Actually, We Owe It All to Ourselves

Paul Krugman has a very good column on government debt and why it doesn’t matter nearly as much as many people believe. There’s just one spot in the column where I think Krugman misses the point, and therefore makes a weaker case than he could have made. He writes:

U.S. debt is, to a large extent, money we owe to ourselves.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

All true, but all beside the point. Even if 100% of U.S. debt were held by foreigners, and even if Americans had no offsetting claims on foreigners whatsoever, the U.S. debt would still be money we owe to ourselves.

To see why, suppose the defense department wants to buy a precision screwdriver for $100 million. The government could, of course, pay for that by raising our taxes. Suppose that instead, they borrow the money from China, implicitly promising to tax us in the future to pay off that debt.

Here’s how that affects you as a taxpayer: It’s exactly as if the government had collected your taxes and then lent them back to you, with a promise that they’ll be along in a few years to collect the debt. Let me say that again: When the U.S. government borrows from Chinese investors, it’s exactly as if U.S. taxpayers had borrowed from the U.S. government. (That is, the effect on Americans is the same either way.) Since the assets of the U.S. government are, ultimately, the assets of the taxpayers, it’s exactly as if the U.s. taxpayers had borrowed from themselves.

Krugman says that we largely owe the debt to ourselves because of offsetting claims by Americans on Chinese assets. I say we entirely (for all practical purposes) owe the debt to ourselves because of general principles that have nothing to do with the existence or non-existence of offsetting claims. We both conclude (for this and other reasons, which are well articulated in Krugman’s column) that the debt is much less of a big deal than partisans on both sides of the aisle would have you believe. In particular, debt, by itself, is not a terribly compelling reason either to cut entitlements or to raise taxes.

As Krugman point out, this is not to say that all government debt is harmless. It is to say that if it’s harmful, it’s harmful for different reasons, and probably to a much lesser extent, than is commonly believed.

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57 Responses to “Actually, We Owe It All to Ourselves”


  1. 1 1 Pietro Poggi-Corradini

    Who’s ‘we’? I was under the impression that there was no such thing as nationalities in economics. Sure humans owe all their debt to themselves, so what? But different groups may owe more to outsiders than others, no? I for instance owe more to others than to myself. My family owes more to outsiders than to itself. I can continue in this fashion by increasing the in-group but why should we expect that as soon as all Americans are considered, then all debt is internal? What so special about Americans, or Italians for that matter?

  2. 2 2 Pietro Poggi-Corradini

    Sorry I might have misread. You’re talking about govt debt specifically, not debt in general.

  3. 3 3 W. Bethard

    Two observations and a question:

    1) Some of us will be gone in a few years, say ten for discussion. I suspect these folks are more likely to approve a federal government expenditure with borrowed money than they would approve if it were paid for with higher taxes today.

    2) Apparently, at least in my city, significant furniture and car buyers respond to No money down, we can finance anyone, come on down today and we’ll put you in a Super Pedic bed and Super Charged Deuce Coupe today.

    3) Even if we owe the debt entirely to ourselves, in light of the above, are we not more likely to make better decisions on what the federal government should spend for us?

  4. 4 4 W. Bethard

    Oops, that last sentence should read, “Even if we owe the debt entirely to ourselves, in light of the above, are we not more likely to make better decisions on what the federal government should spend for us if we decide on a pay as you go basis?”

  5. 5 5 Mike H

    ??? If this argument holds, why do the Chinese think they gain a 100 million dollar asset when the make the loan for the screwdriver? Is this asset illusory, or has $100M of value been created somehow via the purchase of an over-priced screwdriver?

  6. 6 6 Sam Viavant

    I think Landsburg’s point is that taxpayers ALWAYS owe money to the US government no matter who the US government has borrowed from–so we ALWAYS owe the money to ourselves (our own government). But if the US government uses our taxes to pay Chinese investors, doesn’t that have different implications than if the US government uses our taxes to pay some US taxpayers? It seems misleading to say we “owe the money to ourselves” just because we will pay an intermediary US institution (the US government), which will then pay then Chinese. How is that different than directly paying the Chinese? How does this imply we owe the money to ourselves? If the US government pays Chinese investors, American taxpayers transfers resources to the Chinese. If the US government pays US bondholders, American taxpayers transfer resources to other American taxpayers. Doesn’t this imply that it DOES matter who the US government pays off? Have I misunderstood the argument? (I agree it doesn’t matter to taxpayers who don’t hold US bonds)

  7. 7 7 Steve Landsburg

    Sam Viavant:

    “If the US government pays Chinese investors, American taxpayers transfer resources to the Chinese”. Yes, but only to the same extent that the Chinese transfer resources to American taxpayers. At the moment the govt borrows from the Chinese, it is lowering your taxes (relative to what they would have to have been in the absence of the borrowing). That’s essentially a transfer of resources into your bank account.

