Monday, July 11, 2011

If the Public Debt Robs our Children, We Robbed the WWII Generation

It is often said that the public debt is a burden we leave to our children and grandchildren. Even Barack Obama said the same when he was a Senator. Invoking children is a great way to make a moral argument without sounding moralistic, but it is a spurious way to make an economic argument in committing the fallacy that all borrowing is deferred charge.

The American people should know that it is not as if the 14 trillion dollar public debt is owed to foreigners. Actually, Paul Krugman (not surprisingly, a Keynesian) thinks that the figure that matters is the debt (or federal securities) held by foreigners and institutions outside of the US, which is about 9.6 trillion. The remaining 5 trillion or so, called intra-governmental debt, is the debt the federal government owes to itself, such as in the form of debt owed to trust funds like Social Security. The cries against burdening our children and grandchildren are illegitimate here. Borrowing by the federal government is itself a market transaction and an investment decision in which the lender forgoes the present use of her money, and purchases a security in return for interest. This interest is socially costless because it is simply a redistribution from all tax-payers to bond-holders. This is a transfer payment, not robbery.

What is missed in the intergenerational-robbery fallacy is that deficits actually help present working cohorts to invest in the increased supply of assets, generated by the debt. Far from being a burden to their children, the present working cohort are, if they are not also building tangible assets made possible by the money raised, at the very least saving for their retirement and doing their part to ensure that future generations are not called on to fund their retirement (either personally, or by public programs). We don't even have to get into Keynesian arguments about how debt possibly increases aggregate demand and jobs to show that government borrowing in such instances does the exact opposite of burdening future generations. This is what makes government borrowing a potent instrument of fiscal (read "stimulus") policy, and it is the real reason why deficit hawks are against it.

Debt sounds like a bad word only because we are falsely analogizing from the personal, or the household, to the public sphere. But what is prudent for the individual or the household is not necessarily prudent for the market. (That's why the economy needs us all to go out and buy even if we don't feel we should.) Yet the false analogizing isn't too surprising if we recall that one strand of ideology in this country has always started off from the perspective if the individual, and the other, the collectivity. We can argue till the cows come home on the latter, but the idea that the public debt is always and entirely a burden to future generations is simply and certifiably fallacious. We are the children and grandchildren of people living during WWII, during which time the public debt as a percentage of GDP was even higher than what it is now, but I don't think anyone will argue that we're now paying off their debt.

OK wait, maybe some will.

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