Don Boudreaux on Public Debt
Mar 26 2012

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the nature of public debt. One view is that there is no burden of the public debt as long as the purchasers of U.S. debt are fellow Americans. In that case, the argument goes, we owe it to ourselves. Drawing on the work of James Buchanan, particularly his book Public Principles of Public Debt: A Defense and Restatement, Boudreaux argues that there is a burden of the debt and it is borne by future taxpayers. Boudreaux argues that all public expenditures have a cost--the different financing mechanisms simply determine who bears the burden of that cost. Boudreaux discusses the political attractiveness of debt finance because the taxes lie in the future and those who will pay for them may not be clearly identified. The conversation closes with a discussion of the role of expectations in both politics and economics of debt finance.

Don Boudreaux on Buchanan
Economist and author Don Boudreaux of George Mason University discusses the life and work of the economist James Buchanan with EconTalk host Russ Roberts. Buchanan received the Nobel Prize in 1986 for his work creating and developing public choice--the field...
Laurence Kotlikoff on Debt, Default, and the Federal Government's Finances
Laurence Kotlikoff of Boston University talks with EconTalk host Russ Roberts about the fiscal health of the federal government of the United States. Kotlikoff argues that the U.S. government is essentially bankrupt because future taxes will fall hundreds of trillions...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Rick G
Mar 26 2012 at 11:35am

Prof. Roberts, do you really believe that Paul Krugman thinks that there is no cost borne from borrow from “ourselves”? This strikes me as a strawman.

Perhaps he’s not clearly articulated the point, but I’ve always understood his point to be that investments today can/will produce greater return in future benefits than the costs that will be incurred.

That is to say, while the future US citizenry has to pay X% more in taxes, if it makes X+1% more in revenue, it still comes out ahead. It’s essentially the Friedman point about making smart investments irrespective of the source of the funding.

The nature of the disagreement with Krugman and the right seems to be on the ability of the government to identify and pursue good investments. Using the war example, specifically WWII, it’s not just that it preventing us from being obliterated by Nazis, it’s that the investments expanded our industrial capacity, pulling forward investments from which we reaped the benefits in the auto industry (for example). Yes, we still bore the costs. They are still on our balance sheet. But the additional income resulting from the borrowing has outstripped those costs.

And in today’s environment of high unemployment and slack production capacity and cheap money there are many opportunities to investment that will produce significantly greater return than those costs. Yes, there are real costs of borrowing. But there are opportunity costs of not borrowing (and due to the nature of the opportunities, the borrowing/spending is not replacing private sector activity).

Don G
Mar 26 2012 at 1:03pm

I remember reading that Krugman editorial and my take on it was the same (debt to ourselves is a net wash). My thought on that now is that if there are two countries ‘A’ and ‘B’ with a large internally owed debt of the same size. That Krugman’s argument is that is OK, but if the countries swapped debt, that would be bad, eventhough payments streams have not changed. Silly.

That said, I agree with you, Rick, that government spending needs to be done with ROI in mind. When resources are cheap and labor is slack, the ROI is easier to meet the threshold.

Benjamin Stingle
Mar 26 2012 at 2:10pm

Good Discussion. I think you guys were very accurate, and I particularly like your attention to capturing Krugman’s perspective in good faith.

Mar 26 2012 at 2:15pm

The wider point that was made, and is almost universally ignored by the likes of Krugman, is that our focus should not be on what the money is doing. Krugman is blinded by the money such that he does not see that resources are being spent to fight a war or transfer assets, or dig holes and fill them back in. The money is a shroud for this allocation of resources. If I hide fifty million dollars under a mattress for ten years, I have not held resources ransom for a decade. I have simply adjusted the amount of money that is in circulation,(Indeed, what is the difference to other economic actors if I burn that money versus hiding it under a mattress?) and the remaining trillions will represent slightly more resources to reflect the loss of this small part of the shroud. And of course, the compensation will move the other direction when my wife decides it’s time to clean the sheets.

Viewed in terms of resources, we spent vast amounts of resources (lives, steel, human tears, etc.) destroying vast amounts of productive capacity and capital (lives, steel, homes, factories, fields).

This somehow translates to economic gain by the Keynesians because, well, “They weren’t doing anything, anyway.” Again, this makes no sense when viewed in terms of absolute resources. “Oops, we used resources to create too much of what we don’t need/want. This led us to use fewer resources to produce what we do need/want, so now we have less of it. Therefore we have more available resources (“slack capacity”) for use by the government.”

The onus is on the part of those perpetrating this theory to prove that their intervention is preferable to the null hypothesis. Or in other words that production of more stuff via government utilization of increasingly scarce resources would produce X+1% stuff we actually want than with no intervention (which can’t be known once the intervention occurs).

Russ Roberts
Mar 26 2012 at 2:28pm

Rick G.,

You raise an important point about straw man arguments which is why I challenged Don’s example about the redistribution of cars. I think Krugman would agree with Don there and it’s important to make a distinction between real disagreements and semantic disagreements.

Which is also why I quoted Krugman rather than paraphrased him:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

The key to making clear where differences lie is in the opening when Krugman says we won’t be impoverished by the size of the debt because, he later argues, we owe it to ourselves. That’s the essential argument that he is making–that taxes raised to pay off the debt don’t make us poorer as a nation because the recipients of those taxes are the bondholders who are (often) fellow Americans.

There is a sense in which that is obviously true. But my claim (and I think Don’s as well) is that that is not the relevant issue for whether we are impoverished. We are impoverished by the unproductive use of real resources regardless of whether they are financed by taxes today or taxes tomorrow. The fact that we “owe it to ourselves” doesn’t change that. Maybe Krugman’s arguing that debt in and of itself doesn’t impoverish any more or less than taxes. So then his argument is essentially that the increase in government spending that we’ve had over the last 5-6 years and the further increases he’d like to see, are worth it.

As I mentioned in the podcast, the argument then gets entangled in Keynesian arguments in favor of deficit spending when the economy is struggling. I have heard Joseph Stiglitz say that it’s all stimulus regardless of what it’s spent on. Yes, he said, it’s better for it be spent on productive uses rather than unproductive uses but it all helps the economy get healthier. Once you hold that view, then more spending is better than less spending at least up to some point.

Who holds the bonds is to me, simply a red herring. Would Greece’s situation be any different if the holders of Greek sovereign debt were individual Greek investors rather than French banks, say? Would it be OK then for the government of Greece to default on its debt arguing that it would be harmless because “we owe it to ourselves?”

Mar 26 2012 at 3:25pm

Thanks Russ for the latest podcast. It’s always terrific listening to Don’s clarity.

Is it possible to have James Buchanan on EconTalk to talk about his work? I would really love to hear Buchanan’s views on his and Tullock’s legacy on public choice.

Richard W. Fulmer
Mar 26 2012 at 3:28pm

It seems to me that the “we owe it to ourselves” argument is similar to the idea that theft is a zero sum game at the aggregate level. One person gains what the other loses so, as far as the economy is concerned, there is no loss.

This ignores the fact that the victim of theft clearly does lose, that he will act to avoid future loss, and that the actions he takes will likely result in opportunity costs (i.e., they will serve only to protect wealth rather than to increase it).

When government taxes, confiscates, or inflates to pay its debts, those from whom the money is taken lose, they will act in ways to reduce future losses, and their actions are likely to result in opportunity costs.

Chris C.
Mar 26 2012 at 4:46pm

I can’t help but think that modeling for G can take much of these arguments into consideration. Do you, Don or any others that you may know of have any mathematical theories that model G to take into consideration future tax rates/revenues, growth, government waste, opportunity costs, and more of the like. I know that the GMU model would look different then others but maybe there is a way to bring Keynesian and Austrian arguments together here.

Mar 26 2012 at 4:57pm

Russ –

Regarding the response you wrote to Rick G’s comment, I’m curious if my reading follows what both of you are saying:

Essentially, the expenditures of the government are a burden on the taxed populous, now or later, but are nonetheless a burden. The argument may be made as to if government expenditures are worthwhile or not, but they do use publicly collected resources, regardless of the financing.

I think the more nuanced argument around the Krugman / Rick G position (and maybe this is a different argument, but it leads the the support of certain government expenditures) is that certain things in the private sector might not exist without public spending.

For example, government-funded transportation infrastructure lowers the cost of interstate / international commerce, thereby opening larger markets to companies that do not yet exist. This would be an argument for public investment in transportation – since the entrepreneur who has not yet started the business cannot privately fund the building of the road that will be necessary for successful operation of the business, etc.

Similarly with public defense, and perhaps even with health care (although the latter may be harder to implement, as we are seeing): if we do not spend sufficient resources on these things, the very building blocks for private enterprise (consistent democratic institutions, stable government, and an able-bodied workforce) would not be available to create the innovations of tomorrow.

In these ways, some investments can be seen to have a return in which they pay for themselves by stimulating economic growth. Without public roads, we might have to pay a different (higher, maybe) tax rate because less commerce would grow to support other public goods. In this way, public debt could be more closely equated to the classical education argument that if you invest in transformative policies, growth may be faster than without these policies, allowing the increased rate of growth to cover the incurred cost, at the same marginal tax rate.

In summary, yes there are costs, and perhaps the whole discussion comes back to deciding what costs are worth incurring, either from a value to society or from a return on investment perspective.

Mar 26 2012 at 5:03pm

So what is the “burden” on future generations of the USG debt??

Are you and I paying for the huge debts incurred during WW2 or under St. Ronald?

Mar 26 2012 at 5:47pm

Good discussion. Didn’t someone say that sometimes an idea is so wrong that only an intellectual could subscribe to it? Seems to me the “we owe it to ourselves” argument is a prime example.

Don’s point that the argument is as dangerous as it is politically attractive because it dissolves any fiscal restraints and any need for prudence is a great one.

Richard W Fulmer
Mar 26 2012 at 5:59pm

Yes, we are paying the costs for those debts. The costs are in the form of lost opportunities. Because resources were expended to build tanks and bombers that were used to kill people and destroy factories and infrastructure, the resources expended and those destroyed could not be used for other things. We are likely poorer because of that. That is not to say that the expenditures for the war weren’t necessary, just that they weren’t free.

The problem, of course, is that we can’t see what was never created with those resources so we are not aware of the loss.

Mar 26 2012 at 7:31pm

I agree with the final point that this is about aggregation. I think of it this way and wonder if I’m thinking about this wrong.

When an individual goes to a bank and takes out a loan, that loan is funded by some other customer of the bank – a depositor. From the bank’s perspective, the books balance. $1000 in from the depositor = $1000 to the borrower (ignoring reserve requirements). Which means that since the bank doesn’t have to provide any funds, the bank thinks of it as free. And from their perspective, that’s true. But it is certainly the case that the borrower has no burden to pay back.

To suggest that because it’s free from the bank’s perspective entirely misses the point that it’s not free from the borrower’s perspective.

Mr. Krugman seems to be claiming that when you aggregate all the customers of the bank, borrowing balances and is cost free. But that’s only because on one side of the balance sheet are positive numbers and on the other side are negative numbers. It does not follow that those negative numbers don’t exist. Put another way, it doesn’t follow that no one carries the burden of paying back the loans that they took from the bank.

Make the bank the federal government, and allow the people who get the money that’s borrowed and the people who have to pay it back be different people, and I don’t see how it’s any different.

Maybe I missed something?

Mar 26 2012 at 7:38pm

Excellent podcast. On this issue, I really like the simple reductio ad absurdum “If government borrowing does not incur a cost, why should we ever limit government borrowing?”

However, I wanted to hear more about this part of Krugman’s statement:

“Families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base.”

I don’t understand this statement, and it seemed to be ignored in the discussion (or I missed something).

First of all, families don’t necessarily have to pay back their debt, you can often wait for a collection agency to buy the debt and give you a write down, or you can declare bankruptcy. A family could also decide to never pay back a 4% interest loan if that money is making 5% in an investment.

Krugman seems to be saying that government is in that last situation, the return on investment of the spending is higher than the interest being paid? But of course that won’t always be true.

But what does he mean by “The debt from World War II was never repaid”? Surely if you bought a war bond in 1939 worth $100 you got the $100 as promised, correct?

Unlike the U.S. family, the U.S. Government has never defaulted in its debt, so it seems to me the Krugman’s statement here is completely backward. It is the family that can more easily avoid repayment, governments MUST repay 100% of their debts or risk losing their supply of free loans. I can easily ignore a small bill here and there and just live with the temporary credit rating hit.

To me this Keynesian position seems a bit crazy. Of course if I buy a $100 government bond today someone will have to repay it in the future, that is the definition of a bond. Whether its paid by future taxes or printed money or money borrowed from China it still decreases the government’s future resources by $100. Their argument seems to be that “I owe it to myself”, but if that was my last $100 and I need money to eat today I can’t tell the cashier “oh its fine, just pay for it with the money I owe myself”. No vendor will accept future money from ME without charging interest, so by borrowing from me I’ve simply changed places with my government. Where before they needed a loan to fight a war, now I need a loan to buy food. Seems pretty simple.

I think the only way you can make an argument that the U.S. government is getting a free lunch on its debt is via the trade deficit with China. Instead of asking me for $100 directly, I can go ahead and buy that amount of goods at Wal-Mart that sends $100 to China, and then someone in China eventually loans that money to the U.S. Government. In that scenario, I still get my goods and the government still gets its loan, although it only gets the fraction of my spending that ended up in China, it still seems like it could be a good bargain.

Joe Eagar
Mar 26 2012 at 9:53pm

Ok, I can’t believe I’m defending Krugman, but. . .

He’s right. *If* your tax base grows *faster* than your debt (or the discounted value of future interest payments), *then* there is little burden (at least if debt is less than 100% of GDP). This is not Keynesian, nor is it classical; it is a simple fact.

Politicians–left, right, and center–view small, sustainable deficits as a handy means of capturing the revenue generated by economic growth and inflation. There is no partisan viewpoint–they all agree on this.

There are costs. Krugman himself criticized the Bush deficits for crowding out private investment, and he may have been right. They worsened the trade deficit, as fiscal and monetary policy fought each other. Nonetheless, Bush-style deficits *are* sustainable, and if we want to convince politicians to change their behavior, we must first acknowledge that.

(Of course, our current deficits are not sustainable at all. Krugman is wrong to apply these arguments to today’s debt problems).

Jeff Boyd
Mar 26 2012 at 10:15pm

I’m really struggling with this podcast as I never really heard an argument that the government has to pay back the debt that made sense to me. It made the very good argument that deficit spending allows government to spend without the discipline that we as individuals face and crowd out private efforts but that seemed to be as far as it went.

The warehouse full of chocolate covered pickles was a great analogy. If the warehouse is full of those pickles and I’m the person who decides to buy them does it make a difference to the overall economy if I decide to finance the purchase with debt or by emptying my savings account?

Obviously, if a whole industry grows up to build the warehouses to hold the pickles that no one wants to actually eat that is a terrible waste but isn’t the whole point just a question of whether or not the spending is productive?

Mar 27 2012 at 6:12am

If we accept Friedman’s argument that (Government) Debt Today = Taxes Tomorrow, then there must be some sense, at least, in which Krugman is just making the point that they are roughly equivalent, and why do today what you can put off ’til tomorrow. And for that matter, why do tomorrow what you can put off indefinitely?

Whether or not we are “impoverished”, then, comes down to the simple (or simple after the fact!) assessment of whether or not what has been bought is productive and useful. Clearly the children paying higher taxes to pay off their parents’ chocolate covered pickle investments are impoverished in the sense that (A) they could have been paying off something far more useful like broadband infrastructure investment, or; (B) they could have had no tax increase – more money themselves – if the Gov’t just hadn’t bought anything.

Krugman’s error seems to be that the tacit assumption that the Government can spend nothing incorrectly. Presumably Government money spent anywhere on anything would increase aggregate demand somewhere, and that, in the view of some, is all to the good.

Antonio V
Mar 27 2012 at 9:41am

Good discussion, but a little missleading.

One point that is not mentioned is the principle of reducing debt through economic growth: as long as the rate of economic growth (GDP) is greater then debt growth rate, debt is reduced.
Basically, that is one other reasoning behind Krugman’s argument…
Of course, it probably raises issues on how the money is spend…

Mar 27 2012 at 9:46am

This debate is all about the Paradox of thrift. Austrians like Russ and Boudreaux don’t believe in it!

They don’t beleive it because they believe that all government spending is unproductive. In order to justify their views they need to tell us more as to why this is the case.

By the way, a proper Keynesian doesn’t believe in permenant deficit spending. When the economy is at full employment budgets should be balanced. Governments should run deficits in order to get an economy back to full employment.

Keynes’s argument was that a proportion of aggregate Investment should be socialised because the ‘animal spirits’ of investors resulted in long periods of low economic activity. Read Ch 12 of the GT – one of the best piece of economic writing you could ever read.

Mar 27 2012 at 10:24am

An important point is to pay attention when government officials use the word “we” or “ourselves.” Watch the news some evening and listen to the subtle difference: sometimes “we” refers to the whole people, or a subgroup, the taxpayer, and sometimes “we” refers to the government (not the same as the citizens at all).

In a discussion where both sides are referring only to aggregates, that might not be a problem. But often, what you are seeing are completely different views being expressed using the same terminology. Defining “we” and “ourselves” is an important part of the argument, would clear much of the confusion, and would make clear when the taxpayer is being swindled (which is the reason for the obfuscation in the first place).

Pay attention to the point of view of the speaker, not just the words. In politics that’s very important. For example, our relations with China rest on a treaty that determines that there is only one legitimate government of the Chinese people. The Republic of Chine reads that as itself. Formally, The USA and Taiwan read that as the government of Taiwan. We agree on the words, but not what they mean.

Mar 27 2012 at 10:34am

Great Podcast! Thanks again.

Mar 27 2012 at 12:03pm


“He’s right. *If* your tax base grows *faster* than your debt (or the discounted value of future interest payments), *then* there is little burden”

I don’t understand this argument. What if your tax base grows faster than my NO DEBT? Isn’t that even LESS burden? Doesn’t this graph show that we are spending 6% of our budget on interest payments?

How is that not a burden?

Mort Dubois
Mar 27 2012 at 12:46pm

Russ and Don make a reasonable case for limiting government borrowing, but the logic of their argument would seem to encourage running the printing presses as a solution. If your objection to borrowing is that future taxpayers bear a burden, why not just print dollars to repay debts? That way future taxpayers need not pay higher taxes, the debt just disappears. A currency which is inflated doesn’t much bother the future taxpayer, in the same way that I don’t spend much time pining for 29 cents per gallon gas or nickel candy bars.

I was also struck by Russ’s list of the ways that governments finance their activities. Missing were 2 historically important methods: extracting riches from the ground, and stealing them from your neighbors. America can’t be all that bad if the second isn’t a plausible option.

Mark H
Mar 27 2012 at 1:14pm

During the reallocation-of-cars discussion, it seems the only costs mentioned were the costs to those who lost cars and losses associated with behavior changes to mininimize the likelihood of such losses in the future. I was a little surprised not to hear that this is a top-down intervention that likely (given the typically bad bets made by central planners) would result in losses from misallocation of scarce resources.

If a widget-making business’ tooling capital investment was confiscated and reallocated to another business making a similar product, isn’t there a strong possibility of loss of aggregate production? In other words, I didn’t quite understand Russ’s distinction between reallocation of current stuff and borrowing to produce new stuff, since producing new stuff just means a change in the mix of current production (government spending doesn’t create new productive capacity).

Mar 27 2012 at 9:28am

As a non-economist type I was wholly convinced by the argument that burden today from tax is basically the same as burden tomorrow from public debt. But – and I might well be missing some well know reasoning here – if you finance well using public debt and the economy grows and people on average make more money in real terms than when you took out the debt. Does this effectivly mean this burden is reduced as the future tax payers are going to be paying a lower percentage of their total earnings than if you just raised taxes today?

Matt Day
Mar 27 2012 at 2:25pm

I can not believe it took over one hour for you to bring up the probability that Krugman was writing about the aggregate. This seems obvious to me. I had the urge to scream at my iPod as I was listening. 8)

You have to remember the context. Krugman is responding to the current political rhetoric about austerity and balancing budgets while we’re in a recession. To him it is counter-productive to tighten belts in the midst of suffering.

Many politicians are arguing that the solution to our current economic problems is reduced government spending and taxation. They warn of increased debt causing economic trouble in the future. Krugman thinks they are scare mongering, being disingenuous, not thinking clearly, or over reacting.