  8. 8 8 Steve Landsburg

    PS to Sam Viavant:

    It might help to work through this example:

    Scenario 1: The govt taxes you a dollar to pay for a screwdriver, which you remove from your $100 savings account, leaving $99. A year from now, your bank account has grown (at 10% interest) to $108.90.

    Sceanrio 2: Instead of taxing you, the govt borrows that dollar from the Chinese. This leaves $100 in your savings account, which grows to $110 a year from now. At that point, the govt taxes you $1.10 to pay off the Chinese, leaving $108.90 in your bank account.

    Scenario 3: The govt taxes you a dollar to pay for a screwdriver, reducing your bank account to $99. Then it lends you the dollar back at 10% interest, raising your bank balance to $100, which grows to $110 a year from now. At that point the govt demands repayment of its loan, so you fork over $1.10, leaving $108.90 in your bank account.

    Note that inserting the Chinese into scenario 2 has no effect on the outcome. All three scenarios are perfectly equivalent from the taxpayer’s point of view.

  9. 9 9 Sam

    Steve’s argument is that, the source of the loan to the US is irrelevant (domestic or international), and ultimately nets out as a claim against future US productivity essentially making a loan given by the US for goods consumed by the US now.

    Sam – ‘American taxpayers transfers resources to the Chinese’

    only in exchange for something already or to-be received.

    Pietro- ‘I was under the impression that there was no such thing as nationalities in economics’

    Nationalities, not so much, currencies yes.

    ‘My family owes more to outsiders than to itself’

    A country is not a family. Imports and exports will look to balance out or else someone is getting a free lunch.

    Mike H – ‘Chinese think they gain a 100 million dollar asset when the make the loan for the screwdriver’

    Mike, the Chinese don’t ‘gain’ an asset. They’re 100m down until they’re paid back the dosh, which is generated from future taxes.

  10. 10 10 Harold

    Picking a minor point in the Krugman quote and somewhat off topic. He says that foreigners earn less from their safe investments in the USA than the USA earns from their implied riskier investments abroad. Why is it not just as likely that the riskier investments will earn less than the safe ones? There appears to be a contradicion here, that riskier investments carry less risk.

  11. 11 11 Jonathan Campbell

    I, like Harold, don’t get this part of Krugman’s piece: “And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors.”

    Krugman seems to suggest that foreigners just get whimsically to decide what the U.S. Treasury interest rate is. I thought it was the market that decided, based on the perceived riskiness of Treasury assets (with the Fed being an important market participang).

  12. 12 12 BG

    While I agree with the ideas presented here, I think 3 things are a little misleading:

    1) People who complain about excessive debt probably mean that the equivalent aomount that would have to be taxed today (as in the examples above) is way too large. In fact, it is so large that they believe that the increase in future taxes required to pay off the debt is unrealistically large (or would require unacceptable inflation). The $100 bank account and $1 of borrowing might be more meaningful the other way around.

    2) Owing it to ourselves makes the problem of potential default go away as it makes it look as if, if 1) were indeed true, we could cancel the debt and nothing would happen. Practically however, there would simply be some form of income redistribution. Now owing money to the chinese (or having foreign denominated debt) makes it a little more difficult to restructure the debt very aggressively… Also, foreign creditors being aware of the fact that the US could simply devalue to pay off the debt might make them ask for higher rates.

    3) Finally, another, more technical issue is that the rates that are paid on the debt and the rates at which should be discounted future tax receipts in Steven’s example are not necessarily the same one. In the simple exmple above, it’s not necessarily obviously true that all the different rates should all be 10%. That could argubaly make it more or less interesting to borrow rather than tax (at least it would seem so – maybe some macro equilibrium conditions mean that everything nets out in the end).
    Even if today’s rates are extremely low, and thus make it sound appealing to take advantage of them to borrow, it’s not obvious that future growth prospects justify that strategy. Indeed, one of the reasons why long term rates are so low is because investors are worried about long term growth (combined with a large demand for safe assets).

