In a recent conversation with the Libertarian Institute’s Keith Knight, we broke down a 2012 article by everyone’s least favorite economist, the former New York Times pundit Paul Krugman. In it, Krugman makes all the familiar and mistaken arguments about why we needn’t worry about high levels of government borrowing. From “the government doesn’t need to actually pay it back” to “we owe it to ourselves,” Krugman couldn’t be more confident in his wrong-headedness.
Krugman’s arguments are fundamentally flawed because they mischaracterize the nature of government debt, ignore the distortive effects of deficit spending, and downplay the long-term consequences of state intervention in the economy. One of his central claims is the fallacy that “we owe it to ourselves.” He argues that government debt is largely irrelevant because much of it is owed domestically—meaning that one group of Americans (taxpayers) owes money to another group (bondholders). However, this framing ignores the real issue: debt represents a transfer of resources from the productive sector of the economy to the political sector. The fact that the debt is held domestically does not mean it is harmless. As economist Murray Rothbard pointed out, government debt represents future taxation, which distorts economic incentives and reduces capital accumulation. Furthermore, the government’s issuance of debt diverts savings from private investment to public spending, leading to inefficiencies since government projects are not subject to the profit-and-loss mechanism that disciplines private enterprise.
Krugman also repeats his usual Keynesian claim that the U.S. economy needed more government spending in 2011 to reduce unemployment. This is the classic spending multiplier argument, which Austrian economists have long debunked. The Austrian Business Cycle Theory (ABCT) explains that recessions are caused by previous credit expansions and malinvestments. More government spending does not fix these distortions but prolongs them. State spending does not generate real economic growth because it is merely consumption—it reallocates resources that would have otherwise been used more efficiently in the private sector. Stimulus spending does not create sustainable jobs; it temporarily props up sectors that should be allowed to contract, delaying necessary corrections.
In an attempt to dismiss concerns about rising debt levels, Krugman points to historical examples like Britain and post-World War II America to argue that debt is not a long-term problem. However, this comparison is misleading. After World War II, government spending dropped dramatically, allowing for a private-sector-driven recovery. Today, however, government spending remains permanently high, preventing a similar resolution. Additionally, Krugman assumes that interest rates will remain low indefinitely, ignoring the fact that a loss of confidence in U.S. fiscal policy could drive rates higher, making debt service a crushing burden. If the government resorts to money printing to manage this burden, it risks inflation and the destruction of savings.
Another of Krugman’s misleading claims concerns the debt-to-GDP ratio. He suggests that as long as debt grows more slowly than the tax base (GDP), there is no problem. However, this assumes that GDP growth is an exogenous force that can always be relied upon. Austrian economists emphasize that GDP is often an artificial construct, inflated by government spending and monetary expansion. A true measure of economic health is not simply GDP but sustainable, market-driven growth, which deficit spending actively undermines.
Perhaps most troubling is Krugman’s failure to address the moral and political dangers of deficit spending. He assumes that “responsible” governments will impose modest tax increases when needed, but Austrians recognize that deficit spending incentivizes bigger government. Politicians have every incentive to expand state power under the guise of economic necessity. Raising taxes to pay for debt does not simply “divert” resources; it actively punishes productivity and investment. History has repeatedly shown that governments rarely reduce spending even when debt becomes unsustainable. Instead, they inflate their way out of debt, destroying the purchasing power of citizens in the process.
Krugman’s article reflects the standard Keynesian view that governments should intervene aggressively during downturns and that debt is a secondary concern. From an Austrian perspective, this is deeply misguided. Deficit spending distorts market signals, crowds out private investment, and creates long-term economic fragility. The idea that the government can “spend its way” to prosperity ignores the very mechanism that produces real wealth: voluntary exchange, savings, and investment in the private sector.
Rather than more government spending, what was truly needed in 2011-2012 (and today) was the liquidation of malinvestments, a reduction in government intervention, a return to sound money and fiscal responsibility.
What was needed then and needed again today, especially in light of Republican efforts to push through yet another continuing resolution to keep the deficits going and the debt growing, is a realistic conversation about the national debt.