The quoted portion of his column is just making the case that increased deficit spending today isn’t as bad as it is being made out to be by ‘deficit-worriers’. That’s it. He doesn’t say it is free or without consequence. Y’all seem to be reading far, far past what he’s written.

A thought experiment:

a) Suppose that we know we’re in a recession.

b) Suppose that we know we’ll return to prosperity in the next few years.

c) Suppose that the government is capable of effectively spending money to decrease unemployment and/or to accelerate our return to prosperity.

Shouldn’t the government deficit spend?

Now, what if we don’t know any of the above but we just think they are each likely?

I think your disagreement with Krugman is more likely to be with b) or c) above than what y’all were going on about.

Matt Day
Mar 27 2012 at 2:36pm

About the ‘owe it to ourselves’ part…

It is quite different for the debt to be owed to Americans vs. foreigners.

1) The US government can tax Americans.

2) When the debt is paid back it is much more likely to help the U.S. economy than if it is paid to foreigners.

Of course this doesn’t make the debt free but Krugman didn’t say that anyway.

Mike Gomez
Mar 27 2012 at 4:13pm

Matt Day,

The following is in my opinion the most important part of the Krugman quote:

“So the debt didn’t make postwar America poorer.”

If some transaction (in this case, increasing the debt) doesn’t make someone (in this case, America) poorer, then it doesn’t have a cost, and if it doesn’t have a cost, then it’s free. So while Krugman does not explicitly say, “the debt was free,” his comments ammount to the same thing.

Kudos to Russ and Don for highlighting this faulty conclusion. The objection isn’t a game-changer with respect to the stimulus debate, but it performs an important function by informing the discussion.

Darren M.
Mar 27 2012 at 6:09pm

I’d like Krugman to give me his salary for the next several years. Between the two of us, it would just be owed to ourselves anyway. I’m sure he would not consider it a burden since nothing would really have changed in the aggregate.

Mar 27 2012 at 7:11pm


“If your objection to borrowing is that future taxpayers bear a burden, why not just print dollars to repay debts? That way future taxpayers need not pay higher taxes, the debt just disappears.”

ECON 101. Running the printing press is just a more pernicious and invisible means of taxing your people. Every new dollar you print drains value out of all the dollars already in circulation (inflation). Future taxpayers ARE paying higher taxes because their money is worth less that it would be otherwise.

Mar 27 2012 at 9:01pm

I thought this was a good show, and perhaps there should be a “Part 2” about the implications of the debt when it is held by foreigners. For example, the total was $94B in January.

Or, this site puts Foreign held debt at over $5T.

Clearly there is a cost to paying interest on all this debt, and that interest is not “borrowing from ourselves.” $5T is clearly not an insignificant amount no matter how fast the economy is growing. (Which it ISN’T, lately)

Perhaps if our govt spending was actually limited to borrowing from ourselves and not the additional $5T, then we wouldn’t be so concerned about the implications of the debt. In other words, if we’re not concerned about the overall debt to GDP ratio of >100%, then may we should be concerned when the foreign debt to GDP is >33%.

Mort Dubois
Mar 27 2012 at 9:37pm

@ James: Thanks, I understand that. But inflation doesn’t affect everyone equally: it falls much more heavily on creditors and savers than debtors, which seems to be why it’s feared by our ruling classes. The point I was trying to get across is that the logic of the argument that Russ and Don are making doesn’t imply that inflation would be a bad thing, if it relieves the burden of debt. Which it definitely does, both for current and future debtors. If there’s another logical construct which explains why that’s so bad, I’m happy to hear it.

Dave Sage
Mar 27 2012 at 10:19pm

I love your podcasts and I am especially thankful that you took on PK on this issue, because his column on debt was difficult to understand. I think that you clarified the argument for me. Using the case of borrowing to pay for a war, you both characterize the future taxes to repay the debt as a “burden” on the taxpayers. Seems like your argument turns on the idea of burden. I think the burden, if there is any, is the excess discomfort of the tax over the benefit of the successful war. If the benefit of winning the war is equivalent to the taxes needed to pay for it, then where is the burden? (Of course, if you choose to let someone else fight for you and then gripe about fixing his wounds, I can see where the idea of burden comes from.) Now,let me ask you, how much of a burden is it for you to pay taxes to pay for World War II?

One other thing I learned in my one economics course forty years ago is that the real question about any government spending is: Is it paying for something worth doing? If it is, then what does it matter how we pay for it? You have to ask the same question about WW2 and Iraq.

Assignment, Professors: Contemplate the idea of a “burdensome taxes.”

And, please keep up these fascinating podcasts.

Mar 27 2012 at 10:35pm


How does inflation do anything but increase the cost to society? Rather than relieve the burden, it is additive to the interest payment on the debt.

It’s helpful to think of the family finance analogy used in this podcast. Let’s say the family has saved $100K and wants to spend that money during their retirement. If the inflation rate is at 3%, the net purchasing value of that money after 24 years will be $50K.

Of course, they could put that $100K in inflation adjusted t-bills, but then that is just saying that the government intends to make whole one class of investors while diluting the value of the other investors (savers). Clearly the difference between the inflation protected bonds and regular bonds are a real cost of the debt.

Mar 27 2012 at 11:18pm

Drs. Roberts and Boudreaux,

Why is there a distinction between different holders of US debt (the Chinese gov’t vs. US citizens).

If I understand Krugman correctly, he’s saying the gov’t will have to raise future taxes to fund the debt repayment, but since the debt repayment dollars go to US citizens, it’s OK. Is he saying it’s OK because the US citizens will spend those dollars and thus help the economy? If so, wouldn’t foreign recipients of those dollars eventually spend those dollars as well?

Mar 27 2012 at 11:31pm

“I can not believe it took over one hour for you to bring up the probability that Krugman was writing about the aggregate. This seems obvious to me. I had the urge to scream at my iPod as I was listening.”

Yes, but why do you think Krugman didn’t mention it? It would have only taken a few words to do it, so it wouldn’t have lengthened his article to any great degree.

My sense is that he doesn’t mention the aggregate part because it makes it a little more obvious that the individuals that make up the “aggregate” will be comprised of winners and losers. At the end of a poker game the “aggregate” will come out even…but some will likely leave the room richer and happier than others.

Mar 28 2012 at 12:22am

Great podcast! I like how level headed and respectful these podcasts are to opposing views.

The “owe it to ourselves” aspect is a complicated issue. It makes sense for simplicity to keep it to individuals.

However, some of the “owe it to ourselves” comes down to things like how much we borrow from the Social Security Trust Fund. The same thing applies. We tax future citizens to pay Social Security Recipients money that we would have otherwise had. The burden comes from the additional taxes.

Printing money is debt if we plan to “un-print” it later by taxing people to pay back the Fed Reserve held treasury notes. Again, the burden comes from additional taxes.

Mar 28 2012 at 3:21am

Doesn’t this all just boil down to what approach motivates the most (useful) human productive output over some period of time?

Keynesians are simply saying that (1) a more centrally directed economy will maximize human productive output in the present distressed conditions, and (2) upon shifting back to a more decentralized economy, the economy will be better off than had this not been done.

First decide whether you agree with that or not, and whether it can be practically carried out in our political environment. Then it is just a matter of the mechanics of doing it. i.e. How much borrowing and what forms of allocation maximize output.

Lukas Daalder
Mar 28 2012 at 5:41am

I am a subscriber to the weekly podcast and as a result have listened to all of the recordings of the past two years, if not longer. Even though I do not always agree with the guests (or the host for that matter) I very much appreciate the service and hope you will keep up the good work indefinitely!

Having said that, both the two podcasts with Boudreaux I have listened to somehow are the least interesting and in fact the most annoying in the series. Somehow you two bring out the worst in yourself, trying to get the message across. I don’t know why, but the level of the discussion somehow seems to drop to student level, small time bickering on Krugman and Keynesianism… Mind you, I don’t say that you should not criticize Krugman -please do!- but it’s the level at which the discussion is taking place that I find, well, eh… disappointing.

What’s more -and I am not sure whether that’s the reason, although I would think not- Russ appears to do most of the talking.

Sorry to make this critical point, in what is otherwise a very good initiative!

Lukas Daalder

Richard Boltuck
Mar 28 2012 at 9:26am

Hi Russ . . . James’ point struck me as well, that the podcast discussion didn’t address Krugman’s first whopper:

” . . . families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid.”

This is another classic example of false reasoning. Since Federal debt has grown over time (through rollovers when specific instruments mature), Krugman rather than ever repaying debt, the current amount of debt, once established, will exist forever. Britain historically even issued permanent bonds — Perpetuities (

Does the lack of need to reduce the level of aggregate debt mean that taxpayers (current or future) are relieved of the full burden of the debt, as Krugman appears to imply?

No. Even with an actual Perpetuity (that doesn’t require refunding), taxpayers must pay the interest stream, the present value of which is . . . well . . . just the value of the bond! Hmm. Another Krugman fallacy.

On Krugman’s second point, the common nostrum that we owe the debt to ourselves, it might be helpful to consider a mental experiment where that was contrived to be true literally. Imagine there is one taxpayer who is also the bondholder, i.e., he lends the government (and I’ll beg the question of what the government is in this world) $100 at time zero, receiving a 5%-coupon bond that matures one period hence. At time one, the government taxes him $105 and redeems the bond principal and coupon. I submit that is a case that cannot be distinguished from taxing the taxpayer $100 at time zero (and which does not depend of Ricardian/Barro Equivalence in the usual sense). So the taxpayer bears the full burden.

As for Buchanan’s basic argument that taxpayers bear the burden of government borrowing, I think a lot is revealed by intertemporal T accounts. The fallacy of “repaying ourselves” simply ignores that the bond holder acquired the bond by parting with another asset which the repayment restores (which is true even if the bondholder acquired the bond on the secondary market). The bondholder is hence indifferent (at the margin) to the two-part intertemporal asset exchange in which he has engaged, whereas the taxpayer is down the amount of the required taxes (which may or may not be worth the burden to him depending on the value of the government services thus financed).

Other issues not discussed in much detail in the podcast, though in some instances hinted at:

1. The ethics of tagging non-voting, underrepresented future taxpayers with burdens for today’s expenditures (if Ricardian/Barro Equivalence shifts the burden to current taxpayers through a positive bequest motive, then to that extent, this concern doesn’t arise, but neither does any colorable argument for the stimulative effect that Keynesians claim). Should future taxpayers be permitted to “disown” the responsibility of paying debt they never agreed to incur?

2. Other time-shifted burdens of government and their relationship to explicit debt (unfunded liabilities associated with government commitments to future expenditure).

Ivan K.
Mar 28 2012 at 10:38am

Russ – Thanks as always for the podcast. I consider myself generally skeptical of your biases (which is a big reason why I enjoy EconTalk) and hence greatly appreciate the even-handedness with which you conduct these conversations.

There are several considerations I’d like to add to you and Don’s discussion.

1) I think you understate the importance of time. Sure, debt implies future taxation (or indirect financial repression through inflation). But much can happen between the debt issuance and bond redemption-inspired tax increase. Social priorities about inequality could change. Or projects may turn out to be more profitable than anticipated (revenue-driven municipal projects, for instance). The resulting shift in the structure of taxation has important distributional consequences. And importantly, those consequences change over time. So taxing tomorrow is NOT substantively identical to taxing today – taxing tomorrow is subject to the whole range of changes in circumstances and political priorities between time periods.

If future generations benefit from an infrastructure project, perhaps they should get to decide how it’s paid for (by the rich? evenly? by financial repression?). Like most classical thought, I think simply equating taxation and debt misses the importance of time.

2) I think you give short shrift to a thoughtful Keynesian (or new Keynesian, if you like) position. The personal savings rate has jumped recently because of fear. Likewise financial intermediation is stalled as banks build up massive capital cushions. Though our current-account deficit is falling, there seem to be no signs that the US will run a CA surplus anytime soon. So we’ve got private saving, corporate saving and external saving. Who’s the borrowing going to come from? If nominal income is not to fall precipitously, someone’s got to step in on the other side. And that’s government. Admittedly, there are many public-choice concerns here, but the basic point remains intact.

Put another way, suppose we’re currently operating below potential. Suppose further that much of this is due to fear- and uncertainty-based resource-hoarding. If government can tax individuals with a low marginal propensity to consume and give transfers to those with a high MPC, it could significantly improve the situation. Excess savings would be drained from low-MPC individuals by bond issuance. In effect, we could smooth the national consumption pattern just as Friedman stipulated individuals try to smooth theirs.

None of this is to suggest that debt is costless if issued to Americans. But it can also be very beneficial. Particularly now, when borrowers are in short supply and fear abounds, government action in the capital markets can be a boon to recovery.

Thanks as always for the interesting podcasts.

Mar 28 2012 at 12:18pm

Russ –

Thanks again for a great podcast and an interesting discussion.

I’d like to revise slightly my previous argument:

Of course, you and your guest are correct. In the traditional sense, if a debt is incurred; if money is spent, it must come from somewhere. In the case of government, that is taxes, fees, etc – mostly taxes.

In that sense, of course there is a burden of public debt, and bonds are repaid from taxes. I think the disagreement in perspective comes from the view of a “burden.”

If I get a loan to go to school, and have to pay back $300 a month for a number of years, that’s a burden on my wages. If, by not going to school I would have made $2,000 a month net, but after going to school I’m able to land a job that pays $3,000 a month, the $300 doesn’t feel like a burden to me, because it allowed for my means to pay it back to increase as well.

In the case of the government, the statement that Krugman made that “the debt from World War II was never repaid” could be taken as meaning “there was never an implicit increase in tax rates required to pay the debt from WWII.” In this sense, that debt was not felt as a “burden.” (Perhaps, marginal tax rates what they were back then, that statement may need revising.)

It seems then, that government spending can be positive if it does one of two things – if it provides for a national interest (protection, worker protection for societal expectations, etc), or if it helps grow the economy in a way that is not served well by the private sector.

I agree that the argument of government debt not being a burden is a false argument, but in the sense of proper investment, perhaps in infrastructure, raw science, etc, government spending, and even borrowing, can be done at a cost less than the resulting growth spurred by these actions. In normal times, these costs should be allocated within the constraints of the normal budget, but I see no reason that bonds cannot be used as a stop-gap measure.

Perhaps this is arguing against Krugman, and it is definitely not in favor of rapid expansion of the role of government, but let’s remember that proper government programs and policies can provide a great good to society as well.

Mar 28 2012 at 2:45pm

this discussion left out the liquidity trap and depressed economy/employment (ie resource utilization), which inform the context in which the borrowing is being advocated.

zero lower bound and employment r podcasts topics in themselves, but these r big components of the keynesian position which were not mentioned once.

Mads Lindstrøm
Mar 28 2012 at 2:47pm

RTF writes:

If I understand Krugman correctly, he’s saying the gov’t will have to raise future taxes to fund the debt repayment, but since the debt repayment dollars go to US citizens, it’s OK. Is he saying it’s OK because the US citizens will spend those dollars and thus help the economy? If so, wouldn’t foreign recipients of those dollars eventually spend those dollars as well?

Excellent point. The dollars the Chinese holder of US bonds get paid, will sooner or latter find there way back to America and increase aggregate demand. However, the burden will be that American future aggregate consumption is hurt, as the Chinese is consuming instead of an American. This is very intuitive, as it was the Chinese who deferred consumption, it is also the Chinese who will enjoy the deferred consumption in the future.

Mar 28 2012 at 6:06pm

However, the burden will be that American future aggregate consumption is hurt, as the Chinese is consuming instead of an American. This is very intuitive, as it was the Chinese who deferred consumption, it is also the Chinese who will enjoy the deferred consumption in the future.

But the overall aggregate effect seems to be the same in either case.

Case 1. The Chinese buy the bonds. The US gets the benefits of the spending now, without having any US citizens defer consumption now. When the bond is paid the US has to defer consumption but gets the benefit of Chinese spending.

Case 2. A US citizens buys the bonds. The US gets the benefits from the spending now, but a US citizen has to defer consumption. When the bond is paid, the US gets the benefits of both spending and consumption.

In both cases there are four variables (ignoring for now how the money to pay the bonds is raised, which in both cases should be the same anyway):

early spending
early consumption
late spending
late consumption

Let’s assign one point for each for a total possible score of four.

Case 1. The Chinese buy the bonds. The US gets the benefits of the spending now (+1), without having any US citizens defer consumption now (+1). When the bond is paid the US has to defer consumption (0) but gets the benefit of Chinese spending (+1).

Case 2. A US citizens buys the bonds. The US gets the benefits from the spending now (+1), but a US citizen has to defer consumption (0). When the bond is paid, the US gets the benefit of the benefits of both spending (+1) and consumption (+1).

In both cases the total score is the same (three). I’m not sure what this means, but re-reading the thread before submitting this post, I see that Dr. Roberts already made a similar point:

Who holds the bonds is to me, simply a red herring. Would Greece’s situation be any different if the holders of Greek sovereign debt were individual Greek investors rather than French banks, say? Would it be OK then for the government of Greece to default on its debt arguing that it would be harmless because “we owe it to ourselves?”

Mar 28 2012 at 7:38pm

In short, could the case of this discussion be made as follows:

Regardless of who the parties involved are, all debts either have to be repaid or go into default. Thus, all debts are a burden on future resources.

Some debts go to pay for things that turn out to be worthwhile, and return benefits greater than the burden. Others do not.

As a result, everyone (individuals, companies, governments) should be cautious and prudent when making spending decisions, especially decisions about going into debt, since forecasts of future earnings may be more rosy than reality turns out to provide.

Mar 28 2012 at 9:19pm

I thought this was the worst econtalk yet. It was really a series of straw men. Even the one Krugman quote they read, the mostly ignored rather than take it part by part.

Here are some PK quotes from his blog trying to dig deeper into that statement. (I’m fairly certain they know these exist, and I’m baffled Russ and Don chose to ignore them):

“I suspect that I may have been too cryptic in my post on the real burden of debt. So let me give you a thought experiment that may help clarify matters.

Suppose that for some reason the nation temporarily ends up being ruled by a guy who is driven mad by power, and decrees that everyone will have to wear their underwear on the outside (sorry, Woody Allen reference) everyone will receive a large allotment of newly printed government bonds, adding up to 500 percent of GDP.

The government is now deeply in debt — but the nation has not directly gotten any poorer: the public, in its role as taxpayers, now owes 500 percent of GDP, but the public, in its role as investors, now owns new assets equal to 500 percent of GDP. It’s a wash.

So where’s the problem? Well, to pay interest on that debt, the government will have to raise a lot more revenue. Again, this is a wash — the extra revenue is matched by the extra income people receive as bondholders. But tax rates will have to go way up; and because lump-sum taxes don’t exist in the real world, this means that marginal tax rates will have to go way up.

And you don’t have to be a right-winger to acknowledge that yes, very high marginal tax rates act as a disincentive to productive activity. So real GDP may well fall significantly.

This is what I mean when I say that the burden of debt is about incentives, not about having to deliver resources to other people.”

Here is PK agreeing with Buchanan’s obvious point:

“First, instead of a hypothetical example, let’s talk about a real case: US debt after World War II. The government emerged from the war with debt exceeding 100 percent of GDP; because there was almost no international capital movement at the time, essentially all that debt was owned by domestic residents, with a sizable fraction consisting of savings bonds bought by individuals.

Now, here’s the question: did that debt directly make America poorer? More specifically, did it force America as a whole to spend less than it would have if the debt hadn’t existed?

The answer, clearly, is no. Yes, American taxpayers had to pay the interest on that debt. But who received that interest? American taxpayers. Not exactly the same people, of course — although savings bonds were held pretty widely. But America was not like a home buyer who has to scrimp to find enough money to make his mortgage payments; America was both the borrower and the lender, and was essentially paying money to itself.”

Obviously, Krugman was aggregating. Just as Don and Russ might say “trade with foreign countries makes America wealthier,” while still conceding the possibility it makes some Americans poorer. Krugman is arguing their is no net burden to debt, but he’s conceding there are distributional consequences (some Americans will owe others).

I don’t even agree with PK (at least as a general statement). Nick Rowe’s posts were excellent and his back and forth with Landsburg was really interesting. It’s too bad we had to listen to Don this week and not someone who has thought about the issue at a much deeper level.

Lastly, PLEASE, PLEASE, PLEASE don’t listen to Don’s comments about this being a “Keynesian” argument that was motivated by trying to convince people to take on lots of debt. Here is Ed Prescott, the absolutely farthest thing you can get from a Keynesian.