  13. 13 13 Ken B
  14. 14 14 Ken B
  15. 15 15 Ken B

    Boudreaux, better http://cafehayek.com/2012/01/somebody-doesnt-understand-debt.html

    This makes his point nicely. I am not sure he is disagreeing with Steve, so much as with over-interpreting the point Steve makes.

  16. 16 16 Roger Schlafly

    Do you also say that Greek debt does not matter, because they effectively owe it to themselves? If so, why do they have a financial crisis?

  17. 17 17 Bob Murphy

    Steve, what the heck are you talking about? :) Let’s say the Chinese right now donated all of their Treasury bonds to US citizens. Are you saying that act wouldn’t make “Americans” richer?

    If your claim does NOT imply that, then I think you’re playing word games.

  18. 18 18 Bob Murphy

    OK looking at your comments above, Steve, I think I realize what is happening here. I think your point would be better phrased like this:

    “Yes, it makes Americans poorer if we owe interest payments to the Chinese, as opposed to Americans. However, holding previous government spending constant, the fact that we borrowed from abroad means that we have more assets right now than would otherwise be the case.”

    But that’s not really the same thing as your deliberately counterintuitive, “We owe it all to ourselves,” when, no, on the fact of it, we quite clearly owe a lot to foreigners.

  19. 19 19 Harold

    Greece perhaps is a good example. As I understand it, SL’s argument is roughly that Greece would still be in a financial crisis if they had funded their spending through taxes rather than debt. As some people have pointed pout, if they had tried to do it through taxes they would not have been able to do it. So the folly of using debt is that allows Governments to “get away with” spending they could not if the true cost were obvious. This applies if the spending was irresponsible, which it seems much of Greece’s was.

    The flip side is that debt allows you to make responsible public spending that may be impossible through taxes. This would apply to a Keynesian stimulus, if it worked.

    The main point again is that it is not the tax or borowing that is responsible or irresponsible, but the spending.

    This only breaks down where the market wrongly fears that you will not be able to pay back the debt, and therefore raises the interest you must pay on your debt. I say “wrongly”, because if theu are correct, then surely the spending was in fact irresponsible.

  20. 20 20 js

    “It’s exactly as if the government had collected your taxes and then lent them back to you, with a promise that they’ll be along in a few years to collect the debt.”

    I think you’ve misunderstood Krugman. His point is that the generation receiving the loan and the generation paying it back “in a few years” might be different. So it makes sense here to talk about consuming today at our children’s expense. This is not true when the debt is held by US citizens.

  21. 21 21 Ken B

    @Roger: Because of the way they *spent* the money. I think the point Kruggers, er I mean Steve (they are hard to tell apart sometimes), makes is that *how* you finance matters less than *what* you finance. Spending not financing is the real issue.

    Greece is a rent-seeking society which squandered what it borrowed.

    Steve does rather gloss over issues about which currency the debt must be paid in though.

  22. 22 22 Ken B

    @Bob Murphy: I think Steve’s argument assumes we borrowed to finance spending we wanted to make in the first place, not “extra” lower quality spending. He is separating the way you pay for it from what it is. You can see this as either ceteris paribus or postulate-a-can-opener depending on taste.

  23. 23 23 Roger Schlafly

    So is there some example of a country that got into a financial crisis like Greece’s without borrowing money? If so, you have a point. If not, then Greek borrowing led to their crisis.

  24. 24 24 David R. Henderson

    @Ken B,
    I think Ken said it well. But also Bob Murphy made a good point: if you owe something to A, you owe something to A.
    @Steve,
    Notice that if Krugman agrees with your reasoning, he has to seriously question his own rejection of Ricardian equivalence.

  25. 25 25 Ken B

    Roger: non-sequitur. i could as well ask for a country that borrowed without spending, and if you don’t name one calim “If not then their spending led to the crisis.’ It’s not an adequate argument.

    Imagine then the country Grease, which borrowed like there was no tomorrow but put it all in bank accounts in the lenders’ countries. Would grease have a fiancial crisis? Not unless someone stole their accounts: Grease could pay their creditors, they could borrow more. But Greece cannot pay its bills as it spent the money and not on productive stuff. (Part of the spending is future pension promises.) This suggests it is the squandering not the borrowing that is at the root of the problem I suggest.

