"We
owe it to ourselves" was the common refrain that I heard from my
professors as an undergraduate and graduate student about federal debt. Here are some questions that might help clear up whether growing federal debt is a serious problem.
- Does outstanding federal debt ever have to be repaid?
- If federal debt were repaid, who would do the paying, and who would receive the payment?
- If federal debt does not have to be repaid, the U.S. Treasury still has to pay interest to whoever holds Treasury bills and bonds. What are the economic implications of interest on the debt? Who bears the burden of paying the interest and who benefits from receiving those interest payments?
So far, federal debt has not been repaid. In fact, federal debt has been growing for
decades. You and I could not
continuously expand our debt, but the U.S. Treasury is different. Because Congress can tax and because the Fed
can create new money, the U.S. Treasury has a much larger capacity to repay
debt (if it had to) and to pay interest on outstanding debt (which it must do
to avoid default). As long as the real
economy continues to grow, federal debt does not have to be repaid, and it
seems quite unlikely at present that all federal debt will ever be retired by
repayment of principal.
If federal debt were repaid, repayment could come from only
two possible sources: (1) taxes collected in excess of federal spending and (2)
money creation. If taxes in excess of
federal spending were the case (a federal budget surplus), tax payers would be
the payers and holders of maturing Treasury bonds would be the recipients. I pay taxes, but I don’t own much in the way
of Treasury bonds, so I guess I would be a payer, not a receiver. How about you?
If federal debt does not have to be repaid, the Treasury
still has to pay interest on outstanding debt.
Interest on outstanding debt can be paid from one of three sources: (1)
taxes collected in excess of federal spending, (2) money creation, and (3)
additional debt. Obviously, people who
own Treasury bonds are the beneficiaries of interest payments. It isn’t obvious at all who bears the burden
of making those interest payments.
Tax payers are not currently bearing a burden to pay
interest on outstanding federal debt, because federal spending continues to
exceed tax collections. That fact means
that interest is paid through money creation (when the Fed buys U.S.
Treasuries) and by issuing additional debt, which expands outstanding debt, of
course.
The real burden of federal debt is the value forgone by
using scarce resources in ways they would not have been used, aside from the
government’s borrowing. If government’s
use of those scarce resources also creates value, then what we are getting is a
transfer of value from Bobby to Annie, with maybe a net loss and maybe a net
gain. Transfers of value from one person
to another cannot be objectively measured to see if we got a net gain.
If government’s use of scarce resources did not create value
for anyone, but nonetheless caused a loss of value for someone, we end up with
inefficiency and a net loss. But most
government spending benefits someone, somehow, and once again, because
interpersonal comparisons of value are not really possible, we are hard pressed
to say much more.
If government control of scarce resources diverts resources
away from production of capital goods that would otherwise have occurred, it is
possible that growth of the real economy could be retarded. If growth of the real economy is retarded,
that reduces future consumption opportunities below what they otherwise could
have been. Economists who study this
phenomenon have been unable to reach what everyone takes to be conclusive,
persuasive evidence about this issue. In
other words, no one has been able to persuade lots of economists one way or the
other about whether government control of scarce resources has retarded growth
of the economy, although any number of economists make statements about it one
way or the other.
The expression “we owe it to ourselves” is pretty silly,
really. Some part of federal debt (about
40%) is debt held by private citizens of America. Interest payments on that internal net debt
amounts to a transfer of purchasing power to the owners of that debt. Although the payers of that interest are
Americans, as are the recipients of those interest payments, “we” are not
“ourselves.” In other words, growing
federal debt means growing transfer of purchasing power over goods and services
to people who lend to the federal government.
So, even internally held federal debt may pose some issues about which
people will have normative opinions.
For that part of federal debt that is held externally (by Japanese
citizens in large measure, and by other citizens of the rest of the world),
interest payments on U.S. federal debt enlarge their consumption
opportunities. But it is far from clear
that those interest payments reduce the consumption opportunities of
Americans. The evidence so far is that
the standard of living of nearly all Americans continues to rise.
So, should we worry about growing federal debt? Yes, if the real rate of growth of our
economy is retarded, and no, if it is not.
I am persuaded that we do not really know, but nearly everyone has a
normative opinion about the wisdom or stupidity (whichever it is) about growing
federal debt.
