Really basic stuff about government debt

I have become increasingly frustrated with any discussion of the national debt — equally so with conservative scare-mongering and lukewarm liberal responses of the type “well, the deficit is a really serious long-term problem, but….” In reality, there is no inherent problem with any level of government debt for a country that controls its own currency. It can pay back any amount of debt essentially on-demand. Even foreign creditors have no particular leverage over a country with currency sovereignty: the worst they can do is “threaten” to trade their interest-bearing assets in for non-interest-bearing cash. Foreign debt is only a problem if the debt is denominated in a currency over which the country has no control (e.g., gold, another country’s currency, or the Euro), which is not the case for the U.S.

This claim does not require advanced Marxist theory, but simple accounting knowledge. When the government goes into debt, what it’s concretely doing is selling bonds. The government receives cash for those bonds, and the buyer gets an interest-bearing asset in exchange for their cash. If we look at it from the perspective of the U.S. as a whole, it balances out, by definition, every time. The nation is neither richer nor poorer because the U.S. has issued debt — the government has liabilities, but those are equal to the assets it has created for the private sector. This would be true literally no matter how big the debt became. It’s basic Accounting 101.

The same basic principle applies when we look at the interest payable on that debt. One way the government can finance the interest payments is by going further into debt, in which case the national balance again remains the same. Another way is by using tax revenues to pay the interest, in which case money is taken out of the private sector — and then passed right back to the private sector. The distribution is different, but the net effect is the same: i.e., the national balance is unaffected.

In a capitalist economy, there are two constraints on the government’s debt-issuance. The first is that excessive taxation is believed to hurt economic growth, which is questionable given that the government normally sends that money back into the private sector through spending it. However, whether it is true or not, or under what conditions, is less important than that most policymakers and business leaders seem to believe that it’s true. The second is that increasing the money supply can lead to inflation if it outstrips actual economic growth. Interestingly, however, modern central banks have well-known, time-tested means of controlling inflation. Even more interestingly, they generally carry out their operations by buying and selling government debt. In other words, while government debt creates the possibility of inflation, it is also the vehicle by which inflation is controlled.

Reducing the national debt means taking money out of the private sector and using it to settle up on assets that would have pumped money into the private sector. Now I’m no economist, but it seems to me that if the government takes away the private sector’s money and deprives it of promised future income, that will lead to an economic slowdown. And lo and behold, every time the U.S. has paid off or significantly reduced the debt, a recession or even depression has occurred! In fact, this has happened in living memory, as a recession occurred soon after Clinton and the Republicans bravely put partisanship aside to get the deficit under control.

In short, paying off the national debt amounts to taking money away from people and setting it on fire. The only reason to do it would be if we were planning on gradually winding down the United States economy as a whole so that we could start from scratch, just as the only reason a bank would have to “pay back” all its depositors would be if it were shutting down. After all, every bank owes its depositors literally millions if not billions of dollars! Somebody has to pay that, right?! But no, no one has to pay that back, not on net. Debt is an accounting artifact, a way of organizing flows of money.

Intelligent American policymakers going back to Alexander Hamilton have understood this and have tried to strike the balance of taxation and debt-financing that will best support economic growth and productive investment under their circumstances. Stupid, moralistic American policymakers have not understood this and have therefore viewed government debt in isolation from its important role in organizing a modern economy — leading to pointlessly destructive policy choices that slowed down the economy, put people out of work, and left everyone poorer than they otherwise would have been.

You’d think that after a few centuries of capitalism, people would understand how to run the fucking thing, but apparently not. Hence the need for full communism is all the more urgent.

21 thoughts on “Really basic stuff about government debt

  1. In this analysis, what are the factors that determine an appropriate level of national debt? Or is the answer: more is always better? If there is some limit, do you think we are close to it?

  2. I think the only real restraint is inflation. Central banks can control inflation, but not without limit — and sometimes the cure can be almost worse than the disease (as with the man-made recession that the Fed purposefully caused to break 1970s “stagflation”). I see absolutely no evidence that we’re anywhere near that point currently. Just the contrary: if not for the Fed’s extraordinary actions, we would likely be in real danger of deflation, which is much more difficult for monetary policy to fix. Government debt is far from the sole or even primary cause of inflation in most cases, however, even in severe episodes like “stagflation.” But given that it’s the factor over which the government has the most direct control, it makes sense to exercise restraint to leave more “room” for normal monetary policy to work when events in the real economy cause an undesired increase in inflation.

  3. If the money supply has expanded far out of proportion to economic growth, it might make sense to take some of that money and set it on fire to preserve the value of the rest of the money. On the other hand, moderate inflation can actually be helpful for reducing consumers’ real debt burdens, freeing up more money to circulate through the real economy instead of being stockpiled by financial institutions (which can cause a crisis of overaccumulation).

