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.
READER COMMENTS
Thomas Knapp
Apr 27 2020 at 8:17am
Some politicians borrow money.
Their collateral is their promise to beat that money, plus interest, out of “the public.”
That doesn’t mean “the public” has a debt. It means the politicians do.
Mark Z
Apr 27 2020 at 8:18am
In other words (or perhaps in addition), it’s a fallacy of composition to say “we owe it to ourselves.” This should be obvious: many of the people who will compensate current bondholders aren’t even alive yet, many aren’t old enough to vote, and thus in the cost-benefit analysis of deciding whether it’s worth it for them to forego consumption in the future in order so that bondholders can enjoy consumption in the future while foregoing it today, the whether the situation is in the interest of the prospective bondholder gets much more consideration than the not-yet-alive people who have to pay back the loan.
Even ignoring that inter-generational issue though, the relationship between borrower and lender is asymmetric. Bondholders buying government bonds is voluntary; members of the public ‘borrowing’ money from them in order to build schools, army bases, etc. is not. Even if it’s not worth it for me to borrow money against my future consumption to get my share of the greater national security or externalities from public education I’m supposedly getting, I’m still going to be party to the terms of loan. Either way, even if all we care about is aggregates, if we believe people are going to be less enthused about working or making productive investments when they have to pay 70% of the returns in taxes partly in order to pay “back” loans they never agreed to make, then the effect of borrowing today comes at the expense of “our” future production as well as consumption, however “us” is defined.
Jon Murphy
Apr 27 2020 at 8:34am
You highlight an important case where accounting is different from the economics. It’s for accounting reasons, not economic, that “we owe it to ourselves.” Such a claim fails to take in to account (pun intended) the basic maxim of economics: all costs and all benefits to all people at all times must be considered.
As a bit of an aside, a lot of Samuelsonian “Max-U” style thinking falls into this same trap. Optimal tariff models, for example, are optimal in name only. They are “optimal” only because they exclude costs and benefits to foreign individuals. This exclusion is based on accounting, not economic, rationale. As such, one reaches a conclusion that is reasonable from an accounting point of view, but not an economic one.
Bill
Apr 27 2020 at 9:11am
Seems Ryan Cooper commits a similar error with his “Unlike a household, the American state is immortal … .” argument here:
https://theweek.com/articles/909794/there-no-reason-worry-about-national-debt-right-now
Pierre Lemieux
Apr 27 2020 at 10:29am
Bill: Yes, although he does not express his opinion in those simple terms. (Thanks for the link.) His opinion remains of the slogan variety. Among his many errors (and not the biggest one), it is at least very misleading to say that Trump’s deficit was due to his tax cuts. Just looking at the data, one can see that it is rather due to his increasing federal expenditures. (Congress of course is formally resp0nsible for this, but Trump usually asked for more.)
robc
Apr 27 2020 at 10:37am
I assume that was supposed to be “formally”, not “formerly”?
In the same way, congress is responsible for the tax cuts too.
Pierre Lemieux
Apr 27 2020 at 10:40am
Thanks for pointing out the typo, robc. I will correct it now.
Phil H
Apr 27 2020 at 11:14am
The problem with high levels of debt is volatility. In theory it’s true that a country that controls its own currency can’t go bust. But when debt levels are high, small amounts of volatility (e.g. in exchange rates or in tax revenues) can have larger knock-on effects.
Thomas Hutcheson
Apr 27 2020 at 11:23am
Public debt is more like borrowing for a home mortgage than a credit card balance. At full employment borrowing is undesirable only if the return on the expenditure is less than the net present value, in taxeswhich case the complaint should be directed at the expenditure, not the borrowing. At less than full employment the same principle applies except that the some of the prices paid for inputs into the expenditure will be above marginal cost, so this makes more expenditures pass the NPV test. Nevertheless, even at less than full employment some expenditures may not pass the NPV test (the airlines bailout?), but still the lament should be directed at the expenditure, not the debt.
The concern that taxes on the incomes of low-income people to pay interest and principle on debt incurred to finance the consumption of high income people is legitimate, but only as the tax and expenditure decisions are themselves questionable. Focusing on debt or deficits obscures issues more than it enlightens.
