I’ll be commenting on the following statements, posted by a writer on the New York Times in a blog post titled Nobody Understands Debt:
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.
But isn’t this time different? Not as much as you think.
It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.
Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.
Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.
So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.
But the government HAS been running deficits!
This just as a sidenote:
Actually the US government is, has been, and is planning to continue to be running record deficits above $1 trillion:
The total public debt has more than tripled since 2000!
So technically, according to this guy it should all be good, right?
Any serious scientist proposes a null hypothesis.
What’s his null hypothesis?
How much longer should the government follow his policy recommendations before he’ll stop and wonder if
maybe they are aggravating and prolonging the economic crisis in the US?
How much did all this debt help rid the US of unemployment? Didn’t unemployment rather rise alongside the debt? In spite of corroborating data like that, I’m not even claiming that there necessarily is a direct correlation. But the author above obviously claims that there is a correlation in the other direction. If he thinks so, wouldn’t it make sense to have a curious and open discussion about such contradicting data, if he were serious in his pursuit of the truth?
Is it not at least reasonable food for thought to propose the that the public debt doesn’t seem to be a cure against unemployment, that maybe the problem needs to be tackled elsewhere?
What are the problems with the public debt?
The author conveniently picks all the wrong amateur arguments against the public debt to shoot down, and ignores the accurate ones.
The problem with the public debt as I see it, is that, even if “we” were completely indebted to “ourselves” (note the grade A sophistry in such imprecise analyses), the working population is over time more and more on the hook to rich investors and politically connected bankers who just lean back and let the IRS collect for them.
While there may be some small retirees receiving interest payments (which is also unfair because those young people who will be funding their retirement never had any say in the matter), there is a significantly larger percentage of foreign and domestic big time investors who get to collect from people who never had a say in the debt they now need to pay off.
Just look at the Federal Reserve as one example. What do you think happens with all the revenue they earn from interest payments?
People like this author here will likely tell you “It’s all good because it’s all paid back to the Treasury”.
Well, that’s just pure and lazy sophistry!
What’s paid back to the Treasury is the Fed’s PROFIT, which is a more or less negligible sum after all the Fed’s board members, employees, contractors, partners in holding companies held by the Fed, and shareholders have been paid off.
Guess who the Fed’s shareholders are? It’s the big national banks, receiving a handsome preferred dividend every year.
And yes, they can rollover debt for as long as interest rates are low. I may note that I have consistently and correctly predicted record low Treasury rates for years to come. (Just by the by: I don’t know that the author above has ever made such a prediction, except when rates were already way low which doesn’t make it a prediction since it’s already happened. In fact he actually predicted sky rocketing rates and complete fiscal doom back in 2003 with the public debt at a third of today’s level, but then … it’s not like I ever expect consistency and sound methodology from biased academics on either side of the political aisle.)
All these low rates will do is allow the debt to get even more bloated. And interest rates won’t remain low forever, as you can see in Greece and similar situations. Did people like the above author see any of those sovereign debt crises coming?
What about Japan? Their debt is the most crushing of all industrialized nations, and I’m predicting that their time of low rates will be drawing to an end any day now, with their debt and pension crisis having entered its final stage. Then what?
They have been running deficits for two decades, people like this author ought to love what they did. Now what? … All you’ll hear is chirping crickets.
And then for someone like that to go on public record and say “Nobody understands debt.” – It’s embarrassing!
It’s the same old tired Keynesian paradigm: Debts don’t matter … until they do. And then it’ll most likely be too late.
Of course people like the above author may say: “But it’s just the rich who’re supposed to get taxed to pay off the debts.”
Yeah right, the rich people who bribe all the politicians in charge will let that happen, that’s the way of the world in the hazy deluded minds of state tenured academics … get real people!
For a more detailed analysis, read my post What’s the Problem With Government Budget Deficits?, I’ll just post its conclusion here:
As I explained, the ultimate damage caused by public budget deficits occurs at that point in time when taxpayers are forced to restrict their consumption and unjustly bear the cost of malinvestments from the past.
Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.
A real solution would of course be to make investors suffer the consequences of their unproductive investments, default on the public debt, stop stealing money from people, and allow for voluntaryism to take the place of interventionism.