  4. All of that makes sense. Just trying to anticipate the pushback I get when I deploy this rhetoric (without citation) against friends and family members. My imagined worst case scenario you obliquely addressed on Twitter, namely that if a single foreign power held a significant fraction of our debt, they might be able to hold it against us, cashing it in and purchasing assets (like property in the U.S.) with the cash… essentially “repossessing” what we had “bought” with it.

  5. I should add that this doesn’t seem *that* far fetched. Even if China only holds 10% of our debt, it seems like 10% would be enough to cause a serious problem if they tried to trade it in.

  6. In his 1975 book The Screwing of the Average Man David Hapgood introduces the idea of the national debt as “welfare for the wealthy,” and he makes valid points. The nation debt benefits the wealthy people and institutions. If the government did not hold the sixteen trillion plus dollars debt that it does, where would the wealthy put their money?

    By borrowing money the government gives the wealthy a secure investment, an income stream in the form of interest, and the government soaks up much of the excess capital keeping the cost of capital at a sustained level.

    If the government did not borrow money from the wealthy in order to provide services, many of which benefit the wealthy, then the government might have to raise money through fees and taxes, i.e. simply take the money from the rich.
    Not only do the wealthy benefit from government services, but much of the money the government borrows goes directly back into buying goods and services owned by the wealthy.

    It is hard for me to believe that the national debt would continue to grow if the most affluent and influential folks did not wish it so.

    Recently I had an idea: because in the current materialist/capitalist culture where wealth is seen as a virtue (as sign that God has blessed you), and not as a Deadly Sin, perhaps we could reframe the way we speak of the morbidly moneyed. Our culture does recognize various addictions, psychological ills and compulsions, therefore I propose viewing the overly flush as being “pathologically wealthy.” Being too rich is a sickness.

    Part of the pathology of the wealthy is to keep the rest of us burdened by debt—personal, institutional and governmental.

    The average person is no longer a wage slave, but is a fully indentured servant.

  7. You should start closing every post with “Hence the need for full communism is all the more urgent.” Turn it into a lefty Carthago delenda est.

  8. What about student loans? The collapse of the student debt refusal movement (to pay) that came out of Occupy is still very telling to me. Why are people so easily deterred in refusing to pay back their student loans by the not-very-dire consequences of having their wages garnished (money they would have had to pay back anyway, but taken by force) or having their credit-rating ruined (as if what Occupy was all about at base was making sure that everyone had an equal ability to live “beyond their means” on credit)?

    If lukewarm liberals murmur about the “serious long term problem” of national debt, they are referring to it in a practical sense, but in the above articles (and in most other instances I’ve encountered) repaying student loans is cast out as a moral and legal issue. Both debtors and lenders appeal to morality when talking about student loans, but when it’s the national debt, it’s just a strategic problem of economics.

    It seems to me that the failure of these different movements to refuse student loan payback is rooted in an ideology of subjects who prefer to keep with the “legal and moral obligations” to pay back their loans as opposed to making any form of (hopefully temporary) sacrifice that would help a popular payback refusal to gain momentum. The dominant rhetoric of the debt refusal movement runs along the lines of people proclaiming that “debt is slavery” or putting up “i would prefer not to” stickers around town. Is this just another instance of people acting out their desire to make an (ultimately empty) symbolic gesture of resistance or refusal while remaining firmly within the security of the system they pretend to resist? Why are people not wiling to make even this simple sacrifice? Is it because they are secretly enjoying the “slavery” that is student debt?

    Or do you think that this tendency (the refusal to refuse) is related to your above analysis of the bullshit rhetoric that surrounds national government debt? Is it just that people are giving into their ignorance about how debt affects the economy as well as themselves?

  9. Both left and right are neoliberals, for the most part. Certainly in the political/pundit class this is true. It’s the same here in the UK. Here they all studied philosophy, politics and economics (PPE) at Oxford and all swallowed the neoliberal ideology hook, line and sinker. They all believe in Ricardian equivalence (that all debt must be paid back eventually in higher taxes and so must lead to slower growth since investors anticipate increased taxes) and, relatedly, the domestic analogy that moralises national debt by comparing it to that of a family – hence the narratives of ‘living beyond our means.’ The left err on the side of uber-soft-Keynesianism where they want to cut a bit slower and stimulate growth a bit more. But they’re all reading from the same hymn sheet, it’s just the tempo and volume that they modulate.

