but more difficult anti-Keynesian arguments try to show that despite appearances, recessions don’t involve underfull employment; or that even if they do, fiscal policy isn’t effective against them.

  14. Perfected democrat Says:

    Epitomizing the “Peter Principle”, at the very least…

  15. foxmarks Says:

    Full employment is Keynes inventing an unknowable quantity which Keynes proposes to optimize. “Full Leisure” is equally valid, but does not appear in the GDP equation, and is therefore irrelevant to Keynes, neo-Keyns and monetarists.

    Show me the real human who does not put a value on leisure.

  16. Daniel Says:

    On the one hand….

    Oh, never mind.

  17. Nolanimrod Says:

    Krugman’s Nobel was supposedly for some thoughts on the economics of mass production which, although pretty thoroughly demonstrated by Henry Ford, are surely a verboten topic to most of the Kroopies because mass production has been known to cause something called Manufacturing which was icky and had to be stamped out through regulation, unionization, and government meddling.

    Krugman really got his Nobel for Annoying George W. Bush. That is rather a large category, including as it does Albert Gore, Barack Obama, and Jimmy Carter.

  18. Adam unruh Says:

    Kurgan does not understand the broken window fallacy. He said that 9/11 would be good for the economy because it would create jobs.

  19. stumbley Says:

    Really. If “economics” were the “science” everyone pretends it is, would there ever be economic problems? If any of these folks knew what they were talking about, why would there EVER be a depression or recession (since the “economists” could fix things up right away just by jiggering their “scientific” principles)? Why anybody listens to a Krugman at all is beyond me. “Economics” is people, and people are unpredictable and uncontrollable.

  20. gpc31 Says:

    It is truly disheartening that so many from the credentialed classes, especially among academia, take the likes of Paul Krugman and Thomas Friedman so seriously. They want to know what “other smart people are thinking”. Reminds me of William James’ quip that too many people mistake thinking for merely rearranging their prejudices.

    Anyway, Eric Falkenstein has a GREAT blog on finance and other issues. He’s a model of intellectual sanity and fairness. Here’s his post on the latest Krugman kerfluffle:


    Yesterday I read a really fun catfight between Krugman and everyone (e.g, Tabarrok, then Krugman, then Cowen, then Krugman, but this is typical). Now, losing one’s temper in an argument is usually symptomatic of losing the argument, and so I am quite pleased watching Krugman boil over. Yesterday’s Krugman post was precious, as he defending being peevish by noting that he only treats people like ‘mendacious idiots’ if they are so, and civility is irrelevant when the stakes are important!

    He doesn’t understand that civility is more important the greater the stakes, because they are helpful and takes discipline. It’s easy to lose it and just start calling someone names, questioning their motives, but this is just appealing to your base emotions, as highlighted by the behavior people with their frontal lobe activity reduced (i.e., drunk people). On the other hand, on issues that are not important, well, it’s easy to be gracious about things that don’t matter because it takes no effort, there’s nothing to restrain, there’s no cost of doing so because you don’t care if you ‘lose’. If you are trying to bring a crowd to your point of view, manners are very helpful, they are a better sign of good faith argumentation. If you are just being angry, this can help incite a predisposed mob, but little else because everyone knows that someone highly emotional is not reasoning at all, just rationalizing. Sure, we all do it, but if we don’t at least pretend not to, we clearly are not coming close to the rational objective we all aspire to in less heated environments.

  21. foxmarks Says:


    If economists confined themselves to the scientific part of economist, we might have fewer and less-severe “problems”. The laws of supply and demand are as reliable as gravity.

    Keynes’s great innovation was to create an economic model that justified political interventions in economic activity. Those interventions blow natural adjustments in pricing up to become problems across national economies.

    Better to treat economic like science, which is only positive, not normative. Describe what is likely to happen, not suggest what *should* happen. Shoulds are for politicians.

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.

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