Fortunately, deficits don’t matter

For Paul Samuelson told us so:

President Obama‘s budget, released Monday, was conceived as a blueprint for future spending, but it also paints the bleakest picture yet of the current fiscal year, which is on track for a record federal deficit and will see the government’s overall debt surpass the size of the total U.S. economy. Mr. Obama‘s budget projects that 2011 will see the biggest one-year debt jump in history, or nearly $2 trillion, to reach $15.476 trillion by Sept. 30, the end of the fiscal year. That would be 102.6 percent of GDP — the first time since World War II that dubious figure has been reached.

Neo-Keynesians such as Paul Krugman insist that the deficit isn’t a problem because of this line of argument, first presented by Paul Samuelson in his landmark 1948 textbook entitled “Economics”.

“There are also burdens involved in an internally held public debt like our present one, but the burdens of an internal debt are qualitatively and quantitatively different from those of an external debt. This is the first and most important lesson to be grasped, without which nobody can go far in understanding the economics of the public debt. The interest on an internal debt is paid by Americans to Americans; there is no direct loss of goods and services. When interest on the debt is paid out of taxation, there is no direct loss of disposable income; Paul receives what Peter loses, and sometimes – but only sometimes – Paul and Peter are one and the same person. . . . In the future, some of our grandchildren will be giving up goods and services to other grandchildren. That is the nub of the matter. The only way we can impose a direct burden on the future nation as a whole is by incurring an external debt or by passing along less capital equipment to posterity.

Of course, it is probably worth considering that the situation in 2011 is not exactly the same as the situation in 1948, as can be seen in the chart below.  Note the green line, in particular.