Notes on Debt

I think it’s misleading to make the claim (I’m not insinuating that you, in particular, are making it) that people hold a fear of debt simply out of the belief that “too much debt is bad” — even though it is oftentimes framed as such (including by politicians, such as Ron Paul [comparing national debt to household debt]). I think there is a more complicated rationale that many, although not all, hold: accumulating debt without adding to productivity is potentially harmful.

“Households” accumulate debt. The father or mother of a household may take out a loan to invest it in a new family business. This debt will be paid off by future productivity. Those who support fiscal stimulus are suggesting a similar relationship: government expenditure will directly or indirectly provide the means towards productive growth in the United States. A more productivity society will be one more capable of repaying the debt (the debt burden will fall; it will take up less of our nominal [monetary] aggregate demand).

The fear is that this narrative is not true: further government spending (and, thus, accumulation of debt — unless it is paid for by direct fiduciary expansion) will no increase productivity. Instead, our debt accumulation is akin to paying for your consumer shopping on your six different credit cards.

I’m not suggesting that this fear has any legitimate theoretical backing (although, I personally think it does). I’m just saying that the portrayal of the fear of debt by people like Krugman is not entirely accurate, and it avoids detailing the major, fundamental theoretical differences which have led to a variance in opinions on whether we should accumulate greater debt or repay what we have collected so far.

Krugman seems more and more to be living in a dream world. If looking a reality with a different perspective will change its consequences he’s right on.

The commenters on the Times’ website and several here seem not to be able to read what Krugman has written. First of all, he takes up the question of external vs. internal debt and points out that the vast majority of US government debt (including state & local, I believe, but it’s not important) is held domestically. A small fraction is owned by the chinese, japanese, etc. Given that, the simple point he makes is that debt service – including interest payments – is an internal transfer. It does not rob the economy of productive resources or capacity. Saying “interest on debt is real” doesn’t address the point.

Leaving aside foreign debt, the other key point is that the assertion that we’re leaving our descendants “in debt” is simply false. Collectively we owe the money to ourselves.

The real issue is not whether the government has to borrow in order to fund its activities. It’s whether the government is using the resources at its disposal wisely – for education, infrastructure, and other productive collective activities – or foolishly, as on pointless overseas military adventures and endless purchases of weaponry and an enormous standing army. One will produce future economic growth, the other won’t.