The US has a large trade deficit, and a budget that are partially financed by nations that purchase US treasuries with the dollars that we send to them. The US holds assets in other countries that create an inflow of funds to the US that exceed our payments to foreign nations. Consequently, the interest that the US government pays out to fund its budget deficits is paid to American households and firms. Our debt is a source of wealth and income to Americans. It might be better to fund government spending with taxes, but taxes decline during recessions and mandated government spending on social welfare programs increases. Recessions would only deepen if government attempted to balance its budget during a recession.
Private borrowing has increased dramatically since 1980. Government debt has also increased which is partially the result of tax cuts. Therefore, the total debt in the US, in relation to GDP, has increased by 200% since 1980. That has created a problem of overleveraging. Overleveraged households and firms are less able to spend.
Krugman does not discuss the increase in household debt and overleveraging. Some of the increase in debt is the result of stagnant growth in wages and the increased use of credit to fund higher education and household consumption. Mortgage debt also became a much higher percent of household debt during the real estate boom.
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