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If Krugman—who won the Nobel Prize in economics last year and enjoys a high profile—continues emphasising the importance of fiscal expansion while downplaying the need to tackle the bad asset problem, he will be giving the U.S. public an excuse for avoiding the painful job of dumping the toxic assets. His theory will mislead U.S. citizens into believing that big government spending can save the day, thereby making it impossible to build the solid political consensus needed for grappling with the challenge of eliminating bad assets.16

The United Kingdom is another extreme case, with the government’s budget deficit unavoidably reaching 12 percent of GDP in these years immediately after the financial crisis. Interest payments by the government in 2009–10 are likely to be £30 billion a year, or equivalent to just over 2 percent of the economy’s output for the year. Assuming a strong recovery in the economy in 2010–11 onward, and assuming that government spending on services at best is flat after adjusting for inflation for at least eight years, the annual budget deficit is unlikely to return to balance until at least 2017–18. Not until after that would the level of debt on which interest must be paid start to fall. There is no period of so many years in the past in which government spending did not rise. Since 1970 there has been the odd year of decline—one of them was in 1977–78 when the International Monetary Fund had to step in and help the UK government sort out its finances. All these occasional years when government spending declined slightly in real terms felt like a painful squeeze so it’s hard to imagine what an eight-year freeze would be like. This likely pain suggests it will in reality take much longer to stop the debt-GDP ratio rising. And, of course, this is just the immediate deficit—the retrenchment measures needed to cover future pension, health, and welfare obligations will be far bigger.

To spell it out, the crisis of government we face now is more serious by orders of magnitude than that of the late 1970s, a tumultuous era of strikes, cuts in public services, and political upheaval.

The UK’s position will be worse than most but it is not alone. The U.S. situation is similar, and all the rich country governments have mortgaged future tax revenues to a degree that will compromise their ability to provide in future the services and benefits (including pensions) they pay for now. Even if Professor Krugman is right that fiscal stimulus has been and remains essential for now, the existing debt burden means future taxpayers (declining in number, remember) will be paying a higher share of their incomes to their governments for a lower entitlement to services and benefits from their governments. Governments can’t possibly honor the much greater burden of future pension and social entitlements implied by today’s systems, if they were to carry forward into the future. What does this mean? How will the dual debt crisis unfold?

WHAT WILL GOVERNMENTS DO?

The debt time bomb is metaphorical—and metaphorical devices never explode because unsustainable trends are not sustained. (This is a version of Herbert Stein’s Law, which he expressed as: “If something cannot go on forever, it will stop.”) The accumulation of debt, a massive obligation we have imposed on people in the future, will therefore lead to certain more or less inevitable changes. There are a limited number of ways this can work out, and the less unpalatable routes will require an explicit acknowledgement that present choices are required by future obligations.

What are the possibilities? The debts incurred by rich Western countries represent a transfer of resources from the future to the past, and also from future citizens of other countries, to the extent that foreigners are buying the government bonds being issued to raise the money. So there is an international as well as intergenerational aspect to this transfer. We are maintaining today’s levels of consumption not only at the expense