Paul Krugman’s analysis of “nonfinancial debt, public plus private, as a percentage of GDP” in the NYT is impeccable, as far as it goes. The shrill voices demanding austerity will continue to demand austerity until the last non-military public institution has closed its doors. And, yes, this does mean that a modest $5B decline in overall debt as a percentage of the GDP is not going to bring them to holster their firearms.
Of greater interest is the dramatic climb in debt which began long before mid-2006 shown on Krugman’s chart. What does this steadily inclining debt show?
It shows that investors, public and private, believed that future earnings would “cover” current accounts. It showed that they were willing to go into ever greater debt today in order to realize even greater earnings tomorrow. So what?
Well, for one, their gamble might have made perfect sense had investors looked out and seen lines of other investors pouring their wealth into long-term job creation in industries promising high wages and benefits. Such investments would then have anticipated steady growth in employment-based consumption over time. And this growth, in turn, would have turned their current debt into future earnings, as promised.
But, for another, it could therefore have meant increasing receipts, public and private, which could then have meant not increasing, but declining debt.
So why then did none of this occur? Why, in fact, did the very opposite take place?
The opposite took place for a variety of reasons. But two reasons are paramount. Chief among these reasons was the deregulation of financial markets, the very markets whose promised earnings completely outpaced potential earnings for investments in long-term job creation in industries promising high wages and benefits. Rational self-interest drove investors to pour their wealth into instruments that promised higher returns—instruments that bore no relationship to job creation and everything to do with speculative investments promising ever high returns. Under such circumstances, investors who failed to invest in such shaky instruments inevitably fell behind.
But, alongside the deregulated financial markets was the politically-inspired ideological chorus opposing taxes. Thus, an overwhelmingly Republican Congress passed legislation whose costs they then refused to pay for.
It was this combination of deregulation and the refusal to levy taxes that led to the dramatic increase not only in public and private debt, but also in unemployment and flagging production and consumption.
This makes the Obama years even more unusual. For it suggests, against all ideologically driven rhetoric, that it was President Obama who actually took the bull by the horns and said “No more.” In other words, Obama has done what no Republican Congress or President has proved capable of doing: actually showing fiscal and monetary restraint.
Now that’s remarkable.