Krugman LOVES invoking the 50s:
First, instead of a hypothetical example, let’s talk about a real case: US debt after World War II. The government emerged from the war with debt exceeding 100 percent of GDP; because there was almost no international capital movement at the time, essentially all that debt was owned by domestic residents, with a sizable fraction consisting of savings bonds bought by individuals.
Now, here’s the question: did that debt directly make America poorer? More specifically, did it force America as a whole to spend less than it would have if the debt hadn’t existed?
The answer, clearly, is no.
But have a read of MR’s link to this paper:
The statistical trend for growth in total economy LP ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007. For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”
The 50s, when we last had a gigantic debt burden to work off, was right smack in the middle of the most extraordinary burst of productivity the world has ever seen. Life changed more slowly before and after. How can you derive policy recommendations for today from this datapoint? You can’t!
And here’s a graph from Krugman:
Now that’s something that I have NO intuition for. Borrowing from foreigners and buying their assets with the proceeds? WTF?
Not Unreasonable 