Myth No. 5: Government debt is a burden on our grandchildren. There’s no better way to get people worked up about something than to call on their sympathies for their beloved grandkids. The last thing that I want to do is to burden my own grandchildren with the sins of profligacy. But we should stop feeling guilty — at least about government debt — because we are in better shape than conventional wisdom suggests.

Theory and practice tell us that the optimal amount of public debt that maximizes the welfare of new generations of entrants into the workforce is two times gross national income, or GDP. This assumes 1% population growth, 2% productivity growth, 4% real after-tax return on investments, and that people work to age 63 and live to age 85. Currently, privately held public debt is about 0.3 times GDP, and if we include our Social Security obligations, it is 1.6 times GDP. In either case, we could argue that we have too little debt.

What’s going on here? There are not enough productive assets — tangible and intangible assets alike — to meet the investment needs of our forthcoming retirees. The problem is that the rate of return on investment — creating more productive assets — decreases as the stock of these assets increases. An excessive stock of these productive assets leads to inefficiencies.

Total savings by everyone is equal to the sum of productive assets and government debt, and if there is an imbalance in this equation it does not mean we have too little or too many productive assets. The fix comes from getting the proper amount of government debt. When people did not enjoy long retirements and population growth was rapid, the optimal amount of government debt was zero. However, the world has changed, and we in fact require some government debt if we care about our grandchildren and their grandchildren.

If we should worry about our grandchildren, we shouldn’t about the amount of debt we are leaving them. We may even have to increase that debt a bit to ensure that we are adequately prepared for our own retirements.”

Mar 28 2012 at 10:07pm

Forgive me, but I’m going to try to make a somewhat technical point here. It may be of interest to some.

I really thought this podcast was going to get somewhere at around the 50 minute mark, when Russ read the PK quote. The beginning of the quote clearly brought up the point that the government may not ever have to raise taxes to pay back its debt. Don built his whole case on debt causing higher future taxes, I thought for sure he’d have to respond. He didn’t. I’m going to try to underscore the point with a very simple example.

Imagine an economy with no taxes and no government spending. Then for some reason (Shoot down a meteor?) the gov’t has to borrow a lot of money. Let’s assume the interest on the debt is 2% and the rate of growth in the economy is 5%. Let’s further assume that the amount of money was 1 years GDP.

So in terms of GDP (where 1 equal the year 0 GDP), we can look at the debt and GDP over time

year 0 Debt = 1 GDP = 1
year 1 Debt = 1.02 GDP = 1.05
year 2 Debt = 1.04 GDP = 1.10 (rounding)
year 3 Debt = 1.06 GDP = 1.16
year 4 Debt = 1.08 GDP = 1.22
year 5 Debt = 1.10 GDP = 1.28

What’s happening? When the country gets to year 1, they have to pay interest on their debt. Remember there are no taxes or spending. Do they have to raise taxes? No, they just issue 1.02 worth of debt and use the cash to pay the current bond holders. The same story works over the next years. Is this a ponzi scheme? Would bondholders not lend? Look at year five, compute the debt to GDP. It’s about .86 (down from 1). If you took this out to year 100, the Debt/GDP ratio would be 5% (even though the debt would be 7 times as large).

So who’s paying the debt? There are no taxes, and there never will be taxes. The tricky point is that no one is paying the debt. In the way Don argued his point, there is absolutely zero burden to this debt. No one gives up any consumption. No taxes are ever levied. It’s a characteristic of infinite series. The essential point in this example was a rate of interest lower than the rate of growth of GDP.

Here’s the thing. I didn’t just make this up to be clever. This is series economics, and people have been thinking about this for a long time. Here are two citations if you’d like to see this in a more general form:

“Pure Exchange Equilibrium of Dynamic Economic Models” Gale, Journal of Economic Theory 1973

“Notes of the Economics of Infinity” Shell, Journal of Political Economy, 1971

Mar 28 2012 at 10:12pm

I agree with others that Krugman’s primary argument must be that as long as growth or ROI outstrips the increase in debt interest/tax, deficit spending is ok/good.

The idea that as long as bondholders are American, we are paying ourselves is hard to comprehend. I see it as 4 transactions:

1. Receive $100 at t=0 from American bond investor.
2. Spend $100 on a gov’t project.
3. Receive $105 at t=1yr from American taxpayers (burden spread over many people).
4. Spend $105 to repay American bond investor.
* These transactions leave the gov’t at net zero.

From the POV of American bond investor:
1. Spend $100 to buy a bond.
2. Receive $105 from gov’t.
* These transactions leave the investor at +5.

From the POV of the taxpayers.
1. Spend $105.
* The taxpayers are at -105.

This example illustrates that grouping of the taxpayers and the American bond investor do not result in a wash. The result is a cost or burden of $100. The government’s books indicate a wash, but the government is simply an intermediary.

Perhaps Krugman’s point is that it would be worse if the bondholders are not American’s. In that case, American’s would pay taxes, but no single American would receive a bond payment for an equal amount. [of course, no American would have put up money to buy a bond either, so the only difference is whether the interest payment stays in America]

Mar 28 2012 at 10:44pm

” Let’s assume the interest on the debt is 2% and the rate of growth in the economy is 5%. Let’s further assume that the amount of money was 1 years GDP.”

How about let’s consider the case where growth does not exceed the interest on the debt? Italy? Greece? Is the USA next?

Taking Italy where growth is essentially flat and the interest rates were recently as high a 7%, you get quite a different story to the table of numbers presented. I’m not going to spend the time to create the table. I’m just raising the point that the “assumptions” that the growth exceeds the rate of interest on the debt are just that. So far, the Fed has done QE and pushed the interest rates down to zero. One has to be an eternal optimist to think those trends are going to continue for too much longer.

Our total debt service (local+state+federal) is close to $3.5T currently. The burden will clearly be felt when the rates return to historical norms and instead of services or benefits, we begin paying more and more interest.

There is a disconnect in these arguments where the transfer of money from taxpayer to bond holder is thought of as a zero sum game. Money transfer is not productivity in the same way that manufacturing takes capital and turns it into useful products.

Mar 29 2012 at 12:06am

This podcast seemed to entirely miss the point on the effect of our gruesome level of public debt.

Our current and expected public debt and opbligations does not represent future taxation because future taxation cannot be adequate to repay that current and expected debt and obligations, absent massive inflation.

@Rick G, re “cheap money”: Dollars are cheap not because inflationary expectations are low but because the Fed is supplying cheap dollars, and dollars are fungible.

@Mort Dubois: Inflation doesn’t affect everyone equally, but when it dwarfs the benefits of saving and investing it stops functioning as a medium of exchange, and that will affect everyone badly. No, we won’t have to repay the Chinese, and your mortgage and student loans will disappear, but if you live through the period when you have to barter your services or items you own to survive I don’t expect you’ll enjoy the experience.

Ivan K.
Mar 29 2012 at 7:47am

Once again, I feel as if too many of the commentators here, like Mr. Boudreaux, don’t properly appreciate the dynamic importance of time. It’s a central shortcoming of classical economics. Take, for instance, Matthew above. If the government spends $100 today and pays out $105 (including 5% interest) in time t, is that a net gain or a net loss? Well, it depends. In particular it depends on the discount rates of the various individuals involved. If taxpayers today have a high discount rate and taxpayers tomorrow have a low discount rate then it is a net gain, although the ‘net amounts’ wash out. In fact I don’t think this is a wholly unrealistic assumption given that today’s taxpayers are used to milk and honey while tomorrow’s have already had their expectations taken down significantly by the recent crisis.

And what about inflation? Sure, consistently very high inflation throws a spanner into transactions. And sure, it reduces the supply of credit as borrowers demand punishing interest rates. But zero inflation or deflation can be just as harmful. In this case demand for credit falls (despite low nominal interest rates, real rates are punishingly high).

Most importantly, the relevant inflation rate is not just ‘manna from heaven’ but is part of a policy package implemented by successive governments. And that’s the key point Don and some posters seem to be ignoring. The distributional consequences of government debt aren’t fixed. They change depending on successive governments’ choices about inflation and the relative burden of taxation.

Russ recognizes this in the podcast but, as usual, is intensely skeptical of the capability of public institutions to make efficient choices. I’m less skeptical. In either case, we should be having the conversation and not ignoring the dynamic impact of time.

Mar 29 2012 at 8:54am

Thanks for the thought provoking podcast.
One thing that let me wondering was the seeming omission of the real effect of indebtedness. Ie. what is the magnitude of transfer of real resources from tomorrow to today.
The podcast seemed to be circling at the nominal level. The nominal transfer of resources is quite straightforward, but the real transfer is more ambiguous, as the pool of todays resources affects the resources tomorrow.

Mar 29 2012 at 9:19am

“I’m just raising the point that the “assumptions” that the growth exceeds the rate of interest on the debt are just that.”

Of course, I’m trying to point out a simple point in as simple a way as possible. There are also taxes and gov’t spending in the real world, adding those complicate things.The point is implicit in PK’s quote and yet it was totally absent from the podcast. If you want a deeper model, you can go to one of the cites I give or any one of a 100 other papers. But you don’t even know that the literature exists, because Russ and Don who you rely on to be experts aren’t in this area.

Don’t follow the hosts in to the straw man game!

Russ Roberts
Mar 29 2012 at 11:19am


The Krugman underwear example is the point I mentioned in the podcast–government expenditures that finance transfers or that involve using up real resources, have little real effect other than the disincentive effects of taxation. That’s why I thought Don’s car redistribution example was one that Krugman would agree with–there is a burden on the people who are taxed but in the aggregate, there is no net burden–the total number of cars stays the same. (Again ignoring dynamic incentive effects which Krugman accepts.)

You quote Krugman discussing the debt that financed WWII:

Now, here’s the question: did that debt directly make America poorer? More specifically, did it force America as a whole to spend less than it would have if the debt hadn’t existed?

The answer, clearly, is no. Yes, American taxpayers had to pay the interest on that debt. But who received that interest? American taxpayers. Not exactly the same people, of course — although savings bonds were held pretty widely. But America was not like a home buyer who has to scrimp to find enough money to make his mortgage payments; America was both the borrower and the lender, and was essentially paying money to itself.

What does he mean when he says the debt didn’t make America poorer?

Does he mean that using the real resources of tanks and planes and bombs and human effort to produce them fighting WWII didn’t make America poorer? (I am ignoring the tragedy of the deaths because they are outside this discussion of fiscal policy.) Is he saying it didn’t make us any poorer compared to taxation or confiscation?

I’ll accept the latter point, which is Prescott’s as far as I can understand it. But that doesn’t appear to be Krugman’s point.

Let’s take the home mortgage example. If I borrow money from my wife to buy a house, it’s true that the money stays in my family when I repay it over the next 30 years. It’s true that even if she charges me an exorbitant interest rate, that money, too, stays in the family. But what is the implication of that fact? It certainly doesn’t imply that I should buy a really really big house, because I’m only borrowing the money from my wife and therefore the money stays in the family. It doesn’t imply our children are not being burdened when I buy a massively large and expensive house. it doesn’t matter who I borrow the money from. My family will have less to spend on other things. That’s the cost. If the house is glorious and life-changing, then the money spent may be worth it. If it is a 20 bedroom chateau that is horrifically ugly and I overpay for it, I and my children are much worse off.

So do we disagree or is it just semantics?

I do not understand the Prescott piece. He has a particular model in mind that maybe held in 2006 when he wrote it. I wonder if he still agrees with that passage. I’ll try to find out.

Rick G
Mar 29 2012 at 11:26am

Prof Roberts, thank you for the reply. I appreciate you reading Krugman’s complete text, but a full, literal reading of a text that was clearly simplified for a lay audience presents only the illusion of earnest engagement in debate with Krugman’s basic point. I understand the point about the “ourselves” distinction, that we are reaping benefits and future generations are bearing the costs. The individual people affected are different. But frankly, we all get that; it’s obvious. I’m sure Krugman does not believe in the point as you chose to interpret it. To suggest that Krugman doesn’t understand it is not only silly and insulting, but puts Don in a less than favorable light, especially given the mocking tone.

As other commenters have pointed out, the literal interpretation of his clearly simplified language and the subsequent mocking of it as if that was his point completely misses the forest for the trees. You discuss the cost of borrowing at great length, dissecting how it will impact “us” in the form of future taxation. As I understood Krugman’s point, it was not that the money owed literally vanished. It’s that the borrowing produces both long-term benefits and long-term costs. And if the benefits are substantial, the net result is positive and therefore not a burden.

However, when you and Don took the time to discuss the long-term benefits of borrowing, you chose to select investments that were clearly not productive, such as chocolate covered pickles. You selected a specific scenario in which the borrowing clearly would result in a long-term net burden and then presented that as a generalizable conclusion. It seems that to me that you want to work from a presumption that government borrowing cannot produce long term returns that are greater than had that money been left in the hand of the individuals from whom it was borrowed. Now, I could understand it if you actually made the crowding out case explicitly. And I understand that you generally believe that to be the case. But clearly Krugman, as a Keynsian, doesn’t. That remains the fundamental point of disagreement and by focusing on the text you did, you picked a meaningless battle you knew you could win rather than address the underlying disagreement.

I don’t mean to be insulting, but the discussion came across as self-serving and disingenuous. I fully admit that Krugman engages in the same behavior on occasion. Picking nits in phrasing and choosing to interpret vague statements in a way that makes the person look silly. As a lay observer without an economics background, it makes me wary of the whole profession — where being “right” and scoring points against the “enemy” trumps figuring out the truth.

Russ Roberts
Mar 29 2012 at 11:33am


Here is the Prescott paper that underlies his views on debt in the WSJ piece. His basic argument is about the incentive effects of financing transfer payments via taxes or debt. It’s very Prescottian. It’s all about the distortionary effects of taxes on labor supply. And he needs Ricardian equivalence to get his results. It’s an interesting theoretical case. But I don’t think it bears directly on the discussion we’re having here. But you are right–some non-Keynesians like debt. Most don’t. Most Keynesians do.

Mar 29 2012 at 12:56pm


I guess it’s not clear to me why you don’t understand the thought experiment. If the government took on 500% of GDP as debt, and then gave that money out to Americans. Would it make America poorer?

According to you and Don, the answer is yes. Future Americans would have to pay more in taxes. But the answer is clearly, no, no real resources have been used up. America isn’t poorer.

Now in the next paragraph, he notes obviously there are important incentive effects. If our thought experiment is distributionally neutral, that would matter too (he says as much in another quote I posted). It’s just not clear to me, why you aren’t understanding. Maybe you and Don could have tried thinking through the same thought experiment.

I’ll try to answer your questions:

“Does he mean that using the real resources of tanks and planes and bombs and human effort to produce them fighting WWII didn’t make America poorer?”

Were the planes and tanks more or less productive than the private uses of those resources. If they were more productive, they made Americans richer. It’s about real resources.

He’s saying, when Americans bought bonds, they were agreeing to forgo consumption today for more consumption tomorrow. Other Americans, through government, consumed more today and will in turn consume less tomorrow. Americans as a whole are no better or worse off. Again, he’s clearly abstracting away from the size of the pie, and concedes that can matter.

He hasn’t said the following, but I’m pretty sure he would agree. We as a generation can make future generations poorer. We, for instance, can greatly run down our capital stock. We could bomb our buildings. But there’s nothing special about debt that does this.

Mar 29 2012 at 1:08pm


Here is James Tobin in 1961. I would be curious what you find objectionable:

“No one disputes the fact that in a closed economy with full employment the resources used for government expenditure are drawn from other current uses of resources. Given the government program, the reduction in resources available for current nongovernment use is independent of the method of financing the government. This reasoning has traditionally led economists to deny that the burden of public expenditure can be shifted forward in time by issuing internal debt rather than taxing. The debt can be no burden, because future payments of interest or principal from taxpayers to bondholders will be transfers involving no aggregate draft on resources. They may involve redistribution of income. They may even impose a “deadweight loss” because taxes distort incentives. But these recognized qualifications of the traditional view are not what the new heretics have in mind.”

“The Burden of the Public Debt: A Review Article” Tobin, James. Journal of Finance, 1961

The article is interesting throughout as Buchanan is one of the three views discussed, though it is a too short and unfulfilling as it is just a book review, not Tobin’s attempt to place himself in the debate.

Mar 29 2012 at 1:21pm

“He has a particular model in mind that maybe held in 2006 when he wrote it.”

Yes, I think you will find, serious attempts to talk about the burden of debt requires a real model. There is not a simple general answer, in part because of the intergenerational transfers that can take place, that I discussed earlier.

For a different kind of model, you can look at The Deficit Gamble by Mankiw, Ball and Elemndorf.

“But you are right–some non-Keynesians like debt. Most don’t. Most Keynesians do.”

Most economists feelings about debt has no relation to their answer to the question “Is debt a burden?” I have no idea what you are even envisioning with this statement, like a poll to economists “do you like debt?” Y or N And what relevance it might have to this discussion.

Russ Roberts
Mar 29 2012 at 2:01pm


You keep using the example of a transfer payment. We agree on that one. The only net effect are the disincentive effects of the taxes necessary to make the transfers. (I don’t think Don agrees but I’ll let him speak for himself.) Transfers make some Americans richer and some poorer. The overall size of the pie is unchanged if you ignore the disincentive effects of the taxes. So we agree on that. (We might even agree that a transfer program that’s 500% of GDP will have substantial disincentive effects.)

What about government expenditures that use real resources? They are costly, right? It doesn’t matter whether they are financed by taxes or debt (other than those pesky incentive effects.) They are costly either way. The choice between taxes and debt is a choice between taxes today and taxes tomorrow. So there is a burden in either case, it’s just a question of who it falls on.

So I think I understand the semantic problem. I am saying there is a burden with debt just as there is a burden of taxes today. If you’re saying there’s no ADDITIONAL burden from debt as opposed to taxes today, then we agree.

I stand by what I said in the podcast, which you apparently agree with. What is relevant is whether the government spending is productive or unproductive.

The other semantic issue is whether we are “burdening” our grandchildren when we use debt rather than taxes today. When we borrow we are burdening future taxpayers rather than current ones. I know bond recipients are receiving the income from those taxpayers and those recipients are also our grandchildren. But the lender and receivers of payments do so voluntarily. The taxpayers pay involuntarily And that is Don’s (and Buchanan’s point.) So I think it is correct to say that debt pushes the burden of financing government spending away from today’s taxpayers and toward tomorrow’s. I assume you agree with that as well.

I agree with the Tobin quote. I’d like to know what he says the new heretics are saying, then. I’ll dig it up.

Krugman’s mortgage example certainly leads the reader to think that debt is a free lunch. Perhaps he did not mean it that way.

Russ Roberts
Mar 29 2012 at 2:24pm


After reading the Tobin article, I think I have a better handle on where the semantic confusion lies.

I would argue that debt burden future generations rather than the current one.

Those who disagree with me would argue, there’s no burden on future generations–it nets out–yes, future taxpayers have to pay for the principle and interest but future bondholders receive that money. So it’s a wash.

But Buchanan’s point (and Don’s and mine) is that future taxpayers pay for the expenditure. The wash is the bondholders. They get back what they lent out, plus a little bit more for interest. Good deal for them. Whether it is a good deal for future taxpayers depends on what the government spent the money on. If government spent the money on something productive (stopping an asteroid, repulsing an invading army) then it’s a burden worth enduring. If the money is spent on warehousing chocolate-covered pickles, you have burdened future taxpayers.

What Buchanan and Don are emphasizing (and I agree with them) is there a temptation to enjoy benefits today and put off the costs until tomorrow. The political process particularly likes that calculus. Debt lets that happen more readily and makes it uncertain as to who pays the cost. That encourages profligacy.

Mar 29 2012 at 3:57pm

I agree with that assessment of the debate. And I would add that Tobin’s point (that I think Krugman would agree with) is that yours, Don’s and Buchanan’s argument about the future generation “paying” isn’t actually specific to the national debt. The current generation can consume it’s capital stock today and leave less behind for the future generation. If the government had taxed for the resources to build the planes of WWII, our grandparents could have responded by consuming more and saving less and not bequeathing us so many capital goods. I think Landsburg was making similar points when this topic was hot on the blogosphere.

Tobin, “More broadly, here are many sins of omission and commission by which the present generation can contrive to bequeath to the future a smaller capital stock than it might. Why single out debt finance to bear the whole burden of guilt?”

Whether the older generation bequethed enough to offset the cost of the war really requires a model or some subjective assumptions.