  26. 26 26 simon...

    Following this logic, ANY debt is a debt to oneself.
    If I get a loan from a bank today, I just borrow money from my future self, paying a small fee to a bank for their time-machine magic.
    Does it mean I should borrow as much as bank’s time-machine will bear?

  27. 27 27 Ken B

    @David: And Steve did not mention issues about the currency of the debt. If I owe in your currency the consequences — at least for monetary policy — can be very different.

    Here’s another puzzler for Steve. We borrow X from China and China borrows from us. China defaults. Have we lost?

    Still I think Steve’s, sorry Kruggers’s point — they are like bosons some days — is right. The real damage to borrowing flows from the public choice, incentive, and tax effects not the fact we decided to pay next year not this.

  28. 28 28 Steve Landsburg

    Bob Murphy:

    Let’s say the Chinese right now donated all of their Treasury bonds to US citizens. Are you saying that act wouldn’t make “Americans” richer?

    No, I’m saying that if the Chinese *sold* all of their Treasury bonds to US citizens, it wouldn’t make Americans richer. Selling those bonds didn’t make us poorer, and buying them back wouldn’t make us richer.

    I take much of the public hysteria about the debt to come down to the claim that we are poorer because the Chinese hold our bonds. This tends to overlook the fact that we got *paid* for those bonds.

  29. 29 29 RF

    Ok, let’s borrow a lot from the Chinese, give it to US taxpayers, as opposed to buying screwdrivers, and then default on only those bonds held by the Chinese.

  30. 30 30 Rick

    I am so glad you wrote this. This was one of my fave chapters from Armchair Economist. Here’s my question: Why is it that this kind of thinking NEVER EVER EVER EVER EVER makes its way to tv, or talk radio, or any other forum where these kinds of things are discussed? I find that very baffling. There must be some pol. or talking head out there who could use this argument to his advantage, but I never see it, and I can’t figure out why. PS — the easy answer that it’s too deep for the idiot masses just might be true, I guess, but it’s too pat and easy to be satisfying.

  31. 31 31 Bob Murphy

    Sorry Steve I don’t buy it. (To do so would make me intellectually poorer…) Yes, the position you are defending is true, I just think it is different from what Krugman is attacking, and you are muddying the waters by your description of the position.

    I shall rectify this cosmic injustice on my blog in a bit. Right now I am balancing by business’s checkbook. I don’t owe it all to myself.

  32. 32 32 Ken B

    Bob Murphy last year: “Wow, remind me never to cross Landsburg. Your readers got your back, Steve.”
    Bob Murphy today: “Sorry Steve I don’t buy it. (To do so would make me intellectually poorer…)”

    You were warned! :>

  33. 33 33 Conor

    Suppose it is US government policy to spend 10% of GDP. Under the current regime, government spending is financed entirely by a flat 10% tax on labor. John earns $100: he spends $45, saves $45, and mails $10 to the IRS. However, the regime is eventually replaced by one that lowers the tax rate to 5% and borrows from the Chinese to cover the rest of the government spending. Do we expect John, who still earns $100 and now only mails $5 to the IRS, to continue spending $45 and to save $50? It looks to me as though he would if he were a perfectly rational actor who cared as much about his heirs as himself. Even if he weren’t perfectly rational, this system of spending, taxes and debt is simple enough that a mostly rational person might save what is owed to the Chinese. The actual US is much more complicated. Does the difficulty of obtaining and understanding actual US spending, tax, and debt policies make the theory useless?

  34. 34 34 roystgnr

    This argument is correct if you neglect the effect of uncertainty on the economy, which is to say “if false”. And it’s particularly oddly timed, since we’re still in the middle of an economic disaster rooted partly in failed overconfidence about borrowers’ abilities to repay their debts.

    At least in the case of mortgage debt, lenders usually knew from whom they were failing to get their money back. “Imagine a taxpayer had $100 in his account” becomes an overly strained metaphor after that taxpayer loses income and leaves you hunting for a different target for his planned balloon repayment.

