Owing the Public Debt to Ourselves
By Pierre Lemieux
Will a snake who eats its tail end up disappearing? Can we make the public debt disappear? Friday, the Congressional Budget Office announced that the 2020 federal deficit, which its March forecast put at $1-trillion, is now projected to be $3.7 trillion. The federal debt held by the public will increase by roughly the same amount.
The Economist is far from alone in making the snaky sort of statement that appears in “After the Disease, the Debt” (April 23, 2020):
In fact a country’s public debt is not like a household’s credit-card balance. When the national debt is owned by its citizens, a country in effect owes money to itself.
We may agree with the first part of the statement: the government’s debt is not like a credit-card balance, for the simple reason that a country is not a household or an individual. But the second statement—we owe the public debt to ourselves—does not make much sense.
If we owed the money to ourselves, we could simply default. We could then sue ourselves and force ourselves to pay damages to ourselves. Or we could prosecute ourselves for fraud. But what would happen if we did not pay the damages or fine due to ourselves? Could we send ourselves to debtors jail? And if we did and later escaped, would we be manhunting ourselves? There is in collectivism something of the snake eating itself.
The non-romantic fact is that the public debt—government bonds—is not owned by the same persons who benefit from the money borrowed. It is owned by some creditors, the purchasers of government bonds, its proceeds are used by the government to benefit some other persons, and it will have to be reimbursed by still other persons such as the taxpayers of future generations. Similarly, those who will service this debt are not exactly the same persons as those who will benefit from the loan. The overlap between all these groups is far from perfect.
One can imagine stylized cases where the overlap would be virtually perfect between the borrowers and the beneficiaries: imagine that government bonds are sold to finance a project to deflect a large asteroid from destroying the earth, and that all individuals who have had their lives saved will pay equal taxes to reimburse the bonds (and service the debt in the meantime). Yet, note that the persons who are owed the debt are still not ourselves, but the savers or investors who purchased the bonds.
In “we owe the public debt to ourselves” (or a country owes it to itself), there are at least two problems: (1) the “we” and the “ourselves” are two different sets of individuals; (2) the “we” include both individuals who benefit from the loan and individuals who don’t. A social contract à la Buchanan is meant to resolve the second problem, but the slogan echoed by the Economist is not a proof in political philosophy.