What I think makes the government unique is that it can do intergenerational transfers. I don’t know what PK or Tobin would say about that. The Gale, Shell and Prescott papers all have intergenerational transfers as a central component. The central idea is: imagine two generations. In year 1, Young and Old that have resources. We can take resources from the young and give them to the old. Then in year 2, we can take resources from the new young and give it to the new old (last year’s young). Now the year 1 young generation is as well off as before. Rinse, repeat. The young always transferring to the old and then getting a transfer. The LAST generation “pays,” but in an infinite series there is no last generation.

Something to think about. I promise it isn’t lunacy I just made up.

Mar 29 2012 at 4:34pm


I’m normally a big fan; in its different perspectives I’ve found EconTalk an enlightening way to re-engage in a subject I last studied seriously about 20 years ago as an Australian Honours student – some things have changed (less confidence about neoclassical macro) some haven’t…

I’m afraid that this talk fell below your usual standard. While Krugman is an example of some of the more egregiously political proponents of large government, there is a reputable argument behind what he says, namely that, at an economy wide level, there are gains from trade to be had when resources are involuntarily unemployed, and that one of the ways to enlist those resources to production is by increasing “G-T” in the short term as a means of expanding Aggregate Demand.

While some unemployment (both the labour kind widely described as such (and which is associated with fairly high cost in terms of both foregone labour and the flow on effects for severely affected communities) and that of other resources, often not identified in that way) is voluntary – factor owners holding out for higher wages – it seems difficult to say that rigidities – often government mandated – don’t also hamper efficient resource allocation.

Consider the effect of minimum wages; of residential area price (rent) controls; or non-tariff trade barriers, such as the US’s refusal to import cheap sugar (so promoting both domestic sugar prices, and more interestingly, the price of sugar substitutes like “high fructose corn syrup”): each of these is a trade destroying inefficiency. Keynes famously considered the fixity of nominal wages to be such a rigidity, something which, in the context of inter-war Britain and its ineffective attempts to deflate to accommodate the pre-1914 Gold peg, may have been right.

In the world of a benevolent economist dictator (the kind Buchanan critiqued in other work), the dictator would remove these distortionary factors; but in the practical policy world that is very unlikely to happen, all the more because neither side of US politics seems to have much interest in radical economic reform of the kind undertaken by pretty much every other OECD economy (Australia since the late 70s; Thatcherite Britain, Harz IV in Germany for example).

In those circumstances it is credible to think – although the “Keynesians” no doubt overstate this – that some net increase in government demand would increase aggregate demand. Whether this should come from permanent tax cuts or expenditure should be a matter for debate (your discussion of fiscal multipliers a few programs ago would suggest the former) as would the optimal measure of funding (if debt is a concern, there is always the option of simply “printing” money) but would not deny the existence of the “free lunch” represented by increasing voluntary trade, in the most basic, introductory undergraduate sense.

Michael Heller
Mar 29 2012 at 5:19pm

Russ and Don,

Just finished listening to your podcast. Thanks for raising basic principles with clarity and humour. You have a good debate going in the comments.

I was influenced by a later of Buchanan’s books — Democracy in Deficit: The Political Legacy of Keynes (1977). Here are a couple of relevant related quotes from the concluding chapter.

Similarly to the psychology of tax today vs tax tomorrow:
“The [balanced budget] rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers: it will tend to dispel the illusory something for nothing aspects of fiscal choice”

And on the penultimate page:
“A nation cannot survive with political institutions that do not face up squarely to the essential fact of scarcity: It is simply impossible to promise more to one person without reducing that which is promised to others. And it is not possible to increase consumption today, at least without an increase in saving, without having less consumption tomorrow. Scarcity is indeed a fact of life, and political institutions that do not confront this fact threaten the existence of a prosperous and free society”.

Earlier today I responded to Brad DeLong’s new OpEd at Project Syndicate
on demand management employment concerns.

I emphasized a different issue, namely the Keynesian reluctance to contemplate a *privatized* form of ‘demand management’ — in the context of massive private sector cash holding due to uncertainty about government action — in the form of reforms that incentivize maintaining and creating employment in flexible labour markets with reduced tax burdens.

Josh Sher
Mar 29 2012 at 5:49pm

I have lots to say about this podcast:

1. Please try to be consistant. Either ensembles of people (such as “the government”) are a distinct entity or they are not. It really sounds like you guys want to have it both ways. It terms of debt, if the US was 100 people, and the US government borrows money then the debt is distributed among the 100 people. The only complication is that the exact distribution of debt may not be determined at the time the money was borrowed. This can be financed by a tax on income or by a tax on on savings/financial assets. The government printing more money is just a flat tax on savings/financial assets (claims on future cash flows) rather than being the usual tax on income (note that this also entails a negative tax on debt).

2. I find it facenating that Paul Krugman was used as a straw man but Don got his position 100% backwards. Paul has stated very clearly in his blog that what matters about debt is the distributional structure of the debt, not an ensemble total debt. What he was arguing about in the article Don cited was that the argument that intra-household debt is bad because inter-household debt is bad is a falacious argument. Intra-household debt always equals intra-household assets, so the net position is 0 (And intra-US debt always equals intra-US assets…). As far as I can tell, Paul’s position has always been that not all people are equally likely to use resourses, and not all people have equal access to credit, and thus it does matter for aggregate demand who has the resources. Its just that the simple household analogy does not get to the heart of the matter.

3. Lets consider two periods in the economy Time A, and Time B (B>A).
Lets say there are 100 people: Bill and the other 99 of us, and we borrow $99 at time A from Bill to finance $100 of spending. At time B each of us must pay Bill back the $1 they each borrowed.
In period A resources that Bill might have used were instead used by us collectively.
In period B resources that each of us might have used, were given to Bill to use as he chose.
If we assume
Proposition *: that everyone will spend or invest the money they have lying around

than we conclude from proposition * that in Period A public spending increased by $100 and private spending decreased by $100. But in period B there was no change in public or private spending. All that changed was who was spending. The main effect of the borrowing occured in period A (“crowding out”), not in period B. I often feel that people who complain about crowding out and also complain about the burden of the debt are not being intellectually honest-they are accounting for the same money twice.

4. Now central to the Kenyesian claim is that Proposition * is in fact false. There are times that some people are fearful about the future, or think that they will find more productive use for their savings/capital in the future so they want liquidity. So if this was the case in period A public spending increased by $100 but private spending decreased by less than $100. Also, If this was the case, than in period B there would be a decrease in spending since the money that would have been saved in period A without the government spending, was in fact spent.

5. Further, different people have different marginal propensities to spend. So the aggregate spending does change if you change who has the money. Yet, $100 of additional spending today by government still does not lead to there being $100 less private spending tomorrow. There is still $100 available to be spent even if money is transfered from debtors to creditors. If this is not an efficient allocation of this money, its possible that there might be only $90 of net spending later instead of $100 but thats a far cry from saying that if the government spends $100 today, there is $100 less private spending tomorrow. What there is, if there was no idle resourses, is less private spending today. There is a much smaller effect on spending tomorrow, due merely to a change of who has the resourses.

6. In summary, in normal times, the government borrowing money from its own citizens today primarily effects aggregate private spending today (“crowding out”) and has just a small effect on private spending tomorrow due to “distributional effects”. The exact magnitude of the crowding out and distributional effects might vary with the situation. If the Keynesians are correct, in severe recessions, when real interest rates are below zero, there might be many idle resources that the crowding out effect might even go away (in which case there is a corresponding decrease in private spending tomorrow). I dont think anyone claims there is a free lunch unless the return on investment from the government spending is so large it pays for itself.

Mar 29 2012 at 9:37pm

The ideas that passing the debt to the future in an infinite series don’t seem to fit with what we can observe in the natural world. That implies there is no “stopping rule”. [search Rittel – Dilemmas to read more on the stopping rule and failure of general planning] I think part of the weakness of the argument of Krugman or others is that we can rely on never paying back the debt. This is clearly a “no stopping rule” situation. Given that, why did Zimbabwe fail? Or Argentina? They kept adding zeros to their currency and eventually collapsed, but why? In other words, why would we risk such a burden in the future?

So, unless the proponents of debt can also articulate a position for “how much is too much”, or tell how close we are to creating a burden, then shouldn’t we be risk averse and simply say “we’re afraid these investments might not work out”.

There have been several shows that discussed the inability to accurately predict the outcome of the stimulus or of govt spending. In some cases, proponents have then said “well, we didn’t spend enough…” which leads back to the “no stopping rule” issue. Clearly, they had an upper limit in mind when they originally conceived the amount of the stimulus, so they must have had some worry about spending too much and apparently negative consequences of doing so.

Finally, on a slightly different topic – the “we owe it to ourselves” issue, why do we not simply do as Ron Paul suggested and eliminate the $1.6T of debt that the Fed is holding as an “asset”. Why risk it becoming a burden? Let’s just write it off today, since it doesn’t matter.

Mr. Bankerman
Mar 29 2012 at 9:57pm

This conversation has yet to address what this financial professional sees as the core fallacy in the position that “debt is never repaid as long as it is constantly rolled over”.

Prof. Krugman asserts that the “debt from World War II was never repaid.” As anyone in finance can tell you, properly priced debt is always repaid even if the principal balance is unchanged.

The present value of a loan that will be constantly rolled over is the sum of the infinite series of interest payments divided by the relevant discount rate. That debt may never be retired, but it is the source of burden equal to the sum of the discounted interest payments. Unless the Efficient Market Hypothesis is wrong, that discounted sum exactly equals the amount of debt borrowed. (Of course the Efficient Market Hypothesis is wrong, but it is close enough.)

That stream of interest to infinity is the means by which the debt is repaid. There is never a retirement of principal, but the infinite series costs the same as retirement of principal. At today’s low interest rates it is easy to ignore this repayment, but the burden from the full sum of these interest payments is definitionally the equivalent of repaying the loan.

I believe that this omission shows how economists need to learn something about the business of money lending in order to comprehend reality better.

Mar 30 2012 at 1:43am

“Let’s take the home mortgage example. If I borrow money from my wife to buy a house, it’s true that the money stays in my family when I repay it over the next 30 years.”

I think this example would be better if you borrowed the money from your non-romantic roommate. Sure, the money stays in the house, but that doesn’t really help you that much does it?

Matt Cooper
Mar 30 2012 at 6:17am

Some people commented about “not paying the debt (of the federal government ) off. It’s true the gov. will never pay the debt off because they roll it over. In other words, the Treasury issues a 10 year bond to cover expenses. They pay interest semi-annualy for ten years and then they repay the principal, but to get the money to repay the principal, they sell another bond. Therefore, as the total debt grows, the amount upon which they pay interest grows. If the economy grows quickly, so will tax receipts presumably and the interest expense may not be too burdensome. Sadly, at the end of a 20 year debt cycle, our future growth will probably be low for a long time and annual deficits are in excess of $1 trillion. Furthermore, we aren’t piling up this debt to detroy Nazis and the Japanese Empire, but rather to pay current expenses of favored constituencies (2/3 of federal spending goes to entitlement programs). Russ, I wish you would do a podcast talking with someone about financial repression.

I read Krugman’s editorial. I don’t know why readers defend him – I don’t think he would reciprocate under any circumstances. Particularly galling is when he says; “…the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows.” Krugman knows if markets were allowed to operate freely in this environment, interest rates would rise substantially, but the Fed, in pursuit of it’s Zero Interest Rate Policy (ZIRP) makes them artificially low. He also should know that cheap money is what got us in our current predicament.

In all the discussion of the silly notion that “we owe it to ourselves”, I think some have lost sight of the fact that most adults are allowed to vote, but only about half of us pay income taxes. Those taxes mostly pay the interest expense on the swelling debt. However, when the Fed monetizes the debt, the costs will be borne by the poor well – there is a subject for a good podcast!

Marwan Baydoon
Mar 30 2012 at 6:53am

Who owns the debt matters…

While I think the podcast presented a useful point of view, I believe that the question of “who owns the debt?” does matter, and, more importantly, it matters regardless of whether you view yourself as Keynesian, classical or anything else.

The fact is that countries where local investors hold most of the public debt, are able to live with much higher levels of debt to GDP, than countries where more of the debt is held by foreigners. For example, Japan has a debt/GDP of 198% and a very low interest rate. Lebanon has been living with a debt/GDP of more than 120% for many years. The reason such high levels of indebtedness have been sustainable is partly because the great majority of the debt is owned by locals.

Why is that? I suspect part of the reason is alignment of interest. The lenders (local investors) and the borrowers (i.e. governments) are in the same boat. For example, in the case of Lebanon, most of the debt is held by Lebanese banks. Given how interlinked the banks are to the state of the Lebanese economy, the Lebanese banks have incentives to be more lenient towards the Lebanese government, and, if need be, will be more amenable to discuss haircuts or debt restructurings. This is less likely to be the case if the debt was held by a Chinese bank, which is very little affected by the Lebanese economy. To add another comparison: if you take on debt and then you run into financial trouble, does it matter if you borrowed from your father or if you borrowed from a stranger (for example a bank)? I suspect your father may be more understanding, and may not kick you out on the street…

Matt Cooper
Mar 30 2012 at 6:55am

I like the mortgage/govt. debt analogies. The govt. doesn’t need to pay back the debt, because they can roll it over. What if I had a big mortgage loan – maybe I could refinance every few years and buy a new car. I guess that will work until it doesn’t.

Richard Boltuck
Mar 30 2012 at 11:11am

In Charlie’s 3/28 10:07 pm comment, he posits an economy in which the GDP growth rate exceeds the interest rate, the economy borrows in time 0, and hence, rolls over the debt ad infinitum (literally), and hence the cumulating debt diminishes as a share of GDP. Hence, if it could be incurred at time 0, surely it can be sustained at every subsequent time. This example does indeed appear to track Krugman’s first claim in the op-ed cited, that countries need never repay debt unlike households.

Let’s say the government borrows from foreign lenders at time zero and the amount borrowed is spent on immediate consumption. In Charlie’s example, this economy unquestionably violates its intertemporal budget constraint by overspending income (which implies the rest of the world violates its budget constraint by underspending income).

A few points on the plausibility or practical applicability of this example:

1. In an economy with any risk or uncertainty, then even on its own terms, a permanent unrepaid debt imposes costs on the borrowing country by limiting the amount of incremental borrowing it may do in subsequent years (years 1 to infinity).

2. The key to this example, given growth greater than the interest rate, is the infinite time horizon. We are accustomed to analyses in which we acknowledge that time is not literally infinite, but that nothing important is lost by assuming it is (because effects diminish as elapsed time increases), and the mathematics are simplified. Not so here. Once time is set at any finite duration, the seeming paradox of unrepaid debt disappears.

3. Although I don’t believe it is necessarily fatal to the example, I would note that there probably is an ignored equilibrium condition in the assumption that an economy can grow forever at a rate greater than the interest rate. There needs to be a growth model to see the contradiction. A simple one would assume that all growth results from a return on capital, that the return on capital is arbitraged to equal the interest rate, the initial capital stock is great enough to generate the assumed 5% GDP growth at time 0, and that all growth in GDP goes to non-depreciating capital accumulation to maximize future economic growth. Under these conditions, growth asymptotically approaches 2% over time.

On Krugman’s “underwear” example: Everyone receives government bonds at the onset, as if through a helicopter drop. The bonds are not sold to the public and so there is no resulting revenue that the government spends. Of course there is no net tax burden in this example since the taxes paid are used to redeem the bonds held by, well, the taxpayers — who never parted with any money to acquire the bonds in the first place. But that is not, of course, how bonds really work. If the government acquired funds by selling bonds and spent those funds, and ignoring Ricardian/Barro Equivalence, taxpayers (with some time profile) would receive benefits from the spending and burden from paying the taxes to redeem and/or pay interest on the bonds. The tax payments are a burden, the spending generates the benefits, and the net benefit or burden of the transaction depends on both. Just as Don and Russ have said.

Matt Cooper
Mar 30 2012 at 10:14pm

I was interested in Charlie’s imaginary economy. Being an accountant, I did not care to read any academic papers. I decided to look at the situation in my beloved USA in the year of our Lord 2012. God help you if you try to find this from official US govt. stats.
I found nominal GDP info from the GPO, and debt from the St. Louis Fed. From 2005 to 2010, the nominal (excluding inflation) GDP has grown 14.37% while debt has grown 39%. In 2011 and 2012, we’ve added about $1.3 trillion in debt each year. If John Lennon smoked enough dope, he could imagine a Keynseian world in which deficit spending caused “growth”, but in the real world, the Keynseian crowd has driven us off a cliff.

Charlie’s drug-induced dream…

Imagine an economy with no taxes and no government spending. Then for some reason (Shoot down a meteor?) the gov’t has to borrow a lot of money. Let’s assume the interest on the debt is 2% and the rate of growth in the economy is 5%. Let’s further assume that the amount of money was 1 years GDP.

So in terms of GDP (where 1 equal the year 0 GDP), we can look at the debt and GDP over time

year 0 Debt = 1 GDP = 1
year 1 Debt = 1.02 GDP = 1.05
year 2 Debt = 1.04 GDP = 1.10 (rounding)
year 3 Debt = 1.06 GDP = 1.16
year 4 Debt = 1.08 GDP = 1.22
year 5 Debt = 1.10 GDP = 1.28

John Berg
Mar 31 2012 at 2:48am

As the only one among Russ, Don, and me actually alive in 1934, I suggest the following hypothetical narrative as a demonstration of “debt burden.”
In 1934 I, as an individual (and not a family since my grandchildren were to come later) assumed a debt (from which I admit benefiting over the subsequent years) in gold standard dollars (an important point). To make my case precise, I borrowed $g100 (gold standard dollars) from my fixed income of $g400 p.a. which exhausted my credit. Later I could buy with gold standard dollars from my income but not with credit dollars. For example, I could buy 10 lbs. of meat with cash but could not borrow $100 for my parents hospitalization. That inability to obtain future money was the “burden” of my earlier debt.

I return to the family/individual part of my narrative: the importance is that debt dies with the individual. I have various methods to change this, all of which depend on a government existing in parallel with the various individuals of importance to this narrative. Some include estates, corporations, and government.

My grandchildren will be stuck (burdened) with our governmental debt. They will “pay” for any future governmental credit.

John Berg

John Berg
Mar 31 2012 at 3:21am

The cost of a Quackery is not the Quack’s fee but the death of the patient or more specifically the time lost with the Quack’s remedies rather than real solutions.

John Berg

John Berg
Mar 31 2012 at 3:55am

As in 1939, we may again owe Europe an important advance in lesson time because of their unfortunate experience. Would that we learn the economic lesson about the failure of socialism and/or a large, central government.

John Berg

Jim Bryan
Mar 31 2012 at 11:12am

Krugman has become more of a partisan commentator than economist. He has little credibility with me.

As far as WWII goes, after the war, most of the world was in ruins and we supplied goods and services to the world. This allowed us to quickly grow and pay off our accumulated debt. We are in the opposite position now. We are de-industrializing, racking up enormous debts, and bearing the burden of a semi-welfare state.

I listen to other economists that want to debate Krugman, but he hides because his views are based more on ideology than common sense or economics!

The debt is so large that the Fed must spark inflate to reduce the value of our debt, but I am not sure how this is going to play out because the rest of the world is playing the same game. It looks like the race to debase.

Mar 31 2012 at 1:56pm


I appreciate you grappling with the thought experiment, but I think you steered off course.

“In Charlie’s example, this economy unquestionably violates its intertemporal budget constraint by overspending income (which implies the rest of the world violates its budget constraint by underspending income).”

I can’t follow what you are trying to say. There is no violation of the budget constrain to borrow resources from abroad in exchange for claims on our future resources. You can imagine each generation paying back with claims of resources on the generation t+1.

Also, as T grows large but finite, it imposes a burden on future generation T that approaches 0% of their income. Is that a substantial change? I don’t think so, maybe you do.

For everyone else that says I have made simple assumptions that may not be true. I agree!! That’s why I’ve given links to four papers that have all the i’s dotted and t’s crossed. I think all work out a case where rolling over does not work (Prescott solves for different optimal debts). The assumptions certainly matter, and I thought I made it clear in my post. I would like to remind everyone that I didn’t introduce money into my example. The thirty year TIPS is yielding .89%. You have to be pretty pessimistic on growth to think the real interest rate is higher than the expected rate of growth right now.

Taxes complicate things a lot. You have to take incentives into account (which requires a lot of assumptions) and you have to redefine what a burden is. You also have to make assumptions on gov’t spending (does it look like consumption or investment?). The golden gate bridge looks like investment. Medical care for poor elderly looks like consumption. And you have to make assumptions about how much people care about their descendants. Do they want to leave wealth behind or is it just an accident that they do? The real world is complicated. I’m glad some people grappled with the thought experiment, but I have posted links from the 1960s to current articles by leading economists. All your questions have been grappled with before, I just can’t write down a 40 page model for each of you.

