Paul Krugman offers a nice thought experiment to illustrate why government debt, in and of itself, does not make the country as a whole any poorer:
Suppose that … President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?
The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.
OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.
1) Krugman has this right, but he’s also failed to anticipate (and therefore failed to head off) the usual objection: What if some of those bonds are bought not by Americans but by Chinese? In that case, aren’t we requiring that one group of American people make a transfer to another group of non-American people? And therefore haven’t we impoverished future Americans as a whole?
The answer is no, we haven’t, because for every Chinese person who buys a $1 bond, there’s an American who’s paying $1 less in taxes, and that $1 (plus accumulated interest) is part of some future American‘s inheritance.
(Unless, of course, that American’s parents choose to consume those tax savings, but then future Americans are being impoverished not by government debt, but by their parents’ extravagance — though to be fair, it is true that government debt can facilitate that extravagance.)
Having written on this topic many times, I am sure Krugman will come to regret not mentioning this.
2) Given that Krugman (like all economists) understands this point, why does he choose to ignore it whenever it gets in the way of bashing Republicans? All of us — including Krugman — agree that to a good first approximation, the debt does not impoverish anyone. (To a second approximation, the size of the debt affects the timing of taxation and hence the timing of the distortions due to taxation, which can matter.) All of us — including Krugman — agree that spending can be costly. It follows that fiscal responsibility consists primarily of controlling spending, not raising taxes to reduce the debt. (Where have I heard this before?) Yet whenever a Republican politician proposes to cut spending without raising taxes, Krugman is first in line with accusations of misplaced priorities and fiscal irresponsibility. What’s up with that?