Krugman on Debt and Politics

From a posting on Paul Krugman's NY Times blog. I've bolded key bits:

... the $9 trillion includes this year’s deficit, so we start from debt at 40% of GDP, not 50%. Overall, the OMB puts debt in 2019 at 76.5% of GDP; that figure is slightly exaggerated, however, because various financial rescues get counted as additions to the deficit even though taxpayers end up with additional assets. Net of these assets, the debt in 2019 is 68.9% of GDP.

As I’ve pointed out, that’s bad, but it’s not horrific either by historical or international standards. On a comparable basis, federal debt hit 109 percent of GDP at the end of World War II, and hit a second peak of 49 percent at the end of the Reagan-Bush years. And a number of European countries have hit substantially higher debt levels without crisis.

The only reason to fear these numbers is if you believe that our political system is broken, and that markets will soon come to see it that way. Then we could become a debt-intolerant country, and all bets are off. So it’s not really the debts per se, or even the economy; it’s the politics, stupid.

Meanwhile, what everyone should be focused on is the sheer awfulness of the economic projections. OMB has unemployment still at 9.7% at the end of 2010; still at 8% at the end of 2011. These numbers cry out for a more aggressive economic policy. If that’s politically impossible, we’re really in terrible shape.

It looks to me that politics is broken in the US, so unemployment won't come down because Obama won't fight the Republicans to pass an aggressive stimulus/recovery package. So it is very likely that the US will become a debt intolerant country, and in that case a debt of 76.5% of GDP will be an issue.