Saturday, February 7, 2015

Principles of Macro - Let's Grade Paul Krugman

Krugman discusses the national debt.  If this were an essay from a freshman student, I'd give it a pretty good grade.  He mentions some important things that any good principles of macro class should cover, and that the good students should learn.

Suppose that for some reason the government were to decree, arbitrarily, that every American whose last name begins with the letters A through K now owes $100,000 to a special government agency; meanwhile, every American L through Z is given a $100,000 bond to be paid by that agency.
Clearly, the overall level of debt in the U.S. economy has suddenly increased (actually by about $1.6 trillion). But has the nation become any poorer? Is that $1.6 trillion of additional debt money taken from the next generation? No and no: the additional debt represents a claim by one set of Americans on another set of Americans — and we’re talking about people here now, not future generations.

Krugman the principles of macro student would probably get a B for writing this.  It is well thought out and logical.  But it ignores one crucial fact that any good principles of macro course should mention.  The above analysis only holds if all our national debt is owned by other Americans.  Given that the percent of debt owned by foreigners is now over 30% and has been increasing, Krugman's analysis is wrong. The portion that has to be paid to foreigners will make future US citizens worse off.

For a freshman in a principles of macro course, Krugman's analysis might earn a B.  For a Ph.D. economist, however, Krugman earns a F.

No comments:

Post a Comment