David Shemano wrote: > I don't understand how PK can know that 100% is better > if he does not know at what point X% is too high.
I don't know Krugman, but this would be my answer: It is a big assumption, but assume that the formal rights of ownership of bondholders are assured forever. The ratio of public debt to today's GDP cannot tell you how solvent the sector will be when the debt comes due, because nobody knows for sure what the tax revenues will be then. Because those taxes will depend on the level of economic activity then. A precise answer to the question is impossible, because that depends on what the growth rate of *potential output* is expected to be. And that growth rate is self-referential. It depends on what happens to the economy today, which economic policies are followed, etc. If you think you know what will happen to the economy in the short run and what policies will be followed, then you have an answer. For example, if you expect high and prolonged unemployment, then you can expect a big chunk of the nation's productive wealth to decay irreversibly -- including the most important form of wealth (labor). That should lower the growth rate of potential output and even small increases should make you think the sector is insolvent. The longer the depression, the more insolvent the sector will look. On the other hand, if you think the government is not going to allow a depression even if it has to expand its debt, and that will be followed by policies that will increase permanently the growth rate of potential output (e.g. by increasing the pace of technological change), then even large deficits will look sustainable to you. Historically, economies have left behind high rates of indebtedness (private or public doesn't really matter as much as some people think) in relatively short periods of time insofar as those economies have kept rates close to "full employment." Of course, the crucial determinant of the growth rate of potential GDP is the pace of technological change, which also depends on the state of the economy today, the economic policies that will be followed, etc. Also, as I've emphasized on my blog, there is another important way in which the debt has been shrunk to size historically -- wealth redistribution. The easiest way to resolve the debt would be for very rich people to donate their holding of public debt to the Treasury. Short of that, progressive taxation and spending can be used (which has the added benefit of pushing the economy closer to "full employment"). And, of course, unanticipated inflation, which can evaporate at once the unindexed debt. Having said that, the formal rights of ownership of bondholders don't have to be assured forever. It is entirely possible for the expropriated to expropriate the expropriators. The class struggle will shape things up decisively. And who knows what may happen in that area. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
