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Monthly Archives: March 2013

Republicans love to say funny things like:

There are 47 percent of the people who will vote for the President no matter what…. There are 47 percent who are with him, who are dependent upon government…who believe that government has a responsibility to care for them, who believe that they’re entitled to health care, to food, to housing, you name it…. These are people who pay no income tax…. My job is not to worry about those people—I’ll never convince them that they should take personal responsibility and care for their lives…

They also like to explain why they lost with logic such as:

It’s a proven political strategy, which is give a bunch of money to a group and, guess what, they’ll vote for you.

And they also hate Obamacare. They love using their megaphone, known as Fox News, to reiterate this point with headlines such as:

Poll: Obamacare a Bigger Worry Than Sequester

(This is all under the presupposition that we, the Tyrannical Democrats, actually give a shit what people think). Of course, if anyone actually read the bottom print of the article, it would be clear that this poll is from a small town in Pennsylvania.

But okay, okay – too much digression from my main point. People hate Obamacare, here are some statistics:

  • Just over a third think it makes the country better off [1]
  • More than 60% of the country thinks we’re worse off or no different [1]
  • 45% of voters want their Governor to cooperate with HHS, and 11% are undecided [2]
  • 47% (hmm….) of Americans support a full repeal [3]

Alright, yes, I’m “cherry-picking” statistics here. But that doesn’t matter, I’m not trying to make a logical argument (I am trying to understand the Fox News mind, after all). These statistics come under headlines that demonize Obamacare and everything associated thereof.

Do the Republicans not understand that they’re logic is screwed up at a very, very fundamental level? Obamacare is, by far, the President’s largest “free handout” to the “takers”. It’s the most “anti-business” galling, socialist paradise that the 47% better love. Except they don’t. So here’s their argument:

  1. Obama won because he loves giving stuff away.
  2. A majority of the people want him to take his stuff back (again, whether the polls are unbiased etc. is irrelevant)
  3. And therefore, somehow, we conclude handouts are why the 47% voted for Obama.

My point is that, yes, Democrats probably have stronger priors with regard to social spending (though the size of our government declined most rapidly under Bill Clinton, by a whopping 3.9% of GDP). However, plain entitlements like healthcare are not the reason most of the country voted Obama.

They sensed a sense of hope, perhaps misplaced. The idea that maybe America is for everyone. The principles behind Obamacare – social justice, equal opportunity for children – is what they voted for.

So, Republicans, in the future, when you want to make a crappy argument, please don’t use its contradiction as proof thereof.

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James Pethokoukis asks whether spending austerity is the path to prosperity in the US:

So this is my take: Spending cuts can be pro-growth, certainly over the longer term, all else equal. But neither party in Washington has offered a financially and politically realistic path to lower spending — certainly not low enough to balance the budget in a decade — that wouldn’t also, say, risk US defense and basic research capabilities.

Here’s the evidence he starts with:

Researchers tend to find a negative relationship between the size of government and economic growth in advanced economies. After surveying the literature […] it’s “fair to say than an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is […] associated with an annual lower growth rate of between one-half and one percentage point.”

For one, this ignores the fact that many of us who believe in fiscal stimulus today don’t necessarily have stronger priors about government spending, just that at a zero lower bound deficits can be self-financing. But more importantly, the whole, carefully placed, correlation can be rejected with the syllogism:

  1. Researchers tend to find that richer economies have bigger governments (because, you know, they do)
  2. Researchers tend to find that richer economies have slower growth rates (notice that “developed” isn’t a progressive verb)
  3. Therefore, bigger governments must be associated with slower growth rates.

You see, this whole argument is tautological: growth can’t be sustained forever. If the simplistic argument I presented is correct, and growth rates are the ultimate goal, we should move towards becoming India, or something. My argument is, of course, shoddy and, by extension, the idea that government spending is anemic to growth (especially in depressed conditions) is, as well. 

Pethokoukis further develops his argument with a blatantly incorrect op-ed from a former Romney advisor:

First, the lower level of future government spending avoids the necessity of sharply raising taxes. The expectation that tax rates won’t need to rise provides incentives for higher investment and employment today. Second, since the expectation of lower future taxes has the effect of raising people’s estimation of future disposable income, consumption increases today. Third, the new budget’s reduction in the growth of government spending is gradual. That allows private businesses to adjust efficiently without disruptions.

