The National Debt is Probably Not the Problem You Think it Is

Hear me out on this.

Back when George Bush was in office (and after, but more defensively, during the Obama honeymoon), you heard a lot from folks on the left about how we were running up the national debt. Meanwhile, activists on the right, who’d mostly bit their tongues on this subject during the Bush years, now feel fantastically liberated to once again voice the same fear.  Both sides have tried to punctuate their concerns by bemoaning the debt as a burden that we’re “leaving for our grandchildren.”

This pity-point however, is nonsense. Neither group is really being clear about what they actually object to. Or, perhaps, they just don’t know what they’re talking about.

See, the national debt isn’t like a personal credit card; that’s mostly because not many credit card holders can just up and tax themselves to raise revenue whenever they please. And government debt isn’t something that we are “leaving for our children to inherit” at least not in the simplistic sense that we are taking out giant loans and then offloading the duty repay them to someone else. That’s because while all of our children do technically inherit the responsibility of paying down the national debt, they also ultimately inherit all of the money that’s left in our pockets from not immediately paying down that debt. Certainly, it’s possible to have spending decisions that benefit some children at the expense of others. But that’s not a factor of running up debts in and of itself: that’s a factor of taxing or spending inequitably.

Of course, if you really care so deeply about the financial fate of your own specific children, you don’t actually have to wait for the government to change it’s debt-servicing habits in order to protect them from future tax burdens. All you’d have to do is buy government bonds for exactly the amount that you estimate is your family’s share of the current national debt. These bonds would then earn interest: interest that matches the rate at which the national debt earns interest (since you’d now be the people the government owes that interest too).

Now, obviously, buying 60,000 worth in government bonds would probably put a huge dent in your yearly budget. It’d make for a pretty miserable year: you’d mostly likely have to cut back rather severely on things like having a roof over your head and food.

But then, that’s sort of the point: if the debt itself were really such a huge problem, and retiring it such a huge priority, then what you are really talking about is the government immediately taxing everyone to cover it all. And that would be really, really painful. It’s usually better to spread that sort of pain out over a long period of time, in yearly increments. Thus, you’d probably prefer that the government tax you a little bit, every year. And, surprise, that’s exactly what it already does!

Of course, as a country, we’ve decided to tax only a fairly small amount today, which of course inevitably requires that we will someday have to tax much higher rates down the road to make up for it. Luckily, our children will almost certainly be much, much richer, so there will be a lot more to go around. So it’s basically all gonna work out. Unless, of course, our whole country and economy falls apart, but then we’ll much have bigger problems anyhow. But the point is: the size of the national debt isn’t particularly likely to cause that to happen, at least not directly (see below).

National debts are actually nothing more than a question of how to finance national spending. And national spending is going to happen whether you do it or the government takes your money and does it for you (the only alternative is saving, but that requires someone willing to borrow the money from you to then ultimately spend it on something else). Unlike with personal credit card debt, the people to whom we basically owe all this money that we’re borrowing… is ourselves. So it all pretty much works out.

Worried that we’re borrowing “too much?” Well, the thing is, governments have to finance things via either borrowing or taxation, and they cannot borrow infinite amounts of money: they can only borrow as much as people are actually willing to lend them. As it happens, lots and lots of people are still willing to lend the US government their money, so we’re okay on that score for the time being. It’s certainly possible that the United States (i.e., all of us) could welch on its debts, but since it (i.e. us) is stuck on the planet earth, it’d be a little hard for it to hide from the people it owes money to.

And of course, these days, we often owe that money to people in foreign countries: but then, these people have their own governments in debt as well as direct financial interests in our success such that it still all comes out to roughly the same thing anyhow. We’re basically all too interconnected to be anything but all in the same boat. Heck, if our economy tanks for good and we can’t afford to pay anyone back, it’s almost certainly our lenders that are going to get screwed in the deal, not us, and everyone knows it. When a bank sends repo men to someone’s house, it’s generally because they know that the person living there doesn’t have the most advanced military in human history.

That people are willing to lend us their money anyway is just a testament to how good an investment people still think the US government is: we’ll pay you back eventually, and usually not even in carpet bombings! So if you’re worried about the national debt turning into a huge disaster somehow, just be aware that you’re probably worrying about a problem that’s more important to the well-being of Chinese investment firms than American citizens.

If this all sounds far too glib, it is, in a sense. That’s because there are plenty of important things to worry about when talking about the national debt. First of all, a government spending money on things that it must later tax us to pay for is inherently wasteful. Nearly every possible form of taxation ultimately reduces our overall economic welfare by causing people to forgo purchases and activities that would benefit everybody. That’s why we should always be wary of government spending on principle (even if it is sometimes necessary and/or justifiable).  If we’re going to tax and spend, we’d better make sure it’s worth the inevitable waste (which is not to say that individual citizens can’t spend their own money wastefully too, it’s just that the particular waste from taxation is a nigh-mathematical certainty).

But then there is the more pressing problem that perhaps what the government chooses to spend our money on is not really what we most wanted in the first place. After all, if you hired a personal spending agent that bought your groceries for you, and they ended up doing a great job of picking out a nice selection of yummies, you’d be pleased. On the other hand, if they bought nothing but milk when you’re lactose intolerant, you’d probably fire them on the spot. All the milk would spoil: it would be a huge waste of time and effort for everyone.

