Saturday, March 28, 2015

How to Think About the Debt

Paul Krugman recently pointed out something that doesn't get enough attention: debt is money we owe to ourselves. In other words, wherever there is a debtor, there must also be a creditor (otherwise who would the debt be owed to?)
...[N]o, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves — an obviously true statement that, I have discovered, has the power to induce blinding rage in many people...Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols.

Really then debt is a wealth transfer mechanism, as are taxes. This is illustrated by Krugman again, below:
Here’s a thought experiment that may clarify matters (or alternatively make the usual suspects even more enraged.) Suppose that for some reason the government were to decree, arbitrarily, that every American whose last name begins with the letters A through K now owes $100,000 to a special government agency; meanwhile, every American L through Z is given a $100,000 bond to be paid by that agency.
Clearly, the overall level of debt in the U.S. economy has suddenly increased (actually by about $1.6 trillion). But has the nation become any poorer? Is that $1.6 trillion of additional debt money taken from the next generation? No and no: the additional debt represents a claim by one set of Americans on another set of Americans — and we’re talking about people here now, not future generations. 
But, but, you say — that’s not where the debt comes from. It comes from people spending more than they earn. And that’s true — debtors get there by spending more than they take in. But creditors get there by spending less than they take in...

Similarly, here's economist Dean Baker:
    As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Bill Gates’ children may own all the debt — but that is within generations, not between generations. As a group, our children’s well-being will be determined by the productivity of the economy, the state of the physical and social infrastructure and the environment....One can make the point that much of the debt is owned by foreigners, but this is a result of our trade deficit, which is in turn caused by the over-valued dollar.
Now there are few points to raise here.  I would be remiss to not mention that Steve Keen has pointed out that when banks get involved in debt transactions the macroeconomic effects are different due to banks' role in money creation. Keen is correct, or course, but that doesn't mean that Krugman is necessarily wrong conceptually (just overly simplified).

No, what's important to note is that debt is a distributional issue, exemplified by Proverbs 22:7: "The rich rule over the poor, and the borrower is slave to the lender." As Krugman adds, "There is still, of course, the definition of we, white man. Debt has distributional implications, and it may have macroeconomic effects because of those distributional issues. But again, all this is within the current generation; it’s not about the present versus the future. "

Succinctly put, over the past few decades, we have collectively decided to borrow from the wealthy instead of taxing them!

Think about it, if there is enough money available to buy the bonds, then there is enough money to tax! In both cases the money is temporarily unavailable to it's owners.

Deficits started exploding after the imposition of Neoliberalism under Ronald Reagan after 1981. This made the deficit explode. See this post: Why did rich-world deficits start exploding around 1980? The chart is above. "The U.S. federal deficit, which had been decreasing since the end of WW2, began to trend upward beginning around 1980. Why? Well, the proximate cause was big tax cuts, without any offsetting spending cuts. The beast was not starved, and tax cuts did not pay for themselves."

Now the way this works is simple. Government has a certain level of spending. They need to (in theory) collect taxes equivalent to the amount of spending. If they do not, there is a deficit (just like a company taking in less revenue than their expenditures).

To make up a shortfall, the money must be borrowed from someone. The instrument it uses to do this is the government treasury bond. This makes up the shortfall.

And who buys treasury bonds? In theory anyone, but in reality, it is primarily the ultra-wealthy who have the kind of scratch to buy up enough bonds to cover massive budget shortfalls (and foreign governments, but that's a can of worms we'll leave closed for now).

Thus deficits lead to debt, and the bonds are representative of that. Every year's debt gets rolled into the "national debt" which keeps growing and the interest on the national debt is a major expenditure of government tax revenue. But who gets that interest?

