Wednesday, May 1, 2013

On debt and pie holes

One of the headlines on the front page of the Washington Post yesterday turned out to be an irritating brain-worm.  I just glanced past it at the time, scanned the attached article by Edwin Cody.  And I don’t want to criticize Cody himself; the text of the piece did have some interesting data---nothing that could surprise anyone who is following Europe with any interest at all, but nothing very wrong either.  I know Cody didn’t write his own headline.  

But the headline was this: “In impatient Europe, some see more debt as answer”.  And that line has festered.  A little.  It has festered a little.  I woke up this morning thinking about it. 

I don’t want to get all caustic or anything.  I mean I don’t want to say something to the headline writer like: “if you don’t know the difference between deficit and debt, then shut your &^*% piehole about economic issues”.  Still, I would like to remind the headline writer that there is a difference between debt and deficits, and that there is no economist that I am aware of anywhere on the political spectrum who thinks that “more debt” is good, or that debt on its own will solve anything.  A few of the more ardent of the MMT community might follow Abba Lerner’s original formulation that government debt doesn’t hurt, that debt is harmless in an economy with fiat money where (they might claim) the government can always cover the interest on the debt and also achieve its policy goals with respect to employment and inflation.   And many on the left, and even increasingly through much of the right side of the political economic landscape, would say that the long run risk imposed by massive and continuing unemployment may be larger than the risk imposed by short run deficits, since long unemployment causes skills to atrophe and creates the habit and expectation of unemployment among the young.  But no one, no one, claims that a large government debt by itself actually helps.  

The people in Europe have no desire for more debt.  They don’t even have a desire for more deficits, although I believe that they would accept deficits if that’s the only way to stimulate the economy.  It’s not, at least not in Europe: there’s still scope for monetary expansion there, and certainly scope for a modest increase in inflation in Germany as an alternative to grinding deflation in Spain.  

What I think the headline writer meant to say was that in Europe many people are very sensibly tired of the stubborn advocates of austerity and recurring dips into recession.  I don’t think they care whether the stimulus is fiscal or monetary or exports to mars.  They just want someone to recognize that economic stimulus is necessary, and that it should come soon.  

Here are some graphs from this source.  

Unemployment since 2008 in the United States:

A big surge in 2008-2009, followed by a slow but steady decline.  It’s still just under 8%, and long term unemployment is dangerously high; the clear cause of initial unemployment and decline of output was lack of demand, not distribution of skills.  But the longer the unemployment rate stays high, the more this becomes structural, rather than cyclical.  It gradually becomes a permanent change in our ability to produce.

Now here’s the unemployment rate since 2008 in the Euro area:

A big surge in 2008-2009---and pretty much no decline.  In fact, the recent trend is dramatically up.

Now here’s the unemployment rate in Spain:

Notice the scale, on either side of the graph.  In the United States unemployment is just under 8%, and we’re pretty anxious about that.  In Europe in general, it’s over 12%.  In Spain it’s over 27%, and among the young its over 55%.

No one wants debt.  In the long run, debt may indeed be a burden.  It may, although there really is no evidence that it's decisive at anything close to the levels we see in Europe.  But the continuing austerian terror of debt is causing a certain burden, both short run and long.  For the economies of the GIPSIs (Greece, Italy, Portugal, Spain, Ireland) it’s creating a structural change that will last for decades.  For the young in those countries it is causing a catastrophe, a burden from which they will not recover within the span of their lives.


  1. The Bureau of Labor Statistics shows the March 2013 U-6 unemployment rate to be 14.8%. ( This is a much better measure of how bad the economy really is. The "official" unemployment rate doesn't consider the lose of 8m jobs over the past 4 years. Foreigners now hold more than $13T in US debt. ( Being able to pay the interest on the debt and getting out of debt are two totally different concepts. At some point, the interest exceeds the income. Reminds me of how a personal household goes into bankruptcy.....

  2. On the unemployment statistic, absolutely right. Other measures that include underemployment and part time for economic reasons are much higher. But the same is true in Europe. In order to compare unemployment between the US and Spain, or the Euro area, we have to compare apples to apples. We have to use the same unemployment measure in both areas to show how they compare.

    On the debt, the article you cite reports total foreign ownership of US securities: not government debt, ALL US securities, including stocks and private bonds. And of course, US citizens own large amounts of foreign debt too. On the whole foreign-owned US debts are bigger than US-owned foreign debts---but the return that the foreign holders of US debt get are smaller. We get more interest back from other countries on the debt of theirs that we own than they get from our debt that they own. Look here for a graph of this: Also look here: for a later Krugman comment on net US debt.

  3. Holy cow! Every time you explain things Stuart I get depressed. Fifty-five percent unemployment among the young in Spain? I spent last summer driving around the country and saw little evidence of it, but if this doesn't foment social unrest I don't know what will.