  35. 35 35 mark

    I think Krugman’s argument, and this extrapolation, are both overbroad and overstated. Part of it is the “we” is one of those false we’s. The persons who are funded by government borrowing and those who would have to pay taxes to repay the government borrowing, are different. But, even more than that, just because we owe it to ourselves, it doesn’t necessarily follow that we don’t have to pay it back. If we owe it to ourselves, then it’s equally true we could pay it back all at once. If it’s just a circuit, it doesn’t matter which way you run on the circuit, you wind up in the same place. Also, the promise to pay it back is what is essential to the borrowing in the first place. All debtor/creditor relations depend on that confidence, that the debtor will reduce consumption or savings to repay its debts. Try running a government debt program in which the government says, we will pay this debt back if we can roll it over with someone else.

  36. 36 36 Jonathan Campbell

    “No, I’m saying that if the Chinese *sold* all of their Treasury bonds to US citizens, it wouldn’t make Americans richer. Selling those bonds didn’t make us poorer, and buying them back wouldn’t make us richer… This tends to overlook the fact that we got *paid* for those bonds. ”

    This is the crux of it, and it is why Steve’s post is misleading. It is just like saying “don’t worry about your $500k in credit card debt! You borrowed that money to begin with, so presumably you have something to show for it!”

    The subtext of “we owe a lot of money to foreigners” is “and we don’t seem to have spent the money on worthwhile things.”

  37. 37 37 Alan Gunn

    “[D]on’t worry about your $500k in credit card debt!” This is exactly the point. If you got something worth $500k when you ran it up, you did OK. If you spent it all on worthless junk, you wasted $500k. Just as if you had spent $500k cash on worthless junk. Whether you put your spending on a card or take the money out of the bank is a trivial detail; what matters is that you spent $500k and either did or didn’t get your money’s worth.

    I suspect that Krugman, who is after all a smart guy, knows this. He disliked spending when one set of politicians did it and likes it when other do it. So he wasn’t really unhappy about the debt in the old days.

  38. 38 38 Steve Landsburg

    Jonathan:

    The subtext of “we owe a lot of money to foreigners” is “and we don’t seem to have spent the money on worthwhile things.”

    Yes. The problem is that we spent a lot of money and don’t seem to have spent it on worthwhile things. How we paid for it is largely beside the point.

    Edit: I see that Alan Gunn said exactly the same thing already!

  39. 39 39 Will A

    @ mark:


    Also, the promise to pay it back is what is essential to the borrowing in the first place.

    I think what is essential to borrowing is the threat of loss (of collateral, future earnings, increased borrowing costs, etc.) to the debtor if the debtor chooses not to repay.

    If the cost of paying a debt is more than the cost of not paying a debt, then the debtor shouldn’t pay the debt.

    A lender who relies on promises is a lender who will soon be out of business.

  40. 40 40 Neil

    Debt==An amount owed.

    Ourselves==All Americans.

    How can an amount owed to foreigners be owed to ourselves?

    This is a word game that denies either the meaning of the word debt or the meaning of the word ourselves.

  41. 41 41 Jonathan Campbell

    Steve & Allen: So we agree that if you are planning to buy something new, how you finance it doesn’t matter much. But the phenomenon of a citizen being disappointed to find out how big the debt is is analogous to a person finding out how much credit card debt he has, *when he already knows how much stuff he owns*.

    The large debt is *evidence* for a bad thing having taken place (previous leaders wasting money), rather than actually being the bad thing itself.

  42. 42 42 Jonathan Campbell

    I should probably modify the last line to say “The large debt (in combination with knowledge about how much stuff we have) is *evidence* for a bad thing having taken place (previous leaders wasting money), rather than actually being the bad thing itself.”

  43. 43 43 Scott H.

    I’m not sure the European banks would have been reassured when hearing “don’t worry, these bonds are really just money that the Greeks owe to themselves.”

    Devaluation and default fall to the individual bond holder.

  44. 44 44 Mike H

    Ok, I’m sure the changes I’ve made below have errors, but here goes :

    Scenario 1: The govt taxes you a dollar to pay for a screwdriver, which you remove from your $100 savings account, leaving $99. A year from now, your bank account has grown (at 10% interest) to $108.90. Inflation is 5%. Your real gain is $3.71.

    Sceanrio 2: Instead of taxing you, the govt borrows that dollar from the Chinese. This leaves $100 in your savings account, which grows to $110 a year from now. At that point, the govt taxes you $1.10 to pay off the Chinese, leaving $108.90 in your bank account. To lend us the dollar, the Chinese had to remove a dollar from their reserves and release it into the economy, increasing the money supply. Inflation is 6%. Your real gain is $2.74.