These commenters nail it (I have combined various comments, emphasis mine):
I'd say that most comments are about tax policy, and a "redistribution" policy where we are cutting taxes on the wealthy so we can borrow the money from them instead.
I often thought that since it was basically rich people who were lending to the government, they could just about as easily pay it in taxes. Of course, that wouldn't be as pleasant as getting bonds...there is no reason that government has to run a deficit in order to borrow from the wealthy instead of simply taxing them. And there is no reason the government must spend only on current operations and on unproductive war materials. It could instead spend on productive infrastructure and human capital. With real rates currently about zero or less, the cost would be nothing. It's a once-in-(my)-lifetime opportunity, and Washington is letting it slip away. Tragic.

It seems to me the people who worry most about the "debt crisis" are misleadingly (and shamelessly) using it to convince the GOP base that social safety net programs must be cut. If the .01% have so much money they can afford to loan it to everyone else, they can afford to (1) pay their workers more so personal debt is less necessary and (2) pay more in taxes to lower Uncle Sam's borrowing requirements. What does affect the future is the investment we make (or don't make) now which enriches (or not) the future, or failed environmental policies now that pollute the future. Or transfers of wealth to elite classes now that pass on increasing inequality to the future, with all the associated costs.
This commenter to Noahpinion gets at the heart of the matter:
Private wealth increases especially strongly when Public debt increases. Public debt is a safe asset to store value and to facilitate the existence as a rentier. Rentiers can have a disproportionate influence on the policy of a country if the polity allows such, and recent studies confirm that the USA is now more an oligarchy than a democracy. It's in the interest of the rentiers to decrease taxes, especially capital gains and estate taxes. It is also in their interest to find safe returns on their investments, and government debt seems to fit the bill. It can be seen right now that even negative nominal interest rates do not kill the demand for government debt. So rentiers have both an interest in low taxes as well as in more government debt. It's a self-sustaining process.
In other words, the government's debt is a safe asset for the investor class. This is in a world very short of safe assets. Why is it a safe asset? Because of the institutional ability to tax the citizenry. Plus the debt must be paid back with interest. So the debt is not stealing from our grandchildren, or whoever, it is a mechanism to transfer wealth from the public at large to the investor class (the one percent, or more accurately the top ten percent who own over 80 percent of the bonds)

Clear enough? Instead of paying a tax, park your money in a government bond at get it all back, with interest! Who wouldn't want to do that?

Who loses in this scenario? All of us non-rich, whose tax dollars are going ever more to pay service on the debt which winds up in the hands of the rich while dealing with the rising tuition and potholed streets (among other things). Just  ask the "spendthrift" Greek people. Plus the rich get to cry to heavens about the "unsustainable debt"and "big government," and use it as an excuse to sell off public assets and slash the social safety net (but never defense spending or corporate welfare).

So the real purpose of reducing taxes on the wealthy had nothing to do with the government being too large or anything like that. It is much more insidious. It was simply to create a situation where the government has to borrow the taxes it no longer collects. This gives the wealthy a safe asset to store their wealth and a way to suck interest payments out of the general public. Taxes increasingly go to servicing the debt and not to essential functions (like keeping bridges standing up). Taxes are redistribution from the wealthy to the rest of us. Bonds are redistribution from the rest of us to the wealthy. Is it any wonder why the wealthy prefer that policy? Their "concern" over unsustainable debts is just kayfabe.

Included in this is increased spending on the military. This one-two punch (decreased taxes and increased military spending) allows them the rhetorical ammo to both smash the state (the only theoretical constraint on their power) and justify destroying social insurance (to create poorer, more desperate workers). Because the increased spending goes primarily to overseas adventures and not domestic items like health care or education, the average American sees no benefit and sides with the anti-government politicians who militate for even lower taxes. If tax money were spent on good infrastructure and decent public services, it would be much harder to demonize government as useless and wasteful, which is a key part of the strategy. Instead it is spent on war, prisons, and domestic spying

Shrinking government spending will never happen, of course, the reason being that big deficits are exactly the point. In fact the rich need the debt. "Shrinking the government" is just rhetorical red meat to the Heartland rubes; the real purpose is to lower taxes and drive the government's need to issue bonds and borrow from the wealthy whom they no longer tax. The rich get a safe asset to park their cash, their fortunes grow, essential government services shrink, and our tax dollars go to pad their fortunes. It's a key part of the Neoliberal redistibutionist private affluence/public squalor agenda.

