I'm not alone on Government debt

James Hamilton, Professor of Economics at the University of California, San Diego, and a contributor to Econbrowser, says this about Paul Krugman's sanguine attitude towards government debt:

Normally, you'd think that putting off repaying a debt does not make it any smaller. The federal government can (with my wallet) pay the trillion today, or it can wait 10 years to pay one trillion plus 10 years' interest, or wait 20 years to pay one trillion plus 20 years' interest. The present value of the service cost on one trillion dollars in debt is exactly one trillion dollars today, no matter how long you put off paying. My comments on how much a trillion really is are perfectly appropriate for discussion of any repayment timetable.

Perhaps Paul is suggesting that there may be a potential free lunch available from postponing payment in this case, arising from the fact that the economy's growth rate has historically exceeded the government's cost of borrowing. If I put off paying another year, with interest the amount I owe grows 2% in real terms, but my income grows 3%, so things get easier the longer I put it off.

Let me go on the record as favoring the consumption of truly free lunches. If everything the government buys really is free, then by all means, let's have them buy more, and more, and more, and rather than double my taxes, let's cut taxes all the way to zero. Unfortunately, I expect that Paul would agree with me that in fact there is a limit to just how much we can count on supersizing this particular happy meal.

That last point is one of my arguments - if there is a limit to cutting taxes then logically there is a limit to how much debt the government can take upon itself.

I asked a friend the other day to compare his mortgage to his annual income, which he figured out to be 580%. For smaller economic entities like households and businesses, such a huge debt/income ratio is expected and normal. Nevertheless the bigger an economic entity is, the more risky such debt/income ratios become since its collapse would have a huge secondary impact.

The US Government's debt/income ratio is currently 362.64%. That's too large in my opinion.

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