Gerald Seib, in the Wall Street Journal, reports that “There is a cancer eating away at the budget from within, one that steadily drains American wealth, sends much of it overseas and only gets worse over time.”
This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.
Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.
In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.
That’s why I say that the government’s interest payments come right back to the pockets of American taxpayers. The government pays $3 a year as an alternative to taxing you $100 and paying down the debt. The choice to do that puts an extra $100 in your savings account, which earns you $3 a year. There’s the $3 a year coming right back to you. Notice that it comes back to you regardless of whether the government makes its interest payments to Americans, Chinese or Martians. All of the benefits come back to American taxpayers.
Of course, you might choose not to save that $100 the national debt is saving you. That’s fine. Then presumably you’re spending it on something that you value more than an interest flow of $3 a year. Congratulations. You’re a winner.
Or you might grumble that you have no savings vehicle that will pay you the same rate as the government’s paying on its debt. That’s where you’re wrong. You can save by buying government bonds. That will get you exactly the same rate the government’s paying on its debt.
None of this is to say that government debt is entirely without important economic consequences (though I think that might be true). It is to say that the consequences are nothing at all as Gerald Seib (along with so many others) describes them.
If the government borrows an extra $10 trillion dollars tomorrow in order to cut taxes by $10 trillion, it will have to make, say, an extra $300 billion a year in interest payments (for which we are collectively responsible) and at the same time, we’ll collectively earn an extra $300 billion on our savings portfolios. No favor to the taxpayers, but no harm done either.
It’s important to understand this in order not to be bamboozled by tricksters who try to misdirect every conversation about government spending into a conversation about government debt. It’s spending, not debt, that can impoverish us, and that’s what we should be talking about.