Noah Smith and Paul Krugman have already wrecked this argument, and I can’t do any better. 

Noah:

Upshot: If you have no Zero Lower Bound, and if the Fed partially counteracts the demand-side effects of fiscal policy, and if people have forward-looking expectations, and if you don’t cut government purchases much, and if taxes are very distortionary, then austerity works. This is not really a new result, but it rarely gets shown so explicitly, so it’s good that John Taylor and his co-authors went ahead and did it.
That said, the result basically ignores the real Keynesian critique that has emerged since 2008, which is that the Zero Lower Bound matters a lot. It also probably assumes that taxes are a bit more distortionary than they really are. And it also probably overestimates the Republicans’ real willingness to cut transfers (entitlements are the “third rail”, after all), and underestimates their willingness to cut government purchases. In real life, spending cuts usually fall on the things that are politically most easy to cut, but are economically most valuable in both the short and long runs – infrastructure and research. Finally, Taylor’s plan ignores distributional concerns, but that’s pretty much par for the course.
 
Krugman:

Let’s think this through. If you take $200 billion a year from the poor and hand it to the rich, and people believe that this transfer is forever, permanent income theory says that consumption among the poor should fall by $200 billion while consumption among the rich rises by the same amount. There are, however, two reasons not to believe this.

One is that there is some evidence that permanent income doesn’t work all that well, that the rich persistently consume less of their income than the poor.

More to the point here, however, is that it’s very likely that people would view both savage spending cuts and the tax cuts they pay for as less than permanent, likely to provoke a backlash or at any rate a reversal at some point. And in that case the rich would not spend all of their tax cut.

Economists don’t talk about the moral importance of spending in a recession. Unemployment insurance and transfers are discussed in the scope of Keynesian stimulus, and basically all the debate is framed around this attractor. But in a recession, the poorest and most vulnerable loose their jobs. And, when growth resumes, most of the income returns to a vanishingly small percent of the population.

Basically, a financial recession is a redistribution of wealth, to the rich. Not only is the argument against economic stimulus wrong logically, it’s wrong morally. I believe in hard work and fair taxation as much as the next guy, if you don’t believe me, read about my admiration for American conservatism. (Also read Brad DeLong’s takedown of bad conservative ideas with good conservative ideas, notably Milton Friedman).

Unemployment insurance makes sure insures that unemployed parents can continue to buy books for their kids and put food on the table. Transfers help the poor recover from predatory practices (and, admittedly, their own stupidity for buying things they can’t afford – but not their kids’, who will ultimately pay for society’s apathy).

Maybe tax cuts pay for themselves. The argument Pethokoukis presents is unconvincing but, even if they do, the deficits we incur today to build our way out of this recession won’t matter. When the Republicans claim that we should offset any tax increases with spending cuts, I really scratch my head. Because, right now, they both suck for the economy. 

 

Edit: Brad Plumer has a piece making the same argument. It’s wrong for the same reasons. Also, I’ve heard an AD argument suggesting that an increase in oil-exports will cause inflation. This is wrong for the same reason every nut who claimed America’s deficits, or lack of austerity, will cause inflation. In fact, a little more inflation would probably be a good thing. No matter, as I note, the supply-side benefits of cheap oil probably outpace the effects of demand.

Another Edit: Altman and Plumer are right that resulting investment will cause an appreciation of the dollar, even in the counterfactual that the increased exports came from, say, Oman. This is because the infrastructure behind oil production need Omani labor, Omani land, and hence the Omani rial. The cost from demand of oil itself, though, is no different whether it’s flowing from Oman or the USA.

Daniel Altman has a piece in Foreign Policy, concerned about the effect increased oil exports  will have on the American economy, suggesting that Americans might be hit with the infamous “resource curse”:

To buy all that oil and gas, America’s new customers will need dollars — and that will begin to push up the currency’s value. It will rise further still if the oil and gas industries energize the U.S. economy enough to pull in new investment from abroad.

Though these shifts will be dramatic enough, the most profound effects will be on American workers and consumers. A stronger dollar is usually fine for Americans, as long as their purchasing power keeps up with the currency. Yet this is exactly where the problem will be. The new exchange rates will make it harder for non-petroleum industries — where many more Americans are employed — to export their products. At the same time, the strong dollar will make imports more affordable to American consumers. Some of the money generated by oil and gas will still filter through to other industries, but those dependent on exports or competing with imports could find themselves in a dire situation.