    Scenario 3: The govt taxes you a dollar to pay for a screwdriver, reducing your bank account to $99. Then it lends you the dollar back at 10% interest, raising your bank balance to $100, which grows to $110 a year from now. At that point the govt demands repayment of its loan, so you fork over $1.10, leaving $108.90 in your bank account. However, to spend and lend the same dollar, the government had to print an extra dollar, increasing the money supply. Inflation is 6%. Your real gain is $2.74.

    I think Steve’s Scenario 3 was supposed to be like this :

    Scenario 4: The govt borrows a dollar from you to pay for a screwdriver, reducing your bank account to $99. It grows to $108.9 a year from now. At that point pays you back $1.10 for the dollar it borrowed, and taxes you $1.10 in order to cover the repayment. You have $108.9. Inflation is 5% and your real gain is $3.71.

    It looks to me like S4 is better than S2. This has more to do with the effect of each scenario on the money supply than on who holds the debt.

    Of course, the answers will be different in a “liquidity trap” situation, like the present, where inflation doesn’t respond much to marginal changes in the money supply. But the scenarios did say interest rates were 10%…

  45. 45 45 Mike H

    Hmm… S2 is only worse than S4 if I’m a saver. If I’m a borrower, I like inflation. If the nation is a net borrower, does it therefore follow that it should get itself more into hock? :-)

  46. 46 46 Otto Maddox

    So why did the relatively recent Rogoff-Reinhart (?) book warn about impending financial crises when the national debt to GDP ratio exceeds 90%? I’d say that this implies that debt does matter. Otherwise, why do we collect any taxes at all?

  47. 47 47 Max

    Nobody seriously expects governments to pay back debt. It is expected that the debt will continue to expand forever, which is sustainable provided that the interest rate on money is lower than GDP growth. (If growth stops someday, then we need negative interest rates, which is a bit of a technical problem).

    People keep bringing up Greece. Governments which don’t have their own central bank are at the mercy of the business cycle. Even though Euros are in high demand in Greece (Greece isn’t suffering from inflation), Greece can’t spend freely. Just as the state of California can’t spend freely despite dollars being in high demand.

  48. 48 48 Steve Landsburg

    Mike H: It’s very late at night and I don’t have the strength to type up a detailed reply to your scenarios. But part of what you are overlooking is this: If inflation is 6%, the govt is printing money at a rate of 6%, and can put that money toward the purchase of the screwdriver, so they no longer have to hit you up for the full $100.

  49. 49 49 Sam Viavant

    Steven Landsburg–Thank you for clarifying, that makes sense.

  50. 50 50 Mike H

    @Steve, I don’t think I’ve overlooked what you say I have. The govt only prints money in S3, but in S2 they borrow from a Scrooge McDuck (the “this-scenario-Chinese”, who have a big pile of unused US dollar reserves). Either of these actions pushes up inflation in normal economic times.

    If you don’t like my inflation rates of 5% and 6%, use 0% and 1% instead. Although why the interest rate on bank accounts would then be 10%, I don’t know – I mean, has the Fed gone completely mad??

    It does matter who the govt borrows from, whether they are a Scrooge or a Donald.

  51. 51 51 Mike H

    @Otto – you should always keep in mind the possibility that everything you’ve ever read might be wrong – including this reply.

  52. 52 52 W. Bethard

    Alan Gunn:

    Whether you put your spending on a card or take the money out of the bank is a trivial detail; what matters is that you spent $500k and either did or didn’t get your money’s worth.

    Steve Landsburg:

    Yes. The problem is that we spent a lot of money and don’t seem to have spent it on worthwhile things. How we paid for it is largely beside the point.

    I think I get it, the key is that we–ourselves–spend our money on worthwhile things and get our money’s worth. [Well, I don't really get it as it seems to me the set of ourselves at the time of spending, St1, and the set of ourselves at the time of payment, St2 are not identical.]

    So, the real issue is what do we do to give us the best chance to get our money’s worth. It seems to me a human, psychological fact, that most of us are more likely to overestimate the value of something, whether it is “green” energy, or military defense, a hot car or a face lift, if it’s sold as buy now, pay later.

  53. 53 53 Paul

    Steve has made this argument many times and I feel like I have learned a lot from it. Yet, I still feel like I might be missing something and I’m hoping somebody can clear things up for me.

