Paul Krugman wrote in his New Year’s Day column in the NY Times that “Nobody understands debt.”  He complained about the “wrong-headed, ill-informed obsession with debt” that characterizes the current Republican-controlled Congress and is a key element in contemporary conservative thought.

Krugman makes a number of arguments about why the debt is not as pressing a problem as Republicans assert, all of which are valid. Among these arguments are that interest rates have not increased with deficit spending during the Obama administration as conservative experts predicted, and debt is only likely to cause economic troubles when it grows more quickly than revenue from taxes. Krugman does concede that taxes impose some cost on the economy, though this cost is over-exaggerated by today’s “rapidly anti-tax” conservative movement.

At least for the U.S., the increase in sovereign debt is also not a particularly pressing issue:

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.

Contrary to the received wisdom that dominates today’s discussions about debt in both the U.S. and in Europe, Krugman gives us the example of Great Britain, which has historically been able to carry much higher debt-to-GDP ratios than in those countries that are today said to be in fiscal crisis because of their debts:

Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Krugman’s argument in this column is meant to lend support to a fairly standard liberal Democratic/Keynesian line about what needs to be done to adequately address the current crisis. Stimulate the economy by increasing effective demand through increased government spending on goods and services. Additional debt incurred could be partially offset with tax increases, especially on the highest income earners; but more importantly, the economic stimulus created by government spending will create economic growth that, in the long run, will cause a sufficient rise in GDP to compensate for the growth in the debt.

There are good historical reasons to think that Krugman’s analysis makes more sense than Republican counter-arguments. In his Socialist Register 2011 article “The First Great Depression of the 21st Century,” Anwar Shaikh describes the American experience of the Great Depression of the 1930s as follows:

The Great Depression triggered by the stock market crash in 1929 led to a sharp fall in output and a sharp rise in unemployment from 1929 – 32. But over the next four years output grew by almost 50 per cent, the unemployment rate fell by a third and government spending grew by almost 40 per cent. Indeed, by 1936 output was growing at a phenomenal 13 per cent. The rub was that the federal budget went into deficits of almost 5 per cent over the same four years. So in 1937 the Roosevelt administration increased taxes and sharply cut back government spending. Real GDP promptly dropped, and unemployment rose once again. Recognizing its mistake, the government quickly reversed itself and substantially raised government spending and government deficits in 1938. By 1939 output was growing at 8 per cent. (pg. 55-56)

This cycle of phenomenal growth rates sparked by very high rates of government spending continued to escalate considerably over the next several years as the U.S. began its build-up for WWII in 1939, and entered the war in December of 1941.

But here Shaikh’s account of events begins to make some distinctions that are not to be found in the traditional Keynesian analysis. Shaikh emphasizes that during the New Deal and WWII:

the government spending involved did not just go towards the purchase of goods and services. It also went toward direct employment in the performance of public service. For instance, the Works Progress Administration (WPA) alone employed millions of people in public construction, in the arts, in teaching, and in support of the poor.

Shaikh highlights the importance of distinguishing between government spending on goods and services (thereby profiting business with the hope that this stimulus will “trickle down” to employment), and spending directly on employment (with workers’ wages then stimulating business by creating more effective demand from consumers).

The first scenario, the one which Keynes advocated, will only help to reduce unemployment and spur economic growth if businesses re-invest their profits in productive investments that create new jobs. The second scenario, however, is a direct and more certain way to reduce unemployment. And as workers necessarily spend most of their income on living expenses, their wages are less likely to be hoarded (or invested in ways that do not create jobs) than are business profits.

Let’s now return to an examination of the present crisis, and think about the situation not only from the point of view of government spending a la Keynes and Krugman, but also in light of the distinctions that Shaikh makes regarding the character of government debt. we can see from the charts above, the absolute size of the debt in inflation adjusted dollars slightly declined from its peak in the 1940s until the 1970s. After 1980 the Federal debt very dramatically increased from 1980 until the present day.

If we look at debt as a % of GDP, however, what we find is that relative size of debt dramatically decreased from the late 1940s until the 1970s, and has just as dramatically increased since 1980. During the last few years of economic crisis, the relative size of the debt is once again approaching the levels that it had attained during the peak years of spending during and immediately after WWII.

One thing that we must note is the astonishing fact that debt-to-GDP ratios consistently declined during the years that are often described as having been “Keynesian”, while those ratios increased during the years that we have been calling “neo-liberal.” In other words, government debt dramatically increased after the “Reagan Revolution” that claimed to be against Big Government.

If we look at the above chart based on Bureau of Labor Statistics data, what we will also see is that the new era of increased Federal debt has not, by any means, ushered in a new era of full employment. Since 2007 unemployment rates have been among the highest since the Great Depression. By way of contrast, during the era of high levels of government debt immediately after WWII, the U.S. had achieved near full employment.

One lesson that can be drawn from this is that it is not simply a matter of increasing government spending in order to create effective demand, as in the Keynesian model. Rather, government spending can have very different kinds of effects on the economy depending on the nature of the spending. For instance, as Shaikh indicates, there is a major difference between spending that simply makes the government a consumer of goods and services, and spending that directly creates employment.

In 1945 the Executive branch of the Federal Government directly employed 3.4 million civilians (employment by the Judicial and Legislative branches is negligible by comparison). By the early 2000s, that number stood at 1.8 million. During this same time frame, the population of the United States more than doubled. This is one of the key differences between government spending then and now. High levels of government spending today may indeed stimulate the economy, but a much higher ratio of this spending today winds up as a stimulus to corporate profits, rather than as the wages and salaries of the 99%.

At the end of the last Great Depression, it took a major World War in order for the Federal Government to unambiguously commit to policies that would generate economic growth that would benefit all classes in American society. It would not take a World War in order to achieve similar effects, what it would take is the re-orientation of government “toward direct employment in the performance of public service” (Shaikh). Let us hope that it does not take another World War to bring the First Great Depression of the 21st Century to an end.

The prospects for this kind of progressive change do not appear good given the current state of affairs within the American political system. If anything, the exact opposite trends seem to be in motion. President Obama announced plans earlier this week for a leaner military, increasing the Federal government’s focus on creating ever more efficient killing machines that require an ever decreasing amount of human labor to unleash their destructive potential.

It is high time for Americans to refuse to be a part of this upside-down system, and begin building one that is based on that satisfaction of human needs rather than on the pursuit of corporate profits.


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