Prof. Krugman wouldn’t be a Nobel Prize winner if he meant by “spending” nothing other than undifferentiated government spending. He certainly knows that it depends on what money which has been borrowed from lenders is spent on. If it is spent on something which generates a return greater than the cost of borrowing, spending is a wonderful idea — that idea is called investment.
Still, even undifferentiated spending might help to lessen the pain of a recession. I believe it was Keynes who suggested that in a recession it might be smart to pay a fellow for digging a hole and then pay him for filling it up again. As long as he spends his income in the domestic economy, that might generate some benefit. More examples could be given.
Prof. Krugman – when talking about sovereign debt and when suggesting that countries could easily borrow a lot more – hides one fact from the public. That fact can be summarized in one expression: debt capacity.
Every borrower – be it an individual, a company or a state – has a debt capacity. One doesn’t really know beforehand what the limit of that debt capacity is but when one reaches it, one finds out brutally quickly that it has been reached.
Maastricht defined debt capacity as 60% of GDP. Greece has increased that definition to 120%. Japan is closer to 200%. I don’t know where the limit is but it is somewhere!
Once the debt capacity has been reached (as percentage of GDP), additional debt is limited to the percentage increase in GDP (i. e. growth). It’s great fun to go from 0% to 60%, from 60% to 120% or from 120% to 200%, but it’s not a lot of fun having to stay at 200% when GDP growth is only 2%.
There is allegedly no such thing as a free lunch. Except: the debt capacity is indeed a free lunch, a free lunch which is also a scarce resource. The question is who should be allowed to use this scarce resource over what period of time.
If the debt capacity is at 200% of GDP and a society goes in one generation from 0% to 200%, this generation has eaten up the entire free lunch and there is only little left for next generations. There is no way the US debt as a percentage of GDP can increase forever at the rates at which it has increased in the last generation.
So Prof. Krugman, shouldn’t one leave at least a bit of the fun for the next generation?