Is this what PK has in mind when he says the WWII debt was never repaid? I don’t know, but it’s certainly possible. To all the people that started off their post with “I’m a finance professional…” Please note that in my example the debt is also being serviced. As a teacher of future financial professionals, try to keep the condescension to a minimum. We both know this isn’t part of your curriculum.

Apr 1 2012 at 12:02pm

Prof Roberts: I enjoy you show and listen to it regularly. This one fell short. Maybe I need to listen to it twice, but here’s what I thought was missing.

The US Government has been in debt for centuries much of it to fund wars, as you used in your examples, how for instance, is the debt from WW2 a burden on us now? We are the future generation of that deficit spending, how is that causing a burden today and what is the nature of that burden? We don’t need to take about what will happen in the future as a result of deficit spending we can talk about what is happening now, since we have always been in debt. If we had a balanced budget in 1942, how would our life be different today?

The elastic nature of federal fiat currency and the documented existence of money expansion that hasn’t caused inflation. That is the government’s only constraint on money printing and debt creation is the risk of unbearable inflation. Can the government go in debt and just print the money to pay the debt, and if it isn’t inflationary or wildly inflationary, who’s back is it sweat off of? The examples in the show seemed to assume a very inelastic currency.

And the historic record of debt reduction causing recessions. Nearly, everytime the government tries to balance the budget we go into recession shortly after like in. For whatever reasons the following recessions were proceeded by decreases in government debt 1819, 1837,1857,1873,1893,1929, 1937, 1953, 1958, 1961, 1976, 1980,1990, 2001. Is this just coincident?

Richard Boltuck
Apr 1 2012 at 12:14pm

Charlie . . . Well, what I will modify in my earlier critique of your infinite-horizon example is this: the ROW doesn’t really “violate” its budget constraint in your example (as I interpreted it) by underspending its income, since the constraint is an inequality condition, and underspending is hence not a violation. But that is semantics.

The borrowing country, however, I contend, still does violate its constraint. How could it be otherwise? My interpretation, consistent with your example, is that the borrowing country borrows from the rest of the world at time zero and consumes the proceeds of the amount borrowed. Then the point of your example is that the borrowing NEVER repays the loan (which appears to track Krugman’s first contention). Never repaying the loan means never devoting income out of future GDP to repay the loan, which means all future income is available for domestic consumption. Hence, domestic consumption exceeds income in your example, in present value at time zero, by the amount borrowed — a violation of the borrowing country’s budget constraint.

The analog of this overspending is that the ROW defers consumption of an amount equal in present value at time zero to the amount lent forever by continuously agreeing to rollover the debt plus accumulated interest of the borrowing country.

My main point was item 2 in my posting: that without a literally infinite horizon, this artifact of the example doesn’t arise.

Surely, Krugman’s seeming argument that debt from WWII doesn’t impose a burden on the United States is precisely equivalent to the notion that the United States is able to exceed its income constraint indefinitely, or more precisely, forever; if not, there must be a burden borne by someone in the United States at some point. TANSTAAFL, i.e., a burden or cost. No burden, free lunch, or in his parsing, free tanks and artillery, free defeat of the Axis. I don’t think so.

Andy Gottlieb
Apr 1 2012 at 12:16pm


First time commenter, some-time listener, Econ grad 27+ years ago.

On the one hand, I want to agree with the general tone of comments here that this podcast wasn’t the high quality of most of your others, but on the other hand, it caused me to think more than most do, and so I greatly appreciate that.

Your two comments at 2:00 PM Mar 29th I think summarize the good points of the podcast very well. And in particular, I loved learning the “obvious” point that good spending is what matters.

Other commenters have noted that until near the end you failed to mention that the big problem with the debt is the disincentive effects of higher taxes to come.

And while it’s possible that neither of us is correct, I agree with you completely that who the bond holders are is completely irrelevant and so a red herring.

FWIW, I detest what Krugman has become, i’ve love learning more about Hayek and the Austrian school from your podcasts, and I’m sure my general sentiments on policy are very close to yours and very far from Krugman’s. So it pains me to (perhaps better) defend one part of what Krugman wrote that all seem to have given short shrift.

The one thing I think I can add to this discussion is to focus on that “first part” of what Krugman wrote, re: government debt per se “not being a burden” on future generations. Don took this way too literally. I take it as an appropriate small level of debt which does not grow as a percentage of GDP. And unfounded mandate future liabilities aside, few reasonable people looking at 1776 – 2007 in the U.S. can deny this point: moderate deficits and debt “do not matter”.

I was disappointed that neither you nor Don ever talked at all about this point – namely that size (of deficits) matters. Making this explicit even once would have helped both of your arguments tremendously.

I’ve wandered a bit further than I intended, and perhaps this last point is Prescott-Ian (like you and Mankiw, I don’t fully understand what he’s saying, nor fully agree to the extent that I do) or Charlie-an, but it would have been a stronger podcast if you’d pointed out that from an income (GDP or tax base) standpoint, a country with a growing economy is different from a family precisely because it doesn’t have a U-shaped income curve, but rather one that grows “forever”.

Of course, it takes appropriate tax and regulatory – and so incentive – policies, and no doubt spending policies as well, to maintain such a growing economy. Again, I’m surely with you and Don on what such policies should be, and surely NOT with Krugman.

But it’s in that sense that the “reasonable levels of debt are not a burden” point that I’ll actually give Krugman some credit for making, and/or agree with prior sentiments that Don’s arguments in particular were of the strawman variety.

The fact that most of us here would disagree strongly with Krugman on what reasonable and appropriate levels of debt and deficit are notwithstanding, you hurt your cause in the podcast by either saying or at minimum implying that any level of debt is “bad” (even in the narrow, technically correct context of describing it as a “burden”).

Thanks again for this podcast series.

Apr 1 2012 at 6:40pm

Great podcast right up to the last 2 seconds. That pun just didn’t need to happen.

Apr 1 2012 at 9:51pm

My sole issue with the debt discussion in general, not just here, is that the average person doesn’t care about this particular interpretation of “burden,” though it is likely correct.

What I, personally, care about is whether as a result of government spending now, I will have more stuff in the future than I would have if this government spending never happened.

The core of the issue was mentioned but not focused on, in my view: when is government spending JUSTIFIED? Debt, taxation it’s all spending, it all has to be paid for. When SHOULD the government spend money?

Of course you’ve touched on this topic in plenty of podcasts on Keynesianism. I think that the debt debate is really a lot more about this than about the american public being dumb and not realizing that somewhere down the line debt is repaid.

People just think that some spending now, is going to produce ROI that more than makes up for it in the future. Just like an individual family might borrow $1000, invest it and pay it back later while pocketing the $3-400 in returns.

IF of course, there is ever a situation where the government can better allocate resources than the market.

Apr 1 2012 at 9:56pm

Sorry about the double post, but a better family-government comparison would be this: suppose you have a very tight-knit family. All generations of them live together, great-grandparents to great-grandkids. All in the same business, all in the same area.

What would their income curve and debt-managing incentives look like if they had a reasonable expectation that their family would grow numerically and in productivity generation to generation?

Basically this is my take on Andy’s observation.

Rob Bastian
Apr 2 2012 at 4:37am

Prof. Roberts, I think your podcasts are great, the last only less so. I think your fine guest, Prof. Boudreaux and you unfairly framed Krugman’s argument. He didn’t write that public debt has no cost. His point, rather, was that a sufficient public debt has not been incurred during recovery from a major downturn because too many people incorrectly analogize a public debt to a family’s debt.

Working the other side of the analogy, your guest and you give the example of the misguided family that goes into debt to produce chocolate covered pickles.

Granted, if the family had discovered and invested in chocolate covered strawberries or pretzels, it would have been a wiser, perhaps, profitable enterprise.

Still, where the alternative is doing nothing, in essence, sleeping on a mattress of collateral, then throwing the mattress away upon death, the investment in chocolate covered pickles is a much better economic outcome for the town, even if the failed investment was distressful for the family. A warehouse was rented, pickle producers were paid, and at least one pregnant woman, with a transitory taste for chocolate covered pickles had, on one night, her craving satisfied. The disappointed bank suffered a write-down (after, no doubt, the bank executive who wrote the loan retired with an undeserved bonus) and a bankruptcy lawyer earned a fee. Wasted enterprise, albeit dispiriting, is better than no enterprise, as it is better to have loved and lost, than never to have loved at all.

Is public debt spending more like fighting World War II (another example you used) than producing a bridge to nowhere (the public debt equivalent in this analogy to chocolate covered pickles)? That is only one way to analyze a public debt initiative.

The other looks at the alternatives at that particular moment. When nothing else is happening (more technically, but nonetheless metaphorically speaking: being “crowded out”), building a bridge to nowhere might only facilitate one important delivery of a chocolate covered pickle to someone living in Nowhere. In the interim, though, a construction firm stayed in business, skilled employees employed their skills, families stayed together, insurance premiums were paid, and transfer payments were reduced, etc.

It is not, then, just the intrinsic worth of the project for which the debt is incurred, but the timing which is significant. Consequently, a better analysis of public debt cannot be separated from an analysis of the business cycle. That debt has a cost is intuitive. That not expanding public debt during a downturn imposes costs is counterintuitive.

Good projects are always better than marginal projects. But, when times are extremely bad, marginal projects are probably better than nothing.

I look forward to reading Buchanan’s work (a good project) and listening to your podcasts (better than chocolate covered pickles)!

Apr 2 2012 at 1:07pm


“You keep using the example of a transfer payment. We agree on that one. The only net effect are the disincentive effects of the taxes necessary to make the transfers.”

I didn’t see this earlier. I kept using the transfer argument, because you kept saying the cost was paid by whoever pays the taxes. That thought experiment shows that paying the taxes is irrelevant. What matters is real resources. I’m glad we agree on that.

Apr 2 2012 at 1:13pm


Think about it this way. They pay back the loan in year T. They will pay back G(1+r)^T = future value of debt (where r is interest). They will have future income GDP(1+g)^T = future value of GDP.

Now let T grow very large. Debt / GDP goes to 0 as T goes to infinity. This is why I said for a large T the burden on the T generation is small and positive (and arbitrarily close to 0 percent of their income).

Did we violate the budget constraint? No, the budget constraint for both the US and ROW holds with equality in the limit (as T -> infinity).

Russ Wood
Apr 3 2012 at 11:04am

If I understand the Keynesian position, the objection to the 2008 Wall Street bail-outs is that we borrowed the money from the Chinese.

If we’d borrowed only from Americans, it would have been a great deal: though we cannot be sure whether the bail-outs were really needed to avoid a financial melt-down, they came at no cost because “we’d owe the money to ourselves.”

Somehow, I don’t think many of them (outside Wall Street) would see it that way, and I’m pretty sure that I’ve seen Prof. Krugman criticize the bail-outs. Yet, I’m missing the distinction that I think they’d draw between the bail-outs and the stimulus.

mike davis
Apr 3 2012 at 11:55am

Bumper sticker economics is fun!

When modern liberals want to defend borrowing, the sticker proclaiming “Don’t Worry, We Owe It to Ourselves” goes on the Prius. When conservatives want to deplore borrowing, the one that says “We’re Mortgaging the Kids” gets slapped on the Hummer.

The discussion here is framed around the first cliché. But as much as I enjoyed (and admired!) both the podcast and many of the comments, I think a clearer understanding of debt is reached by focusing on the second.

The “We’re Mortgaging the Kids” sticker raises some really hard questions that will require the efforts of economists far more intelligent and focused than me. But here are some thoughts.

Begin with my new favorite example, the asteroid on target to collide with the earth in four years, that can only be deflected by Bruce Willis, Julia Roberts and a $1 trillion rocket. This is a great story (and should be the plot of Russ’s next novel) because it forces us to think about costs and not benefits.. The benefits are unambiguously great and universally shared– despite some evidence from popular culture, our kids don’t want to live in a post apocalyptic nightmare.

The real resources for the rocket must come from the sacrifice of some combination of consumer goods and capital goods. We could pay for the rocket by watching fewer movies and eating less candy, or we could make do with fewer elementary schools and pilotless drones. If consumption gets reduced, current generations pay. If capital accumulation gets reduced, future generations pay. The only way we can, in aggregate, “Mortgage the Kids” is by passing on to them less capital than we would otherwise.

(Side comment: There is another sense in which we could “Mortgage AMERICAN Kids” and that would be to enter into an agreement obligating the kids to pay money back to some non-Americans in the future. The other name for this is “borrow from the Chinese”. Since the podcast mostly ignored external public debt, let’s do the same here.)

Now we needn’t worry much about whether resources used to make candy are ill-suited to the production of asteroid shattering rockets. Markets are very good at redirecting resources to their best use. (And, here again, is the beauty of the story. The four-year time lag permits the necessary inputs time to be retrained and redirected.)

Also, let’s not dwell on who we want to pay. One might reasonably say that since future generations will get most of the benefits from saving the earth, current generations shouldn’t have to suffer a decline in the quality of candy,. But that’s a separate conversation.

The whole thing boils down to a question that’s hard to answer but easy to ask: Does paying for some government expenditures by raising taxes cause us to accumulate more capital or less capital than would be the case if the same expenditures were paid for by borrowing?

The answer we’d like to give, of course, is “It Depends”. And at some level this is obviously true. Certain taxes are more likely to inhibit capital formation than other taxes. Government deficits are more likely to crowd out private investments under some circumstances than others.

I think the better answer to the question, though, is really “We Don’t Know”. Economic analysis in its present state is woefully unable to say much that is practically helpful about the relative impact of taxes and borrowing on the rate of capital accumulation.

I hope I’m wrong and some bright grad student sends me a link to a paper that reveals all. But if I’m right, then I think the public choice questions become much more relevant to the policy. If we can’t say much about whether deficits burden future generations, maybe we can still say something about whether the way we pay for public projects influences the quality of the spending.

The rocket is clearly worth it. Other projects, not so much. If, as many believe and others question, balanced budgets force a more rational spending of public money, then we have a strong argument for balanced budgets.

Apr 3 2012 at 6:15pm

Full disclosure before my comment: while I may lean more towards the Keynesian view of the world, most of what I read of Krugman’s is incredibly politically biased IMO.

I really think you misrepresented Krugman’s argument here… This seems like a pretty mainstream Keynesian position. I believe Krugman’s point wasn’t that debt has no cost at all if it’s domestically owned. Making the logical argument that this means there’s no limit to government deficit spending if it “has no costs” I think the argument is simply that it is possible for a government to be in debt indefinitely.

To make the comparison to personal debt, consider an immortal person who receives very steady and predictable income increases. If this person’s income doubled every year it wouldn’t be unsustainable for them to continuously live off of 1.5 times their present yearly income year after year (assuming their interest rate was less than 50%). I’ve heard government debt characterized as a ponzi scheme based off of a growing economy. As long as your economy is growing, it works.

The one point I think you did bring up in your discussion is the political ramifications of deficit spending. If there truly is a government bias towards overspending, then something should be done. If the fact that spending is done in debt vs current will make the government more likely to invest in chocolate covered pickles, then something should be done to prevent that bias.

Of course, this is outside of any ideological bias towards smaller government. If a government was predictably growing, it could forever be in debt. Our problems today are based off of the combination of deficit spending rising along with expectations of future income growth falling, which does lead to an unsustainable situation.

John Thurow
Apr 4 2012 at 1:38am

If the Government borrows money to pay for project x, I see three possible scenarios:

1) project x makes little or loses money
2) project x makes back all the money spent plus interest
3) project x makes all money spent, interest, and makes a net profit

It seems like when Keynesian’s talk about not having a future burden they think if you add up all the projects funded by deficit spending they would be in either 2 or 3. However, if project x or the accumulative projects fall in 1 then the burden would be the difference in what was borrowed plus interest minus the loss. Notice that in the aggregate this is a loss not a one-to-one transfer from one party to the other for an aggregate balance. It seams like the Keynesians always ignore the latter and think that all government spending is a net gain or no loss “investment”. However, I have never seen them prove that this is the case especially taking into account that the resources allocated can be used for alternative private sector projects. Honestly, I would hate for Krugman to be the financial CEO of my Company…

Richard Boltuck
Apr 5 2012 at 10:30am

First, mike davis, I agree that the distribution over time of the net burden/benefit of government borrowing is properly examined in the consumption/capital accumulation framework you suggest. But the notion of the gross cost or gross burden (that is, separate from the benefit derived from government spending financed by the borrowing) falling on taxpayers with some profile over time depending on the degree to which the burden is shifted forward by Ricardian/Barro Equivalence.

Second, Charley (I’m guessing your a different Charley than Charlie), I see in your comment, two posts above, you’ve raised the Krugman claim that government need never repay their debt again:

” consider an immortal person who receives very steady and predictable income increases. If this person’s income doubled every year it wouldn’t be unsustainable for them to continuously live off of 1.5 times their present yearly income year after year (assuming their interest rate was less than 50%). I’ve heard government debt characterized as a ponzi scheme based off of a growing economy. As long as your economy is growing, it works.”

This is the same claim that Charlie made supported by his infinite-horizon government generating a 5% GDP growth and facing elasticially supplied credit at a 2% interest rate forever.

I previously responded to this example, and Charlie dismissed my response. In my first comment, I noted that it was almost certainly unreasonable to assume an interest rate permanently less than the economic growth rate (as both Charley and Charlie have done).

I would add now that such an assumption violates the transversality condition that must be imposed on this growing economy (or immortal individual). Otherwise, the present value of future GDP discounted at the prevailing/permanent interest rate (which is lower than the growth rate) is infinite. Given elastically supplied credit, why not simply borrow now (at 2% interest) as much as is necessary to allow all national residents to reach the peak of their individual hills of happiness, secured by that infinite present value?

If such a strategy isn’t feasible, something must give in the example — the infinite horizon, imposition of a transversality condition that drives the present value of future GDP to zero (i.e., growth at least eventually at a rate below the interest rate), non-elastically supplied credit from foreigners, or something. And once something is altered, the gross burden of current borrowing reemerges and must be met by taxpayers, current or future.

Andy Gottlieb
Apr 5 2012 at 2:16pm


You assert that it’s almost certainly unreasonable to assume an interest rate permanently less than the economic growth rate. It’s clear from the context that you mean real interest rate, not nominal interest rate, compared to real GDP growth (or nominal to nominal, I suppose).

Do you have history/facts to back up this assertion? I confess that I do not, but I would be very interested in seeing such statistics.

My suspicion is that real interest rates in fact have generally been less than real GDP growth for most of this time, and so the Charlies assumption does not seem at all unreasonable to me. Again, this still does not imply that there is no cost whatsoever to debt (and so to deficit spending), but it actually is quite consistent with my assertion above that, writ small, moderately sized deficits which are not growing as a percentage of GDP “do not matter”, and so my partial defense of Krugman here.

[By “do not matter”, by the way, I mean most specifically that there are no additional negative incentive affects due to people assuming that tax rates will need to rise in the future to pay for today’s deficit spending (versus current tax rate policies in place). I do not mean what I now understand seems to have been Don’s primary point in the podcast that there is no burden at all from deficit spending.
Said another way, in a growing economy with no deficit spending and no increase in real spending at all, then people could reasonably assume tax rates over time will go down – yet surely this is not in anyone’s expectations in practice!!]

Can anyone out there educate us with the facts on this point about the history of real interest rates compared to real GDP growth in the U.S.?

Apr 5 2012 at 4:19pm

I have learned a lot from EconTalk over the past few years! But I have two large criticisms of the way this entire stimulus/debt debate is framed:

1) Can we stop using a home mortgage as the default metaphor for debt? Yes, I know it’s the most common type of private debt, but the metaphor misrepresents the nature of government debt. A house is a tangible asset. The long-term burden of the loan necessarily depends on the value of that asset on the market (if the house’s value gains outstrip the interest rate, then it is not a burden), and, more importantly, the house itself is collateral. When the government borrows money to build pickle factories and earth-saving rockets, these expenditures are not collateral in the same sense. A government bondholder cannot ask for a bottle of rocket fuel in lieu of cash.

I think a much better metaphor (especially to try to explain the Keynesian argument for spending to spur economic development at times of slack aggregate demand) is a student loan. Once the money is transferred to the college, the graduate has no collateral for the lender to seize – only future earnings. But if she is close to a median American, then her debt-financed growth will far outstrip the earnings she would have had if she had not gone into debt. Chitown Nick explained this well above.