The news for consumers is not all good, either. With more income coming into the country, local prices will creep up as well. The United States might go the way of Norway and Australia, rich countries that have become two of the world’s most expensive places to visit and live, in large part because of their resource booms. The combination of higher prices for goods and services and falling wages in industries unable to compete at the new exchange rates will squeeze household budgets from both ends.

I share the same concern increasing prices will have on the median consumer, but think this argument is ultimately unfair. First of all, when it comes to oil, Altman seems to argue that there’s something particularly special about American oil exports. To the contrary, because oil is priced in dollars, American consumers are vulnerable to increased exports of oil whether the crude originates in Saudi Arabia or Texas. For this reason, the comparison to Australia is incorrect, because the rapid rise in Australia’s exports weren’t on the dollar standard.

Indeed, with a few basic assumptions, it is possible to argue that increased American exports will decrease international demand for dollars, and hence its value. I will assume the following:

  • Demand for oil is price-inelastic (this is a fairly defensible and data-driven belief, as indicated by this IMF report)
  • Oil will continue to be priced in dollars (so long as the Americans, and not the Chinese, are responsible for peace in the Middle East, this will continue to be the case)
  • The increase in oil production is exogenous (recent technological advances clearly support this theory).

Consider the international market for oil:

ImageThis rather simple graph illustrates why increased American exports won’t necessarily drive an increase in dollar value. R+ Rrepresents the initial demand for dollars, while R+ Rrepresents the demand for dollars after a positive supply shock. It’s clear that, due to price inelasticity, the demand for the dollar has fallen. A retrospective edit: I should note that I know the price of oil will continue to increase, certainly from rising demand but possibly also from supply-side factors like peak oil phenomenon. Under price-inelastic conditions, this would imply an increased demand for the dollar. However, this graph demonstrates the supply shock against the counterfactual in which America doesn’t export oil which, I think, vindicates my argument.

Oil isn’t like corn or steel. We run the oil market, and hence any exogenous increase in exports, whether from Saudi Arabia, Qatar, which means demand for dollars will increase, regardless. Again, the undertone of the article suggests that Altman feels it’s worse that the oil is coming from the US as opposed to the Arab-world, but the fact is that if dollars are going somewhere, they might as well go home.

It also seems odd to suggest that we might become the “United Petrostates of America”. Even as a nation that championed the idea of free, international trade in the 20th Century, imports and exports remain a relatively small portion of the American economy. “Petrostate” connotes the Saudi disaster that is an economy so drunk and dependent on state capitalism of oil that all institutions become extractive, failing to make the leap of human development required of a modern nation.

There’s another problem with Altman’s argument. Exports will increase, driving demand for the dollar, which will make imports cheap, increasing our deficit.  But this is how trade works! If there’s one concept we all remember from Econ 101, it’s that trade is ultimately self-correcting. Now, one may argue that frictions and controls across money markets won’t let this happen, but Altman – too – in his argument assumes a pretty mainstream interpretation of international trade, so I see no problem criticizing his conclusion on these premises.

We share a similar concern about the income derived from increased production. Unlike Altman, I do think the supply-side effect of oil will far exceed its impact on aggregate demand, resulting in cheaper energy and higher real incomes for all. The US should learn from Norway how to direct an oil boom to the well-being of all without concentrating all the benefits in a rent-seeking minority.

I don’t know whether the answer to this lies in high taxes; regardless, income from land should ultimately be shared by every American. Oil is a dirty good. We didn’t build our country on oil, but on ideas. It will be damning if this windfall impedes our efforts to move to cleaner sources of energy and, as Altman fears, crowds-out better investments.

In the end, if we can divorce ourself from the mess that is the Middle East, we will achieve a geopolitical landmark, allowing us to pursue policy that is truly for greater, visionary interests rather than the short-term need for oil. Arab dictators will no longer have an iron grip on international development and, perhaps, citizens thereof will be freed of the real resource curse.

In the mean time, we should ensure that the coming windfall in investments derived from energy will be directed towards clean energy, human capital, and greater equity. This is no different from any other export, and the relative cost to the US, unlike other exports, is nil because oil is, by standard, denominated in the dollar.

After I responded to Professor Caplan’s post defending an orthodox interpretation of the minimum wage, we had a small conversation on Twitter:

Bryan: My argument is that we should consider all relevant evidence, and most minimum wage researchers don’t.