    Although I must disagree on the last part about not knowing how to run things. The people really in charge – the ones earning the big bucks – know perfectly well how to run things. Shock economics, lurching violently from boom to bust, guarantees ‘interesting times’ and hence opportunities for appropriation and rent extraction. They don’t *want* things to be stable, secure and benefit the majority. They love ‘the game’ above all, the raw, visceral, bloody, feudal battle between rich men and their empires. Without chaos there’d be only book keeping. Chaos makes them hard, in every sense of that term…

  10. subwoofer: Personal debt, especially student debt, is of course a very different issue. I want to push back a little bit on this notion that it’s problematic for people to “live beyond their means.” The US is running a massive trade deficit — we’re importing much more than we’re exporting — and one of the roles of the financial sector is to intermediate the trade balance. Consumer debt can be very destructive, but in the current set-up it’s the only way to give the average person access to the spending power that allows us to soak up all those excess imports. As bad as it sounds to demand further access to credit, not having access to credit is a virtual death sentence in the age of precarity. (Even now that I have a steady job, I benefit from being able to use credit as a form of income-smoothing.) I’m not saying that consumer debt is therefore great, I’m saying that we can’t treat it in isolation from larger systemic problems.

    Hill: We could just, you know, not let the Chinese buy our stuff if that was becoming a problem. To put it in perspective, though, China owns about $1.2 trillion of U.S. debt, and the U.S. GDP last year was a little under $15 trillion. They could make a one-time lump-sum purchase of less than 10% of what the U.S. produces in one year. Pretty sure they won’t own the whole country any time soon.

    As long as they want to run a massive trade surplus (i.e., apparently indefinitely, since they’re a Communist country with a capital-intensive development strategy), though, China is going to need a lot of foreign reserves, particularly in the currency of the biggest export market on earth. They also use their Treasury holdings to manipulate exchange rates to their advantage, so I don’t see them selling them all off any time soon. If they did sell them en masse, it would cause a huge plummet in their value (think of what would happen to Microsoft’s share price if Bill Gates decided to cash out his shares all at once), so it would be a self-undermining move — and it would cause the USD to fall in value, which would be beneficial for many American companies.

  11. Also, back when Japan was the rapidly rising economic power, they went through a phase of buying up U.S. properties, and they mostly turned out to be expensive boondoggles. I have no reason to think the Chinese would do better.

  12. The part that concerns me is the part where we just say no to the most populous country in the world that happens to be relatively well armed with more control over the global economy (by virtue of being the geographic home of most of the means of production) than any other nation.

  13. Remember that stat about how the US spends more on the military than the next ten nations combined? I learned today that China’s industrial production only surpassed the US in the last couple years — and the US system is vastly more productive on a per-worker basis. We have a lot of idle capacity that could be brought back online if needed, and I’m pretty sure that China needs foreign investment more than the US needs Chinese production in specific. The whole point of globalization is that production can be moved around. Why couldn’t it be moved back here? Parts of the US are more than willing to approximate Third World labor conditions if need be!

  14. Martin Wolf had a column a few weeks ago in the FT called “Why China will not buy the world” (searching for the title in Google will allow you to obviate the paywall/registration process).

  15. This reminds me a bit of the modern monetary theory (MMT) take on government debt in the case of countries that control their own currencies. Krugman disagrees, sort-of, with their interpretation, for whatever that’s worth.

  16. I heard this question some time ago, and I’d be interested in your response. If debt is irrelevant, then why tax at all? Just borrow 100% of the annual budget, all the time.


  17. I said in the post that inflation was a potential problem. Taxation, for its part, has a redistributive effect, which packs the one-two punch of serving social justice and helping the economy (by reducing useless stockpiling of money, which can lead to speculative bubbles, and putting it into the hands of people who will actually spend it).

  18. “I said in the post that inflation was a potential problem.”

    Yes, so the disagreement between you and those who worry about debt is simply one of when inflation may or may not affect the economy, right (or, more properly, and what level of debt will inflation result)? And since that is not known, neither you nor your opponents are necessarily correct or incorrect on this?

    “Taxation, for its part, has a redistributive effect, which packs the one-two punch of serving social justice…”

    If your goal is to give money to the poor, you could do so without taxation: just, as I said, borrow 100% of the budget and give some of it to the poor. If your goal is to narrow the gap between rich and poor, you could also do so without taxation: still, borrow 100% of the budget and give some of it to the poor. It seems like (with regards to the ‘social justice’ aspect of your argument), the only purpose for taxation, then, is to take money from the rich-in other words, it’s purely punitive. Or, again, the purpose of taxation, with regards to social justice, is to punish the rich (and not provide for the poor, nor narrow the gap between rich and poor, which could both be done without taxation).

    “…and helping the economy (by reducing useless stockpiling of money, which can lead to speculative bubbles, and putting it into the hands of people who will actually spend it).”

    This, then, appears to be the only rational purpose for taxation under your scheme: if there is no tax, unused money will be used to nefarious ends (speculative bubbles).
    I don’t know economics enough to know whether this is even true, so I’ll take your word for it. But it remains pretty thin gruel upon which to base a federal tax scheme.


Comments are closed.