I think this metaphor clearly supports Russ’s consistent point that wise spending is key. Should I borrow $300,000 to get a Harvard degree or $120,000 to get a Rutgers degree? [future podcast on the economics of higher education???] Potential students don’t have perfect information to know the answer to that question, so some student loans are misinvested in expensive Art History degrees, and a few have a great return in Art History degrees (for that one student that becomes a celebrity artist). Likewise, some stimulus spending is wasted and some has a great return on investment. Russ thinks a higher proportion of stimulus spending is wasted; Krugman is more optimistic about the ability of current government spending to lead to greater growth. But cutting government spending in order to avoid debt is like not borrowing money to go to college. You end up worse off because your growth potential is limited by your current state of affairs.

Others can articulate the similarities/differences better than I can, but can we at least agree that school loans are a more helpful metaphor than home mortgages?

2) My second point is more political. I appreciate, Russ, that you stress that you are not a Republican or Conservative voice. And I’ve only been listening to your podcast during the Obama presidency, so I am left to wonder what your take is on supply-side economics. The reasoning for the Bush tax cuts strikes me as very similar to the arguments presented to defend government debt.

We can all agree that a federal government is necessary and to fulfill its basic tasks, it requires revenue. What its basic tasks are and how it decides to acquire that revenue are what all political debate are really about. Let’s say that a government is fulfilling the obligations that its citizens ask of it and paying for it entirely with a two-tiered income tax system:

50% for incomes over 1 million USD
20% for everyone else

If the Keynesians want to boost the economy (short term or long term), they would hold tax rates steady and go into debt so that the government could spend money it doesn’t have in order to produce a multiplier effect. This investment would lead to greater economic growth and make everyone richer in the long run because it will have grown the pie. Russ, you are skeptical of this view mainly because you don’t think the government will put that borrowed money to good use. Central planning is inefficient; the government will make poor investment choices and we will all be worse off because instead of additional growth, we just have debt to pay back and with interest (even if that debt is owed to other Americans).

However, if Conservatives want to boost the economy (short or long term), they will cut the millionaires’ tax rate down to 20%. This will similarly put the country in debt (because we have not changed the underlying obligations of the government, just cut off a large source of revenue), but now the millionaires are in charge of this money instead of the bureaucrats. The millionaires will invest the money that they are no longer giving to the government, and that investment will lead to economic growth for all Americans because it will have grown the pie. This argument is similar to the Keynesian one, though. The millionaires will invest much their added wealth in foreign companies or save it in off-shore accounts, and so will have limited pie-growing effects.

Russ, you are quick to mock the multiplier effect because there is such a wide range of theoretical values given for it. “It’s unknowable.” I agree with you. I want to know if you are equally agnostic about the stimulative effects of tax cuts, especially those targeted disproportionately to the rich. I have not seen any evidence that Reagan’s or Bush’s (or Obama’s) successes in changing the status quo by making the tax system less progressive were at all productive to overall growth.

If you criticize Liberals for their meddling ways and give Conservatives a pass for theirs, then it makes it harder to enjoy your discussion. I have heard you point out that neither Reagan or Bush shrank the government or created a Hayekian system. But this podcast in particular cast you in an anti-Liberals .: pro-Conservatives light more than usual.

Morten Andersen
Apr 6 2012 at 11:08am

Thanks for a good podcast. I think I can give an even clearer counter-argument against the “we owe it to ourselves”.

After all, looking at people as being part of a nation is just one way of looking at associations of people. We could also look at the totality of humanity. By this reasoning, debt can never be bad, because after all “we owe it to ourselves”. So the U.S. government could go out and say “We’ll just borrow trillions of dollars from China. We owe it to ourselves, namely the association of human beings”.

The example shows that it you can’t just dismiss concerns about debt by pointing to the fact that the persons taking on the debt belongs to a unit that also contains persons that will fund the debt. If you’re red-haired it is not in any way less bad to be in credit card debt just because the holder of the debt is red-haired. No matter if he’s red-haired or black-haired you owe him the money.

By the same token, just because (even if this was true) the U.S. debt was held entirely by U.S. citizens, the country is still on the hook for those money, because the holders is going to demand it back. I don’t think anyone expects U.S. citizens holding U.S. bonds to demand less payment on those bonds out of patriotic reasons. I don’t think they are just going to forgive the debt, any less than a foreign holder would. Also, the holders may be just a small subset of the citizens, who will in a sense “own the future” because they will be entitled to receive a huge amount of the future tax revenue. In effect, the people working in the future would (given a huge enough debt) be slaves of this subset of people who bought the U.S. bonds and their heirs.

Of course, the government could always (but with implications) walk away from its debt. In that case it doesn’t really matter if the holders are American or Chinese. In a way, it’s worse if the holders are American, since in that case the government is imposing a loss on its citizens, potentially causing a huge internal distortion (destroyed retirement accounts etc.). On the other hand, if it walked away from debt owed overseas, the loss would be on those foreign holders, so they will be the ones having to deal with families losing their retirement savings etc.

Gobar Ganesh
Apr 6 2012 at 12:58pm

Krugman’s statement-

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

is nonsensical. As such, there is no logical way to address his point except to show why it is illogical.

“ourselves” means a single entity.

A single entity cannot be both a borrower and a lender unto itself. It doesn’t matter how the single entity is defined.

One cannot owe money to one’s self. By the same token one cannot borrow from one’s self.

Moving money from one’s left hand to his right does not make the right hand a borrower from the left. The hands are simply parts of the individual entity known as one’s self.

One’s self can decide to transfer money from the left hand to the right, that does not constitute borrowing, nor does the reverse constitute repayment. The money never left the entity “one’s self.”

If Krugman believed what he was saying, he would give all his money to the government knowing there is no difference between the government and “ourselves.”

He should be equally willing to give all his money to you or me as we are also mere parts of “ourselves.” I would be happy to owe him whatever he loaned me knowing that another part of “ourselves” would settle the repayment for me. Would he take that deal?

When it comes to his personal money, you can be sure he doesn’t believe there is no cost to him encountered by giving, or loaning, his money to the government.

If the government is no different from “ourselves” then there is no incentive to give, or loan, money to the government as we “ourselves” would already have it, as in the above example of left hand/right hand.

In addition, if the government is non-different from “ourselves”, we should be able to go to the treasury and take whatever money we want since we would simply be transferring it, at our option, from the left hand, to the right, so to speak, with no economic, or taxable, consequence to “ourselves.” Would Mr. Krugman approve of such transactions?

I am inclined to think Mr. Krugman’s real belief is that all “ourselves” money, is really the government’s money (except his, which he likes to keep for himself) which they (politicians) should be able to use in any fashion that suits him, while we “ourselves” are only entitled to whatever he decide the “ourselves” should have.

Without recognition of citizen’s rights to personal property, all wealth belongs to the government, the only monopoly acceptable by the Krugman’s of the world.

From another angle:

The implication of “money we owe to ourselves” is that there is no cost incurred from borrowing the money.

If there was no cost (concern over repayment) to the borrower (be it government, taxpayer or “ourselves”), there would be no profit for the lender. Without an incentive to lend (profit) there would be no supply of money to borrow.

Economics is governed by supply and demand. If the demander is the same entity as the supplier there would be no demand and no supply. The demander would already be in possession of the supply.

“The debt from World War II was never repaid”

That would mean the U.S. defaulted on its debt to its bondholders with no apparent adverse consequences. If that is true, Mr. Krugman should not object the next time Congress delays or denies raising the “debt ceiling.”

They can simply choose to default on all the obligations of the U.S.A. and live a life of merriment, repeating the process every time they want to throw expensive parties (to use the Prof’s example) without worrying about the need to repay the debts incurred.

The fool’s paradise Mr. Krugman has constructed is a wonderful and whimsical place of fantasy for him to live. He will be happy living there with others of his ilk as long as they can convince other foolish people to pay the overhead.

I do not care to join him. I certainly don’t wish to pay the costs to support his childish fantasy.

Andy G
Apr 6 2012 at 10:44pm


If you are going to attack Prof Roberts for political beliefs he supposedly espoused (myself, I’d defend and encourage them), then at least have your facts straight.

If you believe in static scoring and you make your calculation of progressivity of the tax code based on marginal rate amounts, rather than percentage of revenue paid in, you can at least make your liberal argument that Reagan made the tax code less progressive.

But the same simply cannot be said of the Bush tax cuts (which as you note Obama temporarily extended), since they unequivocally made the tax code more progressive, not less, and by progressively taking even more people off of the income tax rolls have contributed to a situation in our country where almost 50% of the populace has no incentive whatsoever in keeping income taxes low, however progressive the code, since they don’t pay any at all.

Apr 10 2012 at 9:25am

As Chris already noted this is all about Paradox of Thrift.

I think the whole issue is easier to think first without money involved as it all comes to how much we produce. That is something we can consume/invest or (re)distribute. Now I hope we agree that in recession the private sector is not able to use all of the resources. Then it should be obvious that government spending/investments are no-brainer, it makes the pie bigger without crowding out. The ROI is very high as otherwise resources are idle.

This implies that the gov debt being burden in the future is true if the gov spending was less productive at the time of spending than the private one would have been. As some one pointed out the payment is lost opportunity which cannot be measured (think about military spending). Now some of the gov spending, esp. in recession is virtue as it creates opportunities out of otherwise idle resources (unemployment people doing something). I think that is Krugman’s position.

Gov debt is really badly understood issue, I think that MMT point of view is spot on. In a nutshell: only the real use of resources matter. The government cannot spend recklessly because it would lead to inflation and diminishing rate of return / crowding out. Thus the only true constraint for the gov is inflation (as a function of its spending productivity) as it can print/shred money as needed.

Gov debt is both liability and asset to the private sector but nobody seems to be worried that we have too many t-bills circulating. In the end gov debt is a wash (if not foreing owned) as Krugman said. It has some distributional effects, some poor kids are gonna pay back to rich kids who inherited assets like government papers. Do not be fooled, follow the money! That is the only burden gov debt is implying for the future (nobody is sendind checks/money back in time!)

Japan has 3 times more debt than the US and has done a lot of QE, still the problem is disinflation.

Ryan Vann
Apr 18 2012 at 12:00am

Both Don and Russ accept Krugman’s rhetoric at face value; I am not sure that is wise. I take a more Machiavellian approach, and commend Krugman as the greatest champion of free-market Economics and privatization on Earth. Ultimately, huge debt run ups result in sell offs of publicly held assets (I can only hope to have enough money or political connections to get in on the selling off of the Virgin Islands).

Cheers to Kruggy, Kapitalist Kampion!

On a more serious note, when Boudreaux finally made the prescient point that Keynesians are thinking along the lines of national accounting and demand, my frustration with this podcast was alleviated. But then they missed the counter move opportunity by not bringing up marginal propensity to consume, which will determine, to a large degree, the demand affects of a tax increase. I’d assume those burdened with a tax have a higher MPC than those that generally hold public debt (mutual funds, banks, investors, etc).

Ryan Vann
Apr 18 2012 at 12:08am

BTW, Boudreaux gets line of the day for his “praying at the altar of subjectivism.” Along with sophistry, it is the philosophy of our age, and an increasingly annoying one at that. Imagine going to a boxing or MMA match, and just seeing two fighters feint and circle the entire match. That is basically the modern attitude.