    Is it different, in a meaningful way, to borrow for a purchase you could not have made with cash, than to choose to borrow instead of pay with cash? For instance, some people would prefer to pay for a house or car with cash but can’t. When these people take on debt they can’t use the money they kept to offset the interest because it was never there to begin with. However, if Bill Gates uses debt, we can assume that he has something else he can do with the money he keeps that he values more than the interest on the debt.

    Maybe people who don’t understand Steve’s argument are having trouble realizing that the US taxpayers are more like Bill Gates in my example, than the person who must take on debt to make a purchase.

  54. 54 54 Major_Freedom

    Landsburg:

    “I take much of the public hysteria about the debt to come down to the claim that we are poorer because the Chinese hold our bonds. This tends to overlook the fact that we got *paid* for those bonds.”

    Yes but that money was received by government and spent by government a long time ago.

    Today, since the Chinese owe the debt, we have to now pay the government who then pays the Chinese, instead of other Americans.

    If the government didn’t borrow from the Chinese in the past, then you can’t just assume that our taxes would have been higher. For maybe the reason why the government spent $X + $100 billion in the first place, instead of just $X billion, is because the government could spend an additional $100 billion by borrowing $100 billion from the Chinese, instead of having to do the politically unpopular thing and raise taxes by another $100 billion. Maybe we should be saying that if the government didn’t borrow from the Chinese, then they would have spent less, not the same amount.

    I mean, suppose I offered to lend you $100 million, that others in the future are going to be forced to pay back. Suppose you are of a morality that leads you to want to be given this money, and that you don’t care that others in the future are going to be forced to pay it back. As long as people in the present aren’t going to pay me back, you’re fine with it. Suppose then that you accepted my offer.

    I would argue that it would be wrong to assume that had you NOT accepted my offer, that you would have gone out and taken $100 million from other people. This is because it would be contrary to the morality we presumed you had of only wanting people in the future to be taken of their money, perhaps when you plan to no longer be in the country.

    Yes, the Chinese paid for the bonds, yes, the government was “richer” back when the Chinese bought the bonds. But the government spent that money. It doesn’t matter if they spent it here or abroad back then. The people who benefited from it are all past and settled. Today, it is the case that Americans, many of whom were too young to even work when the money was borrowed, are now on the hook to paying back the Chinese. Today, it is the case that Americans of today have liabilities to foreigners, rather than having liabilities to other Americans, and rather than having no liabilities to anyone, which are the only other alternatives.

  55. 55 55 maznak

    Major_Freedom: you have made exactly the point I was going to make. Real life governments do silly things when money is too easily available to them.
    Case study: Greece (a case of a government that was able to borrow cheap in a currency – Euro – that it is not entitled to print – and now, when the markets woke up, unable to refinance the debt or even to serve the interest payments).
    In real life excessive government debt can be VERY harmful – ask the Greeks.

  56. 56 56 Major_Freedom

    Maznak:

    In real life government debt is very harmful…period.

    Imagine if I borrowed from people and then paid it back through just taking people’s money from them without their consent.

    Would you say my action COULD be harmful, if only criteria A, B, and C were met? Or would you say my action IS harmful?

  57. 57 57 Al V.

    Re. Greece, aren’t there two issues? First, Greece borrowed money that they could not repay unless they increased taxes to the extent that would have a large negative impact on their economy. Taking Steve’s example, I have a $100 bank account, and Greece borrowed $40 to buy a screwdriver. My $100 grows to $110 a year from now. At that point, the govt taxes me $44 to pay off the Chinese, leaving $66 in your bank account. Greece would need to raise taxes higher than their economic growth could sustain, which would cause their economy to shrink.

    Second, Greece is part of a common currency. Thus, didn’t Greece really borrow from all of Europe?

  1. 1 Some Links
  2. 2 Rowe Row « azmytheconomics
  3. 3 You, Your Grandchildren, and the Public Debt at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics
  4. 4 Some Links « Daniel J. Smith
  5. 5 Let’s Not Talk Past Each Other on the Burden-of-Public-Debt Issue
  6. 6 Debt: The Never-Ending Topic at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics
  7. 7 We Will Not Solve the Debt Issue During This Generation
  8. 8 The Economist Zone
  9. 9 The Unbroken Window » Blog Archive » My One Cent in the Great Debt Debate
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