It is not stealing from the future. It is crass redistribution from the public to the one percent. Just look at the latest GOP budget - eliminate inheritance taxesincrease military spending and gut the social safety net. It's a pretty transparent technique. Here's another Times commenter:
The most elucidating piece on debt I've read was Piketty's section on debt in Capital in the 21st Century. There he talks about how, in general, government debt is a way to get around the politically unpalatable necessity of raising taxes, and is almost always a transfer payment from society as a whole to the very rich (people who can afford to buy bonds). He gives several examples, and the ones that stuck with me the most were of 19th Century Britain on the one hand and 21st Century Europe on the other. During the Napoleonic War Britain amassed massive amounts of debt, and then the government proceeded to pay it all off over the next hundred years, with almost zero inflation, and constant 5% interest rates! The upper class of Britain lived for one hundred years off these bonds purchased by their ancestors. If that was the only way to deal with debt, then I would be all for forcing a balanced budget, however it is not. He then talks about modern Europe, where in general each government's assets are completely cancelled out by its debts. People tend to be very upset by this and claim they are borrowing against their children's future and must (as he put it) "wear sackcloth and ashes" to atone for the sins of debt. However, private wealth in Europe is around 6 times GDP, making Europe the wealthiest society that has ever existed, matched only by pre-WWI Britain. If the governments simply taxed some of that private wealth, they could become solvent within a year.
Here are the top tax rates historically in the U.S. (click to enlarge):



  1. Awesome. Just when I needed to know this. Thank you.

  2. Krugman's focus on debt neatly avoids the issues of resource depletion, pollution overload and climate change that unrestrained growth over the past century has caused. He also avoids mentioning the scramble for yields needed to pay future liabilities and the increased financial risks that result. The debt may not transfer to future generations, but the carnage and destruction certainly will.

  3. Anonymous above seems to have chowed down on stupid, neatly missing the whole point of this blog post. Namely, government debt can (in theory) be easily paid off overnight by taxing the owners of the debt (100% wealth tax on debt). Or paid off over a longer period by simply raising taxes on the owners of debt (the rich) back to tax levels of earlier times.

    Debt is just accounting. It has nothing to do with real world problems. It is trivial to imagine a society with no public or private debt (like the old Soviet union) nevertheless going wild with land-raping (chernobyl) and other real world problems.

  4. Please, I beg of you, go and read some MMT economics. The whole "governments are revenue constrained, and therefore need to borrow in order to finance their spending" line is complete nonsense, since governments that are are soverign issuers of their currency (ie not Greece) can NEVER go bankrupt in their own currency. Indeed, without that governent there, creating demand for their currency by demanding that taxes be paid in it (with the implicit threat of violence if you don't pay) the currency wouldn't exist in the first place. As soon as you subscribe to this false logic, then you immediately get caught up in the paradigm of having to increase taxes to fund services, or else make cuts. The following are good primers:

    Besides which, in a 'healthy' growing economy (with all the ecological destruction that entails) debts and assets should both be growing. As should government deficits.

    1. Funny you should mention that, I've been promoting MMT for years on this blog (and gotten pushback when I do, I can't win!). If you click on the link in the sentence above that reads "In fact the rich need the debt," you'll be taken to an article about exactly that subject. I also touch on it here

    2. Ah, fair enough, hadn't read through all of the links. MMT does rather open a can of worms when you bring it up, but honestly I think it's something that the left really should pick up on, but probably won't, because how on earth do you go about explaining to the electorate that their entire understanding of how the economy works is complete nonsense.

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  6. Post raises interesting alternatives to looking at public debts, but what about the large volume of treasury notes and bills held offshore? Those foreign investors aren't taxable.


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