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Podcast Episode Highlights
0:36Intro. [Recording date: March 14, 2012.] Russ: Our topic for today, particularly on the national level, and particularly for folks in the United States, though we may bring in some issues related to debt around the world. We want to try to get at what is a very complicated issue, which is often called the Burden of the Debt. Is there a burden of the debt in the future? Some people say that when the United States borrows money today and pays it back down the road, as long as the bonds are bought by Americans, the phrase we often here is: We owe it to ourselves. And: therefore there is no debt burden. No burden of the debt on future generations. A lot of people find that unintuitive, and we're going to talk about whether that's true or not. And we are going to draw on some writing by Paul Krugman and also James Buchanan, I expect, in talking about the different views of debt. So, I want to start with a family. A family that goes into debt to buy a house. Is there a burden of that debt in the future? What's sacrificed, and what's gained, I think is useful. Again, a lot of people argue that that's a bad analogy for debt at the national level. But I want to start with the family level, the personal level, because I think it's a useful way to set the debate and discussion. So, when a family borrows money and goes into debt, say, to buy a house, or have a lot of fun, is there a burden? What are the costs and benefits to the family? Guest: Of course there's a burden. There's a cost. Jim Buchanan--we shouldn't get into it here because it gets way too esoteric--himself distinguished between the subjective cost and the objective cost. But speaking just in plain language, when you undertake a project that you have to pay for, whether you pay for it with current income or whether you pay for it out of future income, you have to pay for it. You have to give up something to pay for it at some point. You have to pay for whatever you consume today. Let's recognize at the very start that just because something has a cost doesn't mean it's not worth buying. Almost everything has a cost. So, to say something is costly doesn't mean it's not worthwhile to do. Let's also make the related point that because something is financed with debt doesn't necessarily mean that that decision to finance it with debt is irresponsible. There are many good reasons for financing things with debt instead of out of current income. Buying a home is typically regarded as one of the more responsible things to finance with debt. There's no moral opprobrium that attaches generally to debt. Public or private. Russ: So, let's talk about that family. So, if I go into debt and I borrow $250,000 to buy a house; and I'm going to presume that I expect to have the wherewithal to pay that back. Guest: And the mortgage lender expects it, too. Russ: That's the point. So, a private individual, until this recent dysfunctional era of U.S. mortgage markets, that is sort of coming to an end--it may not, we don't know what is going to happen--but historically, if you wanted to borrow a lot of money, your ability to borrow was limited by the expectation of your ability to pay it back. Things could happen that were unexpected. Inflation is one. Losing your job is another. There are all kinds of reasons that you might have trouble paying that back. But the mortgage lender knows that, and takes that into account. That's part of the reason it has to be compensated with interest. Which is clearly one of the costs at the personal level of borrowing money. You have to pay back more than you started with. And at different times that burden is going to be different, because of different interest rates. And inflation will change what actually happens. You have an expected payment in terms of what you will have to give up in consumption. It may turn out to be different if inflation is different than is expected, which it often is. But if I am going to go and borrow that $250,000, the lender expects me to be able to pay it back. What does that allow me to do? Guest: It allows you to transfer future income into the present, in effect. You and the lender, both, make an estimate. Obviously it has some amount of risk associated with it. But you and the lender make an estimate that your future earnings will be sufficiently large that your lack of liquidity today--your lack of cash today--should not be a barrier to you buying this asset or buying this consumption item--however you classify it today. So, you are in effect telling the lender: Look, I'm going to make this future income; I'd like you to advance me the future income today, and I will return it to you with interest in the future. And the lender makes a similar assessment: I believe that you will have that future income; I believe it well enough that I will advance you that future income on your promise to repay me. So, going into debt allows us to transfer income from our future into the present. Now, let's take an example that's different from a house. The house, by the way, is the collateral. It's the insurance policy that the lender has that things might go awry; and of course the value of that collateral is uncertain. Which we are seeing right now. Sometimes it turns out to be less than what was borrowed, ex post. But ex ante it's not going to be, generally, if things are working as they should.
7:09Russ: But let's say I go out and instead of borrowing $250,000 to buy the house, instead I borrow $250,000. I own a house; I own it free and clear. I go to the bank and I say, I'd like to borrow $250,000, called a line-of-credit or an equity loan, because I have equity in the house. And I am going to take that money and I am going to throw a party for a bunch of my friends. A heck of a party. Maybe a lot of friends. And I'm going to spend $250,000. It's pretty clear what I've done in that case, which is? Guest: You've spent a lot of future income to have a really big party today. As subjectivists, we can't say for sure absolutely that that was wrong. I can't get into your mind if you do that. But most people, a fairly noncontroversial statement, is that you are behaving irresponsibly. $250,000, assuming your income is what it is--if you are Bill Gates and you are spending $250,000 that's one thing, but you wouldn't have to borrow the money, in that case. Russ: Well, I'm going to disagree with you. I don't think there's anything irresponsible about it. I've decided--and again, maybe this is the Buchanan distinction--but I've decided I would rather have a lot of fun now, and a lot less fun later. Guest: Okay. Let me concede. At the individual level, there's no way we can say, no way an outside observer can say it was good or bad. Some people do behave irresponsibly; may wake up in the morning. Russ: I might regret it. Guest: Ten years of time you may think: Boy, I wish I wouldn't have spent $250,000 of my future income in order to have a one-night party. But you are right. There is no way, at least at the private level--one adult can assess that decision. Russ: And the reason I gave that example is that it's pretty clear there's a burden. I pay a price for that. It may be worth it; it may not be worth it. You are suggesting it may be unlikely it's worth it. I agree with you in the sense that most people don't do that, at our income levels. Guest: Yeah. If your child did that-- Russ: I'd stop him. Maybe. Depends on how old they were. But the point is that you would never want to say: Well, it's only a loan, so it's free to me. A child actually--one of the fun things about child-raising is that when you go to the grocery and you give this little piece of plastic and they give you all these bags of groceries, that looks like magic. And you explain to them: Well, it's not so magic. They go and take stuff. Giving them the card gives them the right to take a lot of stuff out of my bank account. "Oh. It's not free." It looks free. It looks like you just pass the card through this magic device, the scanner; my card gets kind of warm after a while because I've been running it through too many times. So, when you go out and you borrow $250,000 to throw a great party, the costs are in the future. The benefits are today; the costs are in the future. All you've done is transfer future benefits into current benefits. Which means you have lower benefits down the road. Because not only do you have to pay back the $250,000, but you have to pay it back with interest. Because you've had access to the money. You might die. You might not keep your job or keep your promise along the way. The lender is going to require, typically, both collateral and a premium for letting you use their money. Guest: Right. And in a world of inflation, a premium for the lender to bear the risk of potentially higher-than-expected inflation. Russ: Meaning, when you pay back the money, it might not be worth as much as before. Guest: Yeah; so the lender doesn't want to be paid back--if the lender thinks he is going to be paid back in dollars that are worth less than what he loaned, he is going to attach an inflation premium to the interest.
10:58Guest: In this example, and I don't want to get ahead of you, it's important to point out here that the person who pays for your party--in common sense--no one would say it's the bank. No one would say it's the bank's depositors. It's you. And you don't escape that payment just because the money advanced to you today to buy your party paraphernalia and party food and drinks comes from a third party. You know you have to repay it, and so the burden is on you to repay it. The fact that that burden doesn't become manifest on you until some time in the future does not mean it is in any way a lower cost to you than if you pay for it out of $250,000 that you had sitting in your bank account. In both cases, you pay for it. Russ: Yeah, and I want to add another twist, which I think will come in handy in what generalizes and what doesn't in the national case. The fact that I can push the cost to the future rather than today is tempting. Now, part of that temptation is rational--I might not be here when it's time to pay it back. Of course, the bank knows that. That's why there's collateral, right? Guest: And an interest premium above the pure time preference aspect. Russ: Absolutely. But it's always tempting to push off costs to the future for future benefits today. And as adults, we try to learn that. Our children struggle to learn that. Our children in general want benefits today and costs tomorrow, and have trouble putting aside money for the future. As adults we have had some experience with that, and we realize that that can be irresponsible, immature--whatever you want to call it. But inside of us, benefits today and costs tomorrow has a tremendous appeal. For obvious psychological reasons. Guest: Evolutionary as well. Russ: Right. And so you've got that urge to borrow money. And the marketplace tempers that urge. It forces you to pay a premium, as we've been talking about; and if you mess up and you buy something like an extravagant party, which as fun as it is turns out not to be as much fun as going 20 years of living badly to pay off the loan, you then learn that it was a bad year. Ex ante it seemed like a good deal, but that was before the fact. After the fact, it turned out not so well; and as you grow up, you learn to try to anticipate those feelings for consequences. And I would argue that's what growing up is. That's a key part, to a large extent, of being an adult. Do you want to say anything more? Guest: Everyone knows that in spite of our protestations about the sanctity of subjectivism, which I agree with-- Russ: The sanctity of what? Guest: Subjectivism. We can't second guess other people's preferences and behaviors. Everyone knows. The world is full--at least the industrial world is full of a lot of people who have credit card debt that they wish they didn't have. That they now regret having. Russ: That the toys they accumulated, the TVs--Guest: Not just in the sense that they wish they could have gotten these things for free. We all wish we could get what we consume for free. But in the sense that: Boy, I wish I had had more self-discipline yesterday or last year, and would not have borrowed the money for whatever it is I bought so I wouldn't have this credit card debt hanging over me today. We all understand the temptation to consume now and delay the costs until the future. And modern credit institutions allow us to do that; although, as you point out, the interest rates do temper that proclivity. Russ: And the flip side--you started to say it, actually, because it is such a useful phrase--the flip side is delayed gratification. Instead of saying: I want the fun now and I'll pay for it later; what savings is all about, as opposed to borrowing, is saying there's stuff I want. I can't have it right now. I could, but I'm worried about the consequences of that, so I'm going to delay my gratification and have it when I'm ready to pay for it and the costs are not as high. Guest: We are both parents, and I'm sure the case is true not only for you but for any parent. No parent has any trouble teaching his child to enjoy things now. We don't have to say: No, no, Junior, you want to consume; you want to have more fun now. Part of what parents teach children is to delay gratification. Or the importance on many occasions of delaying gratification. It would be a very odd little human being indeed who didn't have to be taught that by parents or some guardian. Russ: There aren't many frugal children. Guest: No, it's just not natural. Russ: Just a footnote: I think one of the great lessons of time management is understanding the difference between important and urgent. There's a lot of urgent things that are not important; and if we only do the urgent things we don't end up having a lot of time for the important things.
16:41Russ: Now, let's turn to the national level, and let's ask: Do these lessons and implications we've been drawing for debt apply when a country goes into debt--we should be careful. I want to use the word government, not a nation. When a government borrows money, spends more than it takes in in revenue, and--there's different things government can finance with debt. And we could debate the appropriateness of some expenditures versus others. So, we could talk about, in a war that threatens the very essence of a country's survival, whether that's a good thing to borrow money against; whether it's to have a party at the national level, whether that's a good thing; transfers to special interest groups; infrastructure which in general would have a future benefit that would stretch over time. Guest: Assuming it's not a bridge to nowhere. Russ: Right, as long as they are bridges to somewhere, bridges that the private sector wouldn't build very well. So we could talk about a range of government activity. And I think the extremes would be payments to friends, special interest groups such as farm subsidy payments, or, to my mind worse--building things that are not productive, the use of real resources, which often involves payments to friends, so the people who build the bridges to nowhere benefit but you are not just giving them a check. You are actually getting them to pour concrete and use up real resources. And at the other end an attack on a country whose very survival is at stake and goes into debt to finance the war expenditures. Let's talk to start with about differences if any between the case we just talked about at the family level versus the national level. Guest: I think there are a lot of similarities. A lot of things are identical. That everything is identical--when you make a private decision to borrow, you are not imposing a cost on anyone. You are imposing on maybe your immediate family-- Russ: Unless you lie about your income or ability to pay it back. You could impose costs on other people. Guest: Right, but even there, your credit rating suffers if you are found out of falsifying a document. So there are a great deal of similarities, the analogies between private and public debt hold in a lot of ways. But there are differences. Russ: So, you just gave one that's important. Guest: It's a vitally important difference. Russ: Because it confuses a lot of the discussions, as we'll see. So, the first difference is that, in the case of private--let's call it personal debt--in the case of personal debt, I make the decision and I bear the cost. And in the case of the public debt, there's a whole bunch of different people who are going to be involved in that decision. Not just one decision-making unit. And the costs and benefits are going to fall on different people. We'll get into that. What other differences do you think are important? Guest: I think that's the main difference. You have the decision-making process to go into debt and the decision-making process that determines who will repay the debt and how it will be repaid is very different in both circumstances. And we lose sight of that when we talk about "the nation" going into debt, when we speak as if we have one big collective mind choosing our debt today and being responsible for repaying that debt in the future. Actually, a related difference then--well, I'll just leave it at that for now.
21:08Russ: There's one other difference I think is important, and this certainly is going to be an argument that the justifiers of borrowing are going to invoke. Like many issues in economics, unfortunately this one has ideological and methodological baggage alongside it. So, historically--by which I mean the last 80 years or so, people who want government to be bigger typically are going to be people who are associated with the Keynesian theory of macroeconomics, and a view that borrowing is overly feared; that we should be less fearful of borrowing. Those of us like myself, yourself, who like to see a smaller, more limited government tend not to be Keynesians and tend to be fearful or perceive the costs differently than the other side. I want to get that on the table to start with. It's easy to talk about this as if it's a pure economics conversation, but there's political and ideological baggage alongside it that we should be honest about; and I want to try to bring it out on both sides. But to give due to those on the other side of our view, the people who say that when government borrows it's not as bad, or it's cheaper, or it's more justifiable than at the personal level; public debt is very different from private debt--one of the arguments they make that I think is correct is that I as an individual cannot borrow perpetually. I cannot live beyond my means, in general. There may be moments when I borrow, for example, to buy a house; but then I'm going to pay it back. And it would only be an unexpected outcome that would allow my net borrowing to be other than 0. Meaning I lose my job, or whatever. So, I can rearrange my consumption. Guest: But over time you can't consume more than you produce. Russ: Other than through good fortune or bad luck, one side or the other. And the reason is that the lender--when I'm 80 years old and retired it's a lot harder to borrow money than if I have a nice, full-time job. Guest: No one's going to give you a 30-year mortgage when you are 80. Russ: Correct. Well, if it's short and small enough and you have other assets. But in general it's a lot harder. Two reasons. One is that you die. And the second is because you die, your lifetime earnings pattern typically has an inverted U-shape. That when you are younger, your earnings climb, and when you get older they fall. Part of what borrowing allows you to do is smooth the consumption over that rather than living poorly and then living well and then living poorly; most people, for human psychology reasons, just the nature of our satisfaction and life, want it to be a smoother stream and not as jerky. But that's different at the national level. Guest: I'll concede that, but I'm not sure how relevant that is, actually, for the thrust of the arguments that are made to excuse gargantuan public borrowing. Russ: I like that term, gargantuan. It has a nice--a neutral term, Don. But I think it's relevant in the following sense. In a minute we'll give some examples and we'll see how relevant it is or irrelevant. But certainly if a nation is productive--meaning if it has good institutions and good laws and its people are innovative, as the United States typically is; and our productivity is growing over time, our product is growing--we have productivity--and as a result, it's possible--it may not be desirable but it's possible at the national level, as it is not at the individual level, that the United States could perpetually, the U.S. government certainly, could spend more than it consumes. Somewhat it can, and I hate to bring this up, but it's useful--I hate to bring it up because it's just another level of difficulty in the conversation--but certainly a country can run a trade deficit over a long period of time, meaning it can consume more than it produces--a capital account surplus, if nations want to invest in the United States by having a stake in our assets. If those assets are productive and growing we can at any point in time consume more than we produce as a country. It's not debt, as you have written many, many times; and I've written a few times; we certainly agree on this. It doesn't have to be debt at the trade deficit level. Guest: It's not debt by identity. Russ: Right. But that's one way in which a nation can consume more than it produces, year in and year out. And I think Great Britain did it for decades over its history, a century. Guest: Well, the United States has done it with relatively few exceptions for 400 years. What is today the United States. Russ: And certainly then--to move away from the trade issue and talk about spending--the U.S. government--doesn't mean it's desirable--but the U.S. government can year in, year out spend more than it takes in in revenue as long as the world finds that investment in the U.S. government debt to be attractive and there's confidence that the U.S. government is going to be able to pay back those promises and keeps those promises. That when the nation reaches either a size of debt or a problem with its inner economy and tax revenue that it can't do that, that's when you have a default risk. But in theory, unlike an individual, certainly a nation can borrow perpetually, if it does not over-borrow and stays within its ability to repay. Agree or disagree? Guest: Yes, of course; but the same can be said of a corporation. Russ: Yes, that's true. Guest: There's nothing special about government. Now, the government does have a special ability that private corporations don't have and that is that today's government have sovereign monopoly power over the money supply. That gives them an added attractiveness to borrowers--excuse me, to lenders. If I know that you have, that Uncle Sam has just given you, Russ Roberts, to print as much or as little dollars as you want, I am more likely to lend to you because your risk of default is a lot lower. If your income doesn't rise, then you can always revert to the printing press to pay people. Russ: I disagree with that. I think that's a negative for the lender. Guest: Oh, no, not at all. The government can abuse the power, of course; it can cause inflation to be so high that lenders not longer wish to be repaid in those. Russ: Yeah. Guest: But-- Russ: It reduces the risk of absolute default but it creates the risk of implicit default. It seems to me that the-- Guest: But from the perspective of the individual lender. Russ: China? You think China is comforted by the fact that the United States can print money when it lends it money? I think it goes the other way. I think China is anxious and they've explicitly said so, that there's a temptation on the part of the U.S. government to inflate the debt away. And I think it's a very real risk. Guest: Well, they are still lending money to us. Russ: That's true. Guest: They are still buying American bonds. I haven't thought through this, but perhaps there's a difference between very, very large lenders acting as a single entity, such as a major foreign government. But at the individual lender level, the individual-- Russ: When I go out and buy a Treasury bond. Guest: I think the fact that the government has access to a printing press at the margin makes it more attractive to lend. Russ: What I thought you were going to say is that it's ability to tax. Guest: Well, it has that, too. Russ: I think that's the real comfort. Guest: It has that as well, of course; and that adds to it too. But even that can be abused. If the tax power, much like the inflation power, if it's over-extended, then the government can be thrown out of power, or it can collapse. Russ: Absolutely. Guest: None of these things is guaranteed. But yes, the power to tax, the power to issue money created de novo at the margin at least for relatively small lenders makes lending to the government more attractive than otherwise.
30:56Russ: Let's now turn to James Buchanan's insights into this. Buchanan, in 1958, wrote a book called? Guest: Public Principles of Public Debt. Russ: I had not read the book until recently. Don and I talked about this podcast and he got me to read some of the book. And Don has written about it at CafeHayek, our blog together. What I think is creative--in a way it's so straightforward you could argue in a way it's not creative, but sometimes it's hard to see things that are out in the open--what Buchanan has done in that book. It's a very short book; it's a very dense book. He thinks slowly and carefully. Guest: It's only 160 pages in print, but it's about 800 pages in thinking. Russ: It's complicated. You've got to read it a few times. I read it very slowly. But what I think is useful about his approach, and quite important and striking, is he very explicitly rejects the notion that the national government borrows money and repays that money as if it were a single individual. Because we know we are a nation of different individuals. And the people who lend the money, the people who get the government spending, the people who pay back the money, and the people who receive that payback are all different people. Different groups of people. So, Buchanan's simple point in a way is that you have to take that into account. You can't just say we owe it to ourselves. Because there's no "ourselves." Guest: You can't be misled by Keynesian aggregates, is what he's saying. Russ: Right; there's no ourselves there; there are different groups in our country that borrow the money, pay it back, and receive it. Although there is very little in the first part of the book that is explicitly about Keynesianism, there is a Keynesian aspect to this, which is that, to some extent in the Keynesian view, aggregates are what matter. And things wash out because of that. Whereas in the Buchanan view, and I would say my view and yours, they don't wash out all the time. Let's go through this. Let's start with Buchanan's argument--again, we don't have to think about what kind of government spending it is--let's walk through who pays for it and who gets the benefits. Guest: Let's assume that the government spending is regarded by everyone as being justified; no matter what that might be, it's justified. Buchanan, in 1958, was reacting against what was then a fairly new theory of public finance. He called it the New Orthodoxy. And it emerged in the 1930s right along with Keynesian economics. And it served--although it's probably not necessary for Keynesian economics--it certainly served the Keynesian agenda and people who accepted it were Keynesians. They bought into it. Because, if you bought into it--and I'll explain in just a moment what the "it" is--you didn't worry about debts that you encouraged the government to undertake. The "it", this New Orthodoxy, the new theory of public finance that emerged in the 1930s, was that because the debt doesn't come due until some time in the future, to the extent that that debt is payable to people within the same political community that undertook that debt, then the debt is not a burden. Russ: That is Americans, in this case. As long as the borrowers are Americans and the lenders are Americans, the people who buy the Treasury notes are Americans. Russ: Because it's so important in Keynesian economics for the government to be able to borrow--functional finance--and because prior to Keynes there was, for better or worse, certainly in the economics profession, a bias against government indebtedness in peacetime, the Keynesians had to, at least psychologically to get rid of that. Because we have to be able to go into debt in peacetime on many occasions. And the Keynesians then were able to say because the debt is owed to people in the future, and because those people are citizens of the same country we belong to, it's no problem. "We owe it to ourselves"--that was the famous phrase that justified the debt--so it's not a burden. Buchanan said: Nonsense. Let's look at the individuals involved here. We have citizens/taxpayers, who somehow participate in the political process. We have politicians, who obviously participate in the political process. We have lenders--these would be people who buy government bonds, lend money to the government. And then we have future taxpayers, people whose tax bills will rise when the debts come due. And the bondholders--they can be either the same people who lent the money today or they can be the heirs of the bondholders. Russ: Or the people they sold the bonds to. But that's confusing, I think. There's one other group--those who benefit from the spending. Which could be the nation as a whole, for fighting off an invader. Or it could be the friends of someone.
37:42Guest: So, let's take the war example, which is the example most people regard as the most justifiable use of debt when we all believe the threat is real and imminent. So, government borrows a trillion dollars to fight off an invading enemy, because it doesn't have the liquidity today. Private lenders--and let's assume they are all American-- Russ: We are going to play within the Keynesian rules as much as we can here. So there are no foreign holders of U.S. debt in the story. Guest: So, Americans lend, voluntarily, a trillion dollars to Uncle Sam. Uncle Sam spends that money effectively in winning the war; America survives. The debt comes due 30 years from now. All the holders of the bonds are Americans; Uncle Sam honors its debt commitment. It raises taxes. Or reduces spending. Let's assume it raises taxes. The story is not fundamentally different. It raises taxes 30 years from now to pay off the debt; so some Americans have to pay, or Americans in one capacity have to pay higher taxes; Americans in another capacity receive the principle and interest on the debt that Uncle Sam took out 30 years earlier. Buchanan says: Even though we might agree--we do agree in this case--that the debt was justified, it is still a burden; and this is the crucial part. The people who bear the burden of that debt are the future taxpayers, the taxpayers 30 years hence, whose taxes rise in order to pay off the debt. The fact that, 1. The debt holders 30 years from now are citizens of the same country of the people who paid the debt, that doesn't mean there's no burden to the debt. The fact that the resources to fight the war were of course contributed and literally consumed 30 years ago does not mean that the people who contributed those resources voluntarily bear the burden of the debt. Those are the bondholders. They chose to lend the money to Uncle Sam in return for--additions to their financial portfolios that made them better off. They are not the ones bearing the burden of the war. The burden has to fall somewhere, and it falls on the people who pay off the debt, and those people are the future taxpayers. The nationalities of the bondholders when the debt is redeemed is utterly irrelevant. The burden is shifted to the future, and its real. It's not reduced just because, number one, it doesn't exist today, when the debt is taken out, and number two, contrary to what the Keynesians say, contrary to what Paul Krugman says, it's not reduced or disappears just to the extent that the bondholders are citizens of the same country as the taxpayers whose taxes rise to pay the debt. Russ: So, I think in the Buchanan story, the way to see it is that the bondholders, the people who lent the money to the United States--and obviously some of them died, have heirs; that just confuses things; it's not relevant--so let's make an unrealistic assumption for the sake of understanding the economics: let's assume they are all still alive when the debt comes due. Might be a 5-year bond. Guest: Some of them will be. Russ: Some of them will be. So, they are better off, slightly, by the attractiveness of this opportunity to lend the money relative to other opportunities to lend money. The people today who received the benefits of the government spending--they are not killed in a war as a result; or it could be that they have better bridges and roads-- Guest: And we could even say that people in the future-- Russ: I'm going to get to that. And it could be these benefits extend over time. Guest: And I would assume they did. Russ: Yeah. They are not enslaved by a foreign power, or they get to enjoy the bridges that were built. The special interest payoff is a slightly different story; we could talk about that later as an exercise. So, whatever those benefits were--which we think are huge; we are not disputing the value of the benefits--it's clear who pays for them. In one dimension. It's a little unclear. But in one dimension, it's clear who pays for them: the people who have to finance the taxes to pay back the bonds plus interest. Guest: Oh, I think it's completely clear who pays for it. It's those people. Russ: Well, the reason I want to say it's not so clear--here's why I want to say it's not so clear; and this is a confusion that may be unproductive. We'll see how it goes. And this is why this is such a difficult topic. When the government in the present convinces would-be savers to give their money to the government in the form of bonds, other things don't take place. And if the government were to say, we are not going to fight this war, those other things would take place; and some of those investments would be productive. And so those resources today-- Guest: That's true. But that's true for any economic decision-taking, whether it be political or private. Russ: So, I think the right comparison is to talk about a war financed by taxation today versus debt. Which, as Milton Friedman would point out--that's just taxation tomorrow. You can call it debt. When government finances activities, it can either tax today or tax tomorrow, and Friedman used to always say, and I think it's in agreement with Buchanan. Guest: It sounds on the surface like it contradicts him, but it doesn't. Russ: I think it's the same point. What Friedman used to say is, if you are debating government activity, don't be fooled by whether it's financed by debt or by taxes. Just look at if it's worthwhile. If it's finance a war that's going to save us from destruction, it's worthwhile whether you finance it out of taxes today or taxes tomorrow. It might make sense to do it out of taxes tomorrow, but certainly it's a good idea. If you are doing it to dig ditches to nowhere and fill them back in, you it doesn't matter whether you finance them by taxes today or taxes tomorrow. It's still a bad idea. Guest: What Friedman is saying is the full cost, the cost of government activity today, is the amount of money government spends today, not the amount of explicit tax revenue it takes in today. It's measured by spending, not taxing. Russ: And borrowing doesn't somehow allow you to have a free lunch.