Ashok: But the evidence is only relevant if std theory applies, and unless one has strong priors that has been ‘refuted’, relevant evidence would be far more valuable w/o Krueger/Card, to the extent one trusts empirics

B: Empirical work “refutes” nothing. All it can do is raise or lower probabilities.

A: Absolutely agree, but then you can’t claim that your argument works for those of us w/o strong priors, as you do.

B: How do you figure? If you have 50/50 prior on employ effect of min wage, why doesn’t totality of evidence sway you?

A: Because of empirics from Krueger. Once my priors change, value of “relevant” empirics diminishes as it begs the question

B: Presenting new info never “begs the question.”

I’m using this blog post to explain more thoroughly the point I was trying to make earlier, and 140 characters won’t suffice. 

Here’s the argument for a standard approach to minimum wage and relevant effects on employment:

But suppose you disagree with me on both counts.  Suppose you have a weak prior about the disemployment effects of the minimum wage.  Suppose further that you think that the best empirical work in economics is very good indeed.  Doesn’t existing evidence then oblige you to admit that the minimum wage has roughly zero effect on employment?

Let’s break this down logically. Let the proposition P be that labor markets operate under orthodox theory and hence wage controls cause unemployment. Everyone has some prior on this proposition. As it happens, Caplan’s beliefs are strong, and mine aren’t. So I update my priors quite a bit more significantly considering Krueger and Card, but this isn’t really important to the debate at hand.

Caplan is arguing that I should change my beliefs based on price controls in general, labor market regulation, and immigration. Here’s why I think his argument is wrong:

  • Caplan is arguing that P is true
  • He is, further, arguing that a plethora of other evidence stand as fair empirics against the Krueger study which clearly shows no disemployment effects on minimum wage (or would at least adjust one’s priors to towards that conclusion).
  • In citing the evidence that the labor demand curve for immigrants is downward sloping and hence suggesting that wage controls cause unemployment, one has to assume that labor markets operate under normal conditions, which is precisely the question at hand.

If wage controls are fundamentally different, as Krueger/Card shows, it really doesn’t matter what the rest of an economy works like. The idea that you can extrapolate how labor markets work from rent controls and agricultural subsidies is irrelevant, because we’ve defined our proposition specifically in the case of a labor market.

I was wrong in suggesting that this “begs the question”, considering the Bayesian nature of this debate. However, one would have to have really strong priors to ignore Krueger/Card and hence extrapolate empirics from other industries onto labor, but he can’t then claim that:

But suppose you disagree with me on both counts.  Suppose you have a weak prior about the disemployment effects of the minimum wage.  Suppose further that you think that the best empirical work in economics is very good indeed.  Doesn’t existing evidence then oblige you to admit that the minimum wage has roughly zero effect on employment?

Further, even in the empirics he cites, there’s a missing dimension in his reasoning: humans are not capital:

If you object, “Evidence on rent control is only relevant for housing markets, not labor markets,” I’ll retort, “In that case, evidence on the minimum wage in New Jersey and Pennsylvania in the 1990s is only relevant for those two states during that decade.”  My point: If you can’t generalize empirical results from one market to another, you can’t generalize empirical results from one state to another, or one era to another.  And if that’s what you think, empirical work is a waste of time.

Even if we establish that it’s okay to generalize empirical results from one market to the other – and, as was my point above, that’s not possible without assuming your conclusion – this seems like a pretty remarkable statement. There is nothing qualitatively different between New Jersey and Pennsylvania, or the 1990s and 1960s. There is something qualitatively different between a human being and a machine. For one, it’s illegal to enslave own one of them.

Because standard economic theory applies in one particular market certainly doesn’t suggest that every single commodity or good (if you can even call labor that) operates under these conditions. In the most comprehensive study conducted on wage controls, we have strong reason to believe that these very conditions are irrelevant.

I cede that if one has strong priors and a distrust of economic empirics, the dominant belief might still be an orthodox interpretation of the minimum wage. But if one has strong enough priors he can believe just about anything. When so much empirical evidence casts doubt on economic theory, I don’t understand the need to study “relevant” data, which is useful only to those with such high priors.