Mark Z
Apr 27 2020 at 1:28pm
I think you’re right inasmuch as government spending is a form of investment (though I‘m skeptical about estimates of the NPV of government expenditures), but much government spending is largely consumption. The NPV test may technically still apply to consumption, e.g. it may genuinely be worth it for me to borrow against future earnings to pay for a vacation today, but public finance is more like borrowing against the future earnings of some other people around long after we’re dead to pay for our vacation today. In theory it may be worth it, but how exactly do we measure that? If we can’t, why should we trust the person who stands to consume today at someone else’s expense tomorrow to decide whether it’s worth it? Seems rather asymmetrical.
Jon Murphy
Apr 29 2020 at 11:28am
Part of the problem that Buchanan (and others) highlight is one cannot do a reasonable NPV analysis because the people paying the future costs are not the ones receiving the benefits. Furthermore, since of of those future payers do not exist, we have no reasonable way of estimating their costs and benefits
Thomas Hutcheson
Apr 29 2020 at 5:44pm
And what other way can one decide on an action that has costs and benefits that do not coincide? And whatever way you favor, it still seems to me that the issue is the expenditures and the taxes not the difference between them at time t or the sum over t.
Tom DeMeo
Apr 27 2020 at 1:59pm
Isn’t what we are doing mostly accomplished via quantitative easing?
When the federal government prints a dollar, it is expanding (diluting) the overall money supply by a dollar, and claiming control over that particular dollar.
There is no battle for who owes who. We’ve diluted the entire system, so we can direct a specific value claim. This is a dangerous proposition to be sure, but the huge advantage of it is the lack of the need for reconciliation.
This is one of the few situations where this particular solution is perfect for the circumstances. There is no means available to us in which we can reconcile all the overlapping risks and responsibilities here. Attempting to balance accounts would simply produce cascading failure. Avoiding a mud fight over who owes who is precisely what is needed to protect those who have money just as much as it is protecting those who need it to survive.
Yes, all that value comes from the dilution of our money, and if we don’t stop this at the right time, it will get quite ugly. It is fair to be afraid of that. But just creating currency is the best option we have.
Just how we are giving it out is another topic, and there is plenty to complain about there. But we aren’t borrowing most of this money from anyone. We are using quantitative easing to avoid all that, and that part is smart.
dede
Apr 28 2020 at 4:37am
There is one point I am always surprised is not really discussed. You mention rightly “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.”
My understanding is that the government has ways to issue debt so that it looks like an offer the primary dealers cannot refuse (if only by promising them a few basis points more when the FED repurchases them within minutes) but why on earth do we believe that anybody will continue to hold this junk indefinitely? Is anybody looking at the systemic risk in the US and Europe that real people (“the public”) stop buying it, not at the margin (in which case the FED tricks can work) but for real?
Vivian Darkbloom
Apr 28 2020 at 1:05pm
” When the national debt is owned by its citizens, a country in effect owes money to itself.”
The first clause of that sentence is also important—somewhere between 35 and 40 percent of the US debt held by the public is not owned by US citizens.
Warren Platts
Apr 29 2020 at 9:47am
If interests rates are negative, is there really a downside to borrowing? The government would in effect be paid by the private sector to borrow money from it. Asking for a friend..
Jon Murphy
Apr 29 2020 at 11:24am
Your second sentence answers your first.
dede
Apr 30 2020 at 5:42am
“The government would in effect be paid by the private sector”
This is a very strong assumption. Central Banks are not “private sector” and have been distorting the process for 12 years now.
In the eurozone, negative interest rates have been around for a while now, which has always kept me wondering. As this is impossible (negative interest rate means that the future is more certain than the present), I came to the conclusion that we are facing a distorted reality (that is similar to where Steve Jobs used to live in according to his biographer, or what has been experienced in the Soviet Era when lies were less dangerous than famine for the communist parties’ members).
One explanation for how this can happen is to realise that, because of (or thanks to, depending on your views) regulation, banks and insurance companies are not really private anymore (think 1930’s Germany where shareholders still existed but the decision process did not belong to them anymore)
As for your first question “is there really a downside to borrowing?”, I would say, not immediately. It is always good to get free money, until it is not anymore and you end up with too much debt, meaning default, even if you call it differently because the US government cannot technically default on USD.
Comments are closed.