45:04Russ: So, let's walk through that a little slower to make sure that's right, or at least that we're comfortable with it. Because the alternative facing this terrible war, is instead of to borrow the money, we could have said: Folks this is really bad. I mean, we could think of two ways to finance a war. We could think of three ways, excuse me. The way we just talked about, which is we are going to borrow the money, take the borrowed money and buy stuff with it to fight the war; which is "voluntary," on the surface, because it's taken from people who choose to buy the bonds. The involuntary part comes on the people who have to pay it back. Guest: Which is an important point. Russ: No, it's huge. We're going to come back to the politics, because that's part of the political incentives that are in play here. But it looks voluntary. It's the same involuntary thing; you just push the involuntary part to the future. Guest: That's exactly right. Russ: Alternatively, you could said: Folks, bad news. We're going to be attacked. We are going to have to tax-- Guest: Raise the taxes by a trillion dollars this year-- Russ: And that's going to be painful. It means less private consumption. And the only difference between those two is which Americans end up paying the price. It could be a slightly different group. Which is one of the reasons the political incentives-- Guest: But no, in both cases, the people paying the cost of the war are the taxpayers. Russ: It's just different points in time. Guest: The fact that the taxpayers who pay it in the borrowing case are in the future and the taxpayers who pay it in the taxation case are in the present, does nothing to change the fact that the burden falls on the taxpayers. Russ: Okay. So now the third way--and there's a fourth way, too, I'll get to. Guest: We can stop money creation. Russ: No, I'm getting away from that. That's not my third or fourth; that's the fifth way. That's, again, a different kind of tax. It's an implicit tax. Guest: Fundamental tax, to distort. Russ: But here's a third way. The government could expropriate private resources. It could say: One of the things-- Guest: Well, that's a form of taxation. Russ: I know, but there it's very clear where the burdens are. The government could say: We need transportation in this war; we need to move troops around; we need to fly airplanes. So, U.S. Airways, Southwest, we are coming to you. We are taking all your planes. Guest: To hell with the Third Amendment to the Constitution; we are going to quarter soldiers in your house. Russ: Right. And we are going to steal all your buses and your cars are going to become government. Now, everybody would understand in that case. You wouldn't say: There's no burden, because we all understand that we still have the cars. We still own our cars. We understand that whatever those cars and buses and trains produced for us in benefits--as you said before, it might be worthwhile to use them to fight this terrible external enemy--but we never wanted to say: Well, it's free. Because we still own our cars. Guest: The people getting the benefit from the seizing of Southwest Airlines and the seizing of private homes and hotels to quarter soldiers, or Americans--that doesn't make it free. We seized it from ourselves. No one would say that makes the burden go away. Russ: It's clear what the real cost is. The real costs are those private benefits and pleasures we would have had from travel and comfort in our homes. And by the way, the same thing with food. We have to pay for the food for the soldiers. So, we are coming to your farms, and we are taking your crops. All that does is change who pays for it. It doesn't change the fact that there's a burden of it, or that there are prices to pay. Now most people would argue we have to spread the burden because we are all getting the benefits of this security. Guest: And that would be true. That would be correct. Russ: And so therefore it's not right to just punish people who already own cars, happen to own airplanes. Let's spread the burden. Guest: And that's why there's a Just Compensation requirement in the 5th Amendment Takings Clause [to the Constitution]. Russ: Yeah. So I think we've made some progress. Guest: Did you list all the ways to pay for it? Russ: We could ask people for donations. We could ask people voluntarily to give. Guest: In which case they would be the payers. Russ: And I think in the background of our conversation, which I think both Keynesian and classical economists, and I would put both you and me and Buchanan in the classical camp-- Guest: In this case yes-- Russ: A pre-1930s view of debt. What everybody agrees on is that there are some distortionary effects from these different methods. The form of taxation matters. Whether the tax system is well-designed. There are extra costs from that. But we also all agree that that's relatively small compared to what we are talking about.
49:49Russ: Okay. You want to say anything else before we gone on? Guest: No. Russ: So, now this is where we are 49 minutes into this; and now we get to preps [?preparations?] the hardest part. Which is that I am going to take a quote from Paul Krugman and see if we can apply what those claims are so far, and if we can disagree with him in a useful way. So, Krugman explicitly, in a column that was written January 1, 2012-- Guest: January 2, 2012 edition of the New York Times. Russ: Right. It was online on January 1st, but it came out in print on January 2nd. Guest: I know the column well. Russ: Don's written on it. And I've been chewing on it since he got me to think about it. Here's what he [Krugman] wrote; and I'm going to try to sketch out the rest of our conversation. I want to try to address the Krugman point. And then I want to go to the really large question of sovereign debt generally and whether we are in a crisis or not in some dimension. Greece is still embroiled, as we record this, in some serious problems; Spain and Italy seem to have some problems. And a lot of people say: That doesn't apply to the United States. Other people say: Oh, my gosh, we are going down the same path. Guest: John Taylor, for example, is worried that we are not there yet but close to it. Russ: I'm a little worried about it, myself. So, here's the Krugman quote; and it applies perfectly to what we've been talking about. He just has a different view. And by the way, those of you who have written me, I appreciate it and you have encouraged me to have Paul Krugman as a guest--I am eager to have Paul Krugman as a guest. I prefer to have Paul Krugman defend himself than have to read him. I've invited him; he has not responded. It could be he is not interested. It could be he has not gotten my emails. If anyone knows him out there and wants to encourage him to come on, we'd be happy to have him. It surely would be interesting and lively and we'd both learn a lot; at least I would. But here are Paul Krugman's words:
Deficit-worriers portray a future in which we're impoverished by the need to pay back money we've been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don't -- all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second -- and this is the point almost nobody seems to get -- an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn't make postwar America poorer. In particular, the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history.
Before we talk about it, I want to let people chew on that quote. You might want to rewind and hear it again. It's a long quote. I want to both be fair to him and to--it just so perfectly captures the alternative view to what Don and I have been talking about. But I want to just re-emphasize his points. He makes two points. The first is that government doesn't have to pay back it's debt. It can roll it over. And the second is, it's not harmful; there is no burden, and we owe it to ourselves. To the extent that taxpayers are the holders of the debt rather than foreigners. And again, I want to give him the benefit of the doubt, and assume that that's not literally true, but it is to a large extent. Guest: The argument he's making is that--he admits that his argument and that part of it applies when the debt is internally held. Russ: Yeah. So, what's wrong with him? What's wrong with that argument? Is he wrong? Guest: Yes. Russ: Why? Guest: Well, first of all, you didn't point this out, but it is true of course that the debt incurred to fight WWII did not prevent America from growing economically. Well, again, just because a debt has a burden does not mean that it is not worthwhile. Just because an expenditure has a cost does not mean that expenditure was not worthwhile. Russ: Yeah. Well, that argument, that part of it-- Guest: And that also, this is a sort of post hoc fallacy, in a way. Russ: Correlation isn't causation. Guest: You could have someone here who makes a strong--. Let's assume these expenditures were completely wasteful, and yet America grew. Therefore these wasteful expenditures weren't that wasteful. But maybe America wouldn't have grown even more. Russ: Right. Guest: But we can forgive him that. It's a column for a newspaper. We all write sloppy things. Russ: We simplify things. Guest: We simplify things. I write sloppy things sometimes. The heart of that claim is that because we owe it to ourselves, it's not a real burden. That is a mistaken--this is the claim that Buchanan so carefully examines and exposes as fallacious in his writings, most noticeably in the book that you'll put online, that Buchanan wrote in 1958. By the way--and I've searched his blog and I've looked at his columns. I see no evidence that Krugman even acknowledges Buchanan's contributions. In 2012, unlike say, in 1957, you cannot make the claim that Krugman makes as if it is an established, indisputable truth that only untrained economists disagree with. You have to deal with Buchanan's argument. You have to show why Buchanan mistaken. And that is what I think Krugman has not even attempted to do. Maybe he's done it elsewhere. Russ: But he doesn't need to. Because it's obviously-- Guest: Well, the way he dismisses it, he dismisses it, in his newspaper column, his blog, he dismisses Buchanan's view as-- Russ: Irrelevant-- Guest: As if it's a flat-earth kind of claim. Russ: Right. It's irrelevant. Guest: So, yes. If American A has her taxes raised so that American B has his bond redeemed with those taxes, the money stays in America, but that doesn't mean there is no burden to that debt. The taxes are still raised. Krugman will admit, as the Keynesians admitted--there is a slight burden, the distortionary effects of having to raise marginal tax rates. Russ: Right. Guest: No one denies that. But the absolute amount of money paid from A to B does not disappear as a burden just because B is a citizen of the same country as A. And that is what Krugman is suggesting.
57:41Guest: So, here's why, here's where the politics comes in. Let's now, let's get away from the war thing, because we all agree that war is necessary to fund. Russ: If you are under the threat of imminent invasion. Guest: Oh, yeah, right. Much of Uncle Sam's belligerence. Russ: To pick a better example, I'll take the example of the example of-- Guest: Stimulus spending-- Russ: No, no, I want to take an example of, there's an asteroid about to hit the United States and if it hits, everybody understands on its current path it's going to devastate 330,000,000 people and destroy all their stuff, so we've got to build a complex set of activities to shoot it down out of the sky. Guest: Let's back up for a moment. His claim can't be dismissed this easily. Resources had to be spent to fight the war. Resources had to be spent to destroy the asteroid. Resources have to be spent for corn subsidies. Resources have to be spent and are being spent today with borrowed money. That money has to be repaid. The need to repay is a burden. It's not reduced as a burden just because it's funded with money borrowed today and taxes put off into the future. Would Krugman say--I suspect he would not--but would he say, let's suppose the war were funded out of current taxes, going back to your previous example. You wouldn't say: Oh, you are paying those taxes to ourselves, therefore these people who worry about the cost of the war, they are absurd because most of that money is being paid to us. It's still a cost. Again, it may be worthwhile. We can agree it's worthwhile. That doesn't mean it's not costly. It doesn't mean it's not a burden--on the people who pay the tax. And this is the problem. Because current taxpayers, participants in the political process, by being able to borrow through government are able to consume more today than they otherwise would could. Oh! I get to have whatever goodies the government is going to give me today! Without my taxes! Or anyone else's taxes rising today! Then, that creates an incentive, because we all like to spend other people's money, an incentive to spend the more today. So, at some level, the fact that the burden can be pushed off to other people, particularly people who aren't voting now--they are voting only in the future if they vote at all. They can't even identify themselves. That creates a not-logically necessary but it creates a politically-likely scenario in which the government does spend more money than otherwise. It does use up more resources today on projects today that it would not otherwise engage in, if those projects had to be funded out of current taxes. Because they don't have to be funded out of current taxes, then government spending rises higher than it would otherwise rise. You cannot say that the cost of those programs, whether they are necessary or not, disappears just because taxpayers in the future will be the ones who see their tax bills rising to pay off the debts when the bonds come to be redeemed. And that's what Krugman wants to say: Oh, you people are so dumb; you don't realize, that you see we are paying it to ourselves so it is not a real cost. Again, that's easy to see when you recognize it. You wouldn't say that if the programs were being funded out of current taxes. You wouldn't say: There's no real cost to this program because you see, we are taxing some Americans and giving the proceeds to other Americans. So, it's not costly! Of course it's costly. The cost is being paid by the people who have to pay higher taxes. It makes no difference at all whether those taxpayers are existing and paying taxes in the current fiscal period or if they exist and pay the taxes in the future fiscal periods. They are the ones who pay. And the burden is no lower; in fact it is probably higher because the incentives for government to spend more money today are raised due to the fact that the cost can be pushed off into the future.
1:02:11Russ: So, the way I see it--I think that's beautiful but here's the way I would suggest to challenge Krugman's view. And I really hope Mr. Krugman responds even if he doesn't want to be a guest on the program. Or some of his friends will, I'm sure. So, I invite people who think he's right to comment on this podcast in the comment section. But the way I think about it is: It's a slippery slope of intellectual reasoning to think that we owe it to ourselves. Because on the surface, it would seem to justify any size of government spending, because there is no burden. For example, let's say it would cost a trillion dollars to fight off the invaders or destroy the asteroid, or whatever it is. A trillion. But let's suppose the government decides, out of political reasons, to spend $4 trillion. Make a much bigger effort. Turns out to be a mistake. Turns out it isn't necessary. Turns out we could have just spend $1 trillion. But, while we are borrowing, let's borrow $4 trillion. Guest: And this is why. If people believe the Krugman view, then they are more likely to accept that. "Oh, well, we owe it to ourselves." Then why would they care how much government spends? If it's not a real cost, if we owe it to ourselves, then by all means reduce that risk even further by spending not just $1 trillion but $4 trillion. Why not $40 trillion, because we all owe it to ourselves; it's not really costly? Russ: And, if the government borrowed enough money, as each individual borrower decides whether it's worthwhile or not--and one of the complications we've left out here, which I suspect would be part of Krugman's defense or someone else's defense--is that interest rates would perhaps be different if you went to borrow $4 trillion versus $1 trillion. You'd have to pull resources out of the buyers of the bonds to induce them to offer $4 trillion; you'd have to offer them a higher interest rate than if you were only doing $1 trillion. I worry that that complicates things. Put that to the side. If the government goes and borrows $4 trillion, that means there's less stuff that's created today. If they requisition not just the airplanes for the war, but the cars, too, just in case, you wouldn't say: Well, because we're going to pay back, say, the car owners--suppose we borrow the money to buy the cars from the private sector rather than confiscate them. So, again: three methods. We can borrow the money today to buy the cars from people so we have them to use for the war. Turns out not necessary, totally unproductive. We could tax people today to get the money to buy the cars. Or we could just confiscate the cars. In all three cases, we don't get the benefits of using the cars. We hope that it's there's a benefit from defending ourselves, but if it's a mistake, if it turns out that we shouldn't have taken the cars out of circulation and all they did was sit around in government parking lots, you wouldn't want to say: Well, if we used borrowing to finance them, then it didn't cost anything. It obviously cost us the fact that we didn't have our cars. People who paid for it, it would be different. In the confiscation case, it's the people who own the cars. In the current taxation case, it would be the people paying current taxes. And in the debt case, it's people paying taxes tomorrow. Those are the people who finance the use of cars in the war. You wouldn't want to say there's no burden. Guest: Take a simpler case. Suppose government changes transportation policy: it just requisitions cars from people in the top 50% and gives those cars to people in the bottom 50%. So, we are just giving it to ourselves. Now, you can think it is a good policy. And I will concede for argument's sake here--let's assume it is a good policy. God dictates it's a good policy. So, we all agree it's a good policy. That does not mean that that policy does not cost Americans anything. It costs the people whose resources are confiscated. It costs the car owners whose titles to those cars and ability to use those cars are stripped from them. And the fact that the cars are given to other Americans does nothing to reduce the burden of those people who have to pay for the policy. Russ: I don't know if that's a good example or not. I don't know if I agree with that. I agree with your point, but I would argue that's probably different than what we've been talking about in that that's a reallocation. At least you can argue, correctly, that the total number of cars hasn't changed in the United States. Guest: Well, but if government had this power to do this kind of requisitioning, what would happen to the amount of requisitioning that it does. That's a marginal tax point. Russ: Right. Guest: But the point of my example here--I agree, it's a little bit different than the debt thing--is simply to point out that just because the person who is taxed--in my example, a car is taken from him or her--is a citizen of the same country who gets the proceeds of that tax--the other American who gets the keys and the title to the car--that does not mean that there's no burden. That Americans in fact pay no price, that there's no cost to this program. There is a cost; it's borne by the people who lose their cars. Russ: I think Krugman would agree with you there. Guest: I don't think he will. I think he would be consistent. He wouldn't. He's saying that there is no burden except for the marginal tax rate point: there's no burden when in the future, future taxpayers are taxed in order to pay future bond holders. What's the difference? Okay, they are in the future. So? Russ: I think he'd say-- Guest: I think he clearly does not want the two--and we're picking on Krugman here; this is the view held by a lot of people prior to when Buchanan wrote-- Russ: Correct-- Guest: Krugman's just resurrected it. Krugman does not want the two to be the same. But I think they are the same in important respects. Not in all respects. But in the essential respect that just because the people who have resources confiscated or are citizens of the same country to whom those resources are transferred, does nothing to reduce the burden of the program.
1:09:24Russ: Well, I'm not sure. But the point I want to make a slightly different point that I think gives Krugman his due. And I think Krugman is consistent in a way you've suggested is inconsistent. I think fundamentally what the defenders of debt spending are saying today--the sovereign debt issue we're not going to talk about--obviously everybody agrees, people who want bigger U.S. government debt now, and those of us who are opposed to it, that if you make it too big, you could eventually risk default. The debate right now is: Is it too big now? There's arguments on both sides. You could argue that we're in perilous waters; you could argue there's nothing to worry about. I wish we had time to talk about; but we don't. I want to make a different point. I think the fundamental reason that Krugman makes the argument that he does, and people like him, who are arguing for bigger debt, is that when they say there is no burden, I think fundamentally they are talking about aggregate demand. Guest: Yes, yes, yes. Russ: I think they are saying--the reason there is no "burden"--I am going to call them Keynesians. I am going to get away from poor Mr. Krugman. He's certainly a Keynesian. Let's talk about Keynesians generally. Keynesians are worried about aggregate demand. And they are worried about spending. Those of us who are classical argue that that's misplaced emphasis, and maybe often wrong. But certainly a misplaced emphasis, in that while it is certainly true that in the future, when bondholders are repaid by taxpayers, there's no net change in aggregate demand then, that doesn't mean it's free. And of course, where I think, what is strange about that view of the Keynesians is that it's also true today. That when we issue bonds today, we are taking money from one group of Americans and giving it to the others, the people who are hired by the government or who benefit from government spending. In that sense, it's a wash on the surface, in terms of aggregate demand. They have to argue that: Well, the people who lent the money were going to keep it under their mattress or some other unproductive thing--and that's an interesting argument. We've had conversations with people about that before. But I think just fundamentally, intuitively why they ultimately look to the future and say this is not a burden is because they are saying: Well, aggregate demand is going to be preserved, so the economy is healthy, and we are going to get back on track. Guest: Yes, I agree with that. And even if we concede both the centrality of aggregate demand in a Keynesian way, we concede when American A pays American B, that does not--and I agree. That's what motivates a lot of this. By looking at aggregate demand, they so: Oh, because we owe it to ourselves, there is no threat to the economy. That may be true. That's a separate issue in macroeconomics. But it's very dangerous. Particularly for someone who has a public voice, of the kind that Krugman has. Very dangerous because it's wrong to say-- Russ: Maybe-- Guest: wrong to say that debt owed to ourselves is not a real burden. It makes it appear as if, at least to the careless listener, as if someone like Krugman is saying: Well, you know, it's not costless at all. As long as we borrow money from Americans and then tax Americans to pay that, then that somehow gives us an ability to get something for free. We get it for free. We don't have to pay for it. Well, if people believe you can get something for free and don't have to pay for it: Why not? Why would you pay? Russ: There's no budget constraint.
1:13:32Russ: So, let's come full circle. Let's try to take it back to the family level. Which Keynesians-- Guest: Krugman-- Russ: do not accept. My punchline, and the reason I don't like your car example, is that I think that's a reallocation of happiness and wellbeing among Americans. And you can debate whether that's good or just or whatever. Guest: And all I'm saying is it's costly. It has a cost. Russ: I understand. But I think the Keynesians would accept that. I think part of the confusion in this issue is definition of cost and definition of burden. And we've given our implicit definition. Guest: It is an intricate issue. Russ: But I'm going to cut through all that. And again, I'm going to talk about an expansion of government spending, not a reallocation of private consumption. A family who goes into debt on a get-rich scheme that is flawed. So, I go out and I borrow a huge amount of money to buy up an inventory of a product I think is going to be a world-changer. And it's a loser, it turns out. No one wants to buy it. Guest: You buy a warehouse full of chocolate pickles. Russ: Yeah, exactly. That's a mistake. And whether I fund that out of debt, with debt--that is, future consumption--or I say to my family: We are going to move into a really small house and we are not going to be able to go out to eat, and nobody can buy clothes and if you get holes in your socks and your shoes, too bad, because we are making an investment. We are going to be fabulously rich, because these chocolate pickles are going to be a huge success. It doesn't matter whether I borrow the money or whether I give up my consumption today. There's a cost to me, and all that really matters is whether chocolate-covered pickles are a hit. If they are a hit, it's only a question of when I pay for that investment. Guest: Yep. Russ: And I would argue--the part where I think both you and I agree and where we disagree with the Keynesians, is that if government goes out and does something gloriously productive like save us from an asteroid that is going to destroy us, it doesn't matter whether it's financed by taxes today or taxes tomorrow. If it's a good use of money, the only difference is who bears the burden of the debt. If it goes and buys chocolate covered pickles because it thinks those protect us from an asteroid--that's a bad example--because they think it's going to improve the health of the nation, it doesn't matter whether it's taxed or borrowed. It's a bad use of real resources today. Guest: Right. So, to put a codicil on that, the reason we should have a preference for funding government expenditures out of current taxation rather than the future debt, is because current taxpayers are a bit more likely--not perfectly so--a bit more likely than are future taxpayers to monitor-- Russ: the quality of what the government spends the money on. Guest: The amount and the quality. And so, to the extent that government pushes those burdens into the future, it's released from fiscal constraints--healthy fiscal constraints--than would otherwise exist today, if anything had to be made out of current tax dollars. And then, so the people could--Keynesians just say that, 'Well, if it's pushed off into the future it's not really a burden. If we owe it to ourselves it's not really a burden.' That makes the issue even worse. Because then people today would say, 'Oh. Well, in that case, we don't have to worry. We are getting something for free. We are getting something that doesn't cost us as a group anything. So, go for it. Chocolate covered pickles. Let's go settle Pluto. It's all free.'
1:17:21Russ: Before we close, I just want to raise one semantic issue. And then an issue about expectations, something we haven't talked about. And the semantic issue: the reason I think that Keynesians would agree with you about your car example is they'd say, 'Well, sure it's a burden on the people who financed those transfers. But it's just a transfer. The total number of cars stays the same. I agree with that. And that's why I think it's important to make a distinction between real resources that get used by government spending, regardless of how they are financed and whether they are productive is what matters--of course, as transfers. Now, a transfer of, say, pure money--forget the cars--a pure money transfer, say, from rich to poor, or politically unpowerful to politically powerful, that has disincentive effects because the taxes ultimately have to be raised to pay for it. Everybody agrees with that. I think we may disagree about how large those disincentive effects are, of higher tax rates. But I think it's important to distinguish between transfers versus real spending--spending on real resources. Of course, the government transfers relentlessly, large amounts from one group to another. The group that's losing their money is going to respond by not trying to accumulate as much. That's the disincentive effect that I think everybody respects. But I think the key in this whole area, when you talk about the burden: I think the Keynesians would agree there's a burden on the people who lose the transfers, who are paying the taxes. But they'd say the net burden, the total effect, is zero. And I think they'd be roughly right. But not with real resources. Not when we're building a bridge or tanks or other things that mean we have less today. Guest: Look, I don't want to go to the mat defending that particular example. But here we have a connection between some of Buchanan's most famous work and Gordon Tullock's most famous work. Gordon Tullock's most famous work, his