Well, that’s pretty much exactly the situation with the government: it’s set itself up as our purchasing agent and has taken over some of the decisions about how we’re all going to spend our store of national wealth (leaving us all with the far less important question of precisely how to finance that spending: taxes now vs. taxes later).

So when liberals and conservatives complain about the national debt, the “what about the children!” line is mostly nonsense. What they’re really upset about is WHAT we’re choosing to spend our money on: liberals tend to hate the fact that we’re buying guns, while conservatives hate the fact that we’re buying butter. Libertarians tend to hate the fact that we’re buying so much period, as a whole, instead of letting individuals make their own spending decisions. Communists would be upset that anyone other than the government gets to make any of their own spending decisions. And of course, Glenn Beck is just incredibly upset all the time about everything.

So it goes.

Just remember: what can potentially hurt “the children” is not either you, or the government on your behalf, spending money. That’s going to happen regardless. It’s the fear that we might spend it on really dumb and wasteful stuff, thus reducing the potential wealth in society and leaving less neat things to pass on to them.

But, as I said, our children, and especially our children’s children, are almost certainly going to be richer, healthier, live longer, live happier, and just generally have all sorts of awesome things we never got. Ingrates!


~ by Drew on 2009/11/10.

5 Responses to “The National Debt is Probably Not the Problem You Think it Is”

  1. lol that was the most amazing thing I’ve read today.

  2. You make good points here. And since I’m also a lot into these kinds of considerations, I’d like to say a couple of words too. I’m not American so I may be ignorant in some specific American matters, but principles are the same everywhere.

    You stress the difference between personal and national debt and state that they are fundamentally different. As long as you are considering the national economy as a closed system, and are talking about internal debt and are ignoring interest, you are right. The internal national debt is debt that some citizens have towards other citizens that did something for the common good.

    For example, the nation needs a new highway in order to function well. The government takes the decision to build it and asks some citizens (construction workers) to make it. These workers must be paid. So the state needs to get money from somewhere in order to pay them. As you say, it has fundamentally two options: tax every citizen immediately an amount of money (let’s say $1) and thus raise the amount necessary, and pay the workers and be done with it; or it can borrow the money from citizens that have it and want to invest it. The second option however, is more tricky because borrowing means having to pay interest on the borrowed money. So, yes, everyone gets to keep their $1 for now but the government needs to find a way to pay yearly $0.10 of interest *and* eventually the $1 to the people it borrowed from!

    Thus, after a year, the total national debt has increased from $1 in the beginning, to $1.10. Add to that the fact that the government itself takes a share for it’s own needs, say $0.01, bringing the total to $1.11. Now, the government has the same two options again: pay off by taxing everyone, or borrow again to pay the interest and postpone the inevitable to the next year.

    The fact that the government takes a share for it’s own existence, doesn’t fundamentally change the problem. After all, I took a 10% per year interest rate just for the sake of the example. I could have taken 11% and assume the government itself didn’t take a cut.

    The citizens do get richer every year, but as long as this richness comes from mutual services rendered (like building the highway), the total richness does not increase. It simply gets polarized to one side of the society: the ones that did the most work (or the ones that managed to get their work valued more !)

    This is where the globalization comes into play. It offers new sources of money, for the citizens as well as for governments (who can borrow internationally). But this does not solve the problem either: it just makes it wider and more complex.

    We started with a closed system somewhat controlled by one entity: the government. And as you said, the problem of national (internal) debt can (kind of) be solved by taxing everyone and getting rid of the debt (if you ignore the interest). But internationally this is not possible any more. A nation’s debt is now like a credit card debt towards third-party entities that you don’t control anymore.

    This is where I think you’re fundamentally wrong.

    So, national debt is a problem because it grows faster than the economic growth (or else, total richness) and it is larger than the national “controlled” system. By the time you have saved the $60.000 to buy bonds the debt would have gotten to $150.000. This is because you also have personal expenses and cannot earn $60.000 unless you have a house, a car, good food etc.

    The debate may rage on to determine what is justified governmental spending and what is not. But regardless of the answer, the fundamental problem doesn’t change. Even if you didn’t have any government at all, the private parties that would take parts of the government’s current role, would sooner or later face the same problems.

  3. […] National Debt is Probably Not the Problem You Think it Is | That Shallow Fellow… Like this:LikeBe the first to like […]

  4. There is one thing that you are missing, which allows you to clearly make your point: numbers. I agree with you on most points, except you are assuming we will pay down the deficit slowly, and in reality we are creating more debt every year. Our mandatory programs (welfare, medicare, TARP, etc) plus the interest owed on debt, is larger than our tax revenues. So even if we got rid of the federal government AND all defense, we would come up a little short. Yet we have a 4 Billion dollar per day defense budget and a massive federal government, so we come up billions short. Our credit rating has already been downgraded, and it is likely to happen again, considering no debt has been paid down since the last downgrade. You are viewing this as a partisan issue but, as an accountant I can tell you, it isn’t political. It’s a numbers game.

  5. You couldn’t be a trained (and objective) economist. The greatest economists of all time have pointed out that the most common error in the study of economics is “not taking into consideration ALL of the effects of an economic policy and just looking at SOME of the effects”. Today’s national debt is much more of a problem than most people think. Unlike debts of the past (like WW2) this debt has no rational basis and is the result of a greedy, irresponsible government.

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