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Sunday, November 30, 2003An Economic Sermon for your Holiday Weekend
All you debt hawks out there -- I want you to think about a few things.
There are a series of classic paradoxes, traditionally used to impress on students the basic macroeconomic fact the whole is not always a mere sum of its parts.
The more aggregative your outlook the more debt appears to self-cancel, for example. My owing money to a loan shark is a source of concern. My owing money to my father is of somewhat less concern, since the assets/liabilities remain within the family. Even if dad charges me an exorbitant interest rate -- well heck, he will only use the money to buy nice things for mom, right?
You can extend this argument to a nation's public debt. From this viewpoint, the federal debt is innocuous, merely what we all "owe ourselves."
What about externally-held public debt -- those foreigners who buy our treasuries? Traditionally external debt is looked on with xenophobic suspicion -- we worry about "leakages" of expenditure going abroad not matched by "injections" of income generated internally. It we who spend but the foreigners who benefit, we worry.
The more globalization increases international trade, the less are these suspicous worries warranted. Sure, we may owe money to foreigners, but these foreigners are also our customers. We get much of our money back in the form of orders for our own country's output.
The less didactic your outlook, the more debt resembles a convention, a mere way of describing details of ownership rather than an active force. Not only xenophobia but also America's Puritan heritage sometimes points thoughts about public debt in the wrong direction.
Traditional Puritan thinking associates indebtedness with indolence and profligacy, suggesting conclusions like "less aggregate debt is always superior to more." This conclusion is not always true.
Please picture for a moment an economy with many modern factories, abundant natural resources, and a vibrant work force. It is these that all determine how wealthy the economy will be. This economy's debt structure -- including whether there's "lots" or "little" private or public indebtedness -- merely describes "who owns what" and "who must behave how." It has nothing to do with the workers, machines, and resources which actually produce all the GDP.
From this viewpoint, then, fretting about alternate structures of private/public debt is like worrying about what color the machines are painted. What does it matter who owns a machine, or whether it serves as collateral in some debt arrangement? Its productive capabilities are all about the metal it is made of, not about how it is described in some contract.
Inappropriate didacticism gives rise to the most commonplace argument against high levels of federal indebtedness -- the notion we somehow pass a debt "burden" to our children by increasing the federal debt.
The temptation for jokes here is simply too great. Here's one: "I asked my daughter about the federal debt. She said it was okay, she'd take care of it somehow!"
Here's another: "But seriously folks. I did ask her. Heck -- she said she'd just pass it on to her daughter!"
As it turns out the last joke is no a joke at all. Any level of federal debt gets passed on from one generation to the next. No generation has to pay off all the federal debt. The idea it does is just plain silly.
What we and our children must face with higher levels of federal debt, however, is higher levels of interest payment on the federal debt. Through the first half of the 1990s, for example about 18% all federal receipts had to be devoted to interest paynments on the public debt. The 90s boom reduced this number to roughly 10%, but with the increasing federal deficit a reasonable forecast suggests an increasing level of 17% by 2007.
In the language of modern political economy, these interest payments are an entitlement. To the extent our debt is held externally (by foreigners) as well as internally, it is not only a domestic but also an international entitlement.
But entitlements can be the subject of a future sermon -- that's enough for today. Get out and enjoy the rest of the holiday weekend -- and for now at least, stop worrying so much!
Link posted by Steve Antler
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