Neil Irwin notes that the “soaring dollar” is sign enough that the American economy is recovering:

In short, the U.S. economy is looking a bit better. And the other world economies are sucking wind. Just today, new data from the European Union showed that  in the 17 countries that use the euro currency, employment fell to its lowest level in seven years in the final months of 2012. In other words, things are even worse for workers in Europe than they were in the immediate aftermath of the 2008 crisis. […]

In other words, as terrible as the economy here may feel, it could be a lot worse. And importantly, while government policies (particularly by central banks) certainly have a lot of power to influence exchange rates, the core reality is this: The value or the dollar or any other currency hinges on the economic outlook for the country that uses it.

Dean Baker begs to differ:

The only serious way to get the trade deficit down is get the dollar down. That will make our exports cheaper to people living in other countries and make imports more expensive for people in the United States. That means more exports and fewer imports, and therefore a smaller trade deficit. (For those folks who were looking to the trade agreements, the idea that these will reduce the trade deficit is just something that the Serious People tell to children.)

Anyhow, it is easy to show there is no direct relationship between the health of the economy and the strength of the dollar. In fact, the recovery in the first half of the Clinton administration was based to a substantial extent on the idea that a lower deficit would lead to a lower valued dollar and therefore more net exports. And, this largely worked as shown below.

Other things equal, for a country that’s not price-inelastic on trade (technically, if the Marshall-Lerner condition is satisfied) I’d support a weaker currency. This generally benefits the disadvantaged who, in theory, would be more employable in traditionally blue-collar jobs like manufacturing and low-end services. It hurts the people who have much wealth in dollars, but that increasingly excludes the poor, and even middle-class.

But, it’s too simplistic to assume that what we need right now is a weaker currency, or that traditional devaluation (err, “depreciation”) will increase exports. Take, for example, this graph of our exports to China:

Image

This graph shows that after the recession ended, both exports to China and the dollar increased with each other. This isn’t to say that there’s a causal relationship, indeed theory would suggest just the opposite. But does indicate that simplistic devaluations need have no effect. So just as Dean says “it is easy to show there is no direct relationship between the health of the economy and the strength of the dollar”, it is easy to show there is no direct relationship between net exports (which haven’t changed much in the past five years) and the dollar.

There’s also a pretty important problem with significantly devaluing the dollar. The world would be very angry with us. The world operates on a dollar-standard and countries pay for the most important import (oil) with the greenback. This means that countries keep dollars so that they can keep their energy sources flowing, and it also means that many nations have much of their wealth in dollars.

We would be ceding a key, global presence if our economy couldn’t survive without a weaker currency (recent job reports and sales show that this just isn’t the case). 

Indeed, a rise in the dollar implies an increased demand for dollar-denominated purchases, i.e. American exports. As several large multinational corporations signal a shift in manufacturing presence back to the United States, while still others plan on starting operations anew, it’s clear the world expects a growing demand for American exports. The value of the dollar is as much about market expectations regarding the American economy, as it is about the American economy itself.

Exchange rates, however, are also limited in the information they provide about an economy. For floating currencies, as the demand for exports increases the currency gains value. Eventually, the increased value results in a decreasing demand for exports. Indeed, between any two freely-trading nations, the exchange rates automatically adjust to create a standard equilibrium. 

Of course, the world is neither that simple nor predictable, but principally the same. Neil also recognizes this, I’ll finish with him:

At times, the tendency to conflate the strength or weakness of a currency with the strength or weakness of the nation is problematic. It can lead to bad policy if, for example, policymakers in a country with a terrible economic situation are unwilling to take steps to help because they fear allowing their currency to decline.

But strip out that emotionalism, and this teaches a fundamental lesson for policymakers: If you take care of your country’s economic prospects, the value of your currency will take care of itself.

So, contra Dean, I don’t believe that a rising dollar is a bad thing, per se. I certainly don’t believe devaluation sends the right message. And, when Dean says:

Anyhow, it is easy to show there is no direct relationship between the health of the economy and the strength of the dollar.

He knows that if the correlation doesn’t hold in the upward-direction, it definitely doesn’t on the way down, either. So if one can’t prescribe policy recommending a stronger dollar citing no correlation, then we certainly can’t recommend a weaker dollar, either. In this case, we let it be, laissez-faire

 

People like to caricature PK as some sort of deficit nut. The crazy professor that runs around screaming “Deficits don’t matter, ever“, or “Keep printing that money“. Or, more recently, that he’s a crude Keynesian.

So, I’m not going to do any analysis here, just post a few quotes from the good doc and you tell me if this is “crude” or, as Jeffrey Sachs and Joe Scarborough put it:

Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong. Reasonable liberals and conservatives can disagree on what role the federal government should play yet still believe that government should resume paying its way. It has become part of Keynesian lore in recent years that public debt is essentially free, that we needn’t worry about its buildup and that we should devote all of our attention to short-term concerns since, as John Maynard Keynes wrote, “in the long run, we are all dead.” But that crude interpretation of Keynesian economics is deeply misguided; Keynes himself disagreed with it.

Here’s what Paul Krugman has to say:

I wish I could agree with [the view that deficits never matter, as long as you have your own currency] […] But for the record, it’s just not right.

The key thing to remember is that current conditions […] won’t always prevail […] But this too shall pass, and when it does, things will be very different.

So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation […]

Suppose, now, that we were to find ourselves back in that situation with the government still running deficits [and] that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates. […]

Well, the first month’s financing would increase the monetary base by around 12 percent. [The price level would rise] roughly in proportion to the increase in monetary base. And rising prices would, to a first approximation, raise the deficit in proportion.

So we’re talking about a monetary base that rises […] 400 percent a year. Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.

I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk […] can make that point disappear:if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

[…] But the idea that deficits can never matter, that our possession of an independent national currency makes the whole issue go away, is something I just don’t understand.

Correct me if I’m wrong, but the professor sounds like a Very Serious Person.

James Hamilton asks Brad Delong:

Finally, let me invite you to answer the questions I posed for Krugman and O’Brien: “Do you maintain that U.S. debt could become an arbitrarily large multiple of GDP with no consequences for yields? If you acknowledge that there is a level of debt at which these effects would start to matter for the United States, what is your estimate of that level, and how did you arrive at it?” We give our answers to these questions in our paper. What’s yours?

I’m going to invite myself into this little debate. This question can be interpreted in many different ways that, I think, is the problem with the fear-mongering behind a particular debt-GDP ratio. What do I mean by this?

The R-R paper infamously notes that after debt exceeds 90% of GDP, yields start rising, because investors no longer have confidence that the country in question can service its debt. Even ignoring the fact that this “limit”, if you will, doesn’t apply to countries that borrow in their own currency, the 90% figure is meaningless.

Presumably, investors worried that countries will have to borrow more to pay interest on its bonds which will lead to a snowball effect of debt accumulation. Therefore, it’s hardly the debt that’s important, but the deficit. So it’s not a particularly worthwhile task to wonder the debt-GDP ratio at which a country “tips over”.

Consider an example. You’re told a country has debt levels at a staggering 500% of national income. You’re also told that its debt has been at this level for the past 500 years, and official estimates predict this ratio well into the next 500 years. The market won’t suddenly demand higher yields, because the country has consistently serviced all its interest in the past, and will do so in the future.

Deficits imply that a country has to borrow to service its interest, debt implies nothing. The 90% figure was likely a correlation with a) the fact that the countries in question couldn’t denominate debt in their own currency and b) they had high deficits.

So yes, I believe debt against GDP can become arbitrarily large so long as a country isn’t running deficits. Of course, on the long journey to huge debt levels, a country does run deficits, and it’s entirely possible that investors deem this to be unsustainable, causing a debt crisis in the interim. You can parse this as a one-time promised deficit of whatever level you choose. Say, if, the US buys all the gold in the world to build statues and create a Cult of Obama. As long as it does it only once, services all its interest, and doesn’t run a deficit next year to do so.

But that’s not the question being asked. The question that’s being asked supposes an arbitrary debt to GDP. Position has no meaning without regard to velocity which, itself, has no meaning without regard to acceleration. I would actually argue that so long as an arbitrarily high nth derivative of debt is negative, the countries fiscal position would be stable. Of course, this is beside the point in reality because the level of confidence with which an investor can know debt is greater than he can know deficits, and so forth. The nth derivative becomes, basically, unknowable, at which point the investor plays it safe.

You might think my answer is meaningless, and to some extent it is. But that’s because it’s answering a meaningless question.

 

Edit: Note, I don’t actually thing that our long-term debt is irrelevant. In fact, I depart from Krugman in that I think we had better start talking about rising healthcare costs not just in 20 years, but in 50, 100 today. But, unlike others, I won’t wrongly caricature him as someone who doesn’t care about this, but he definitely seems to discount for the future far more (as in have faith that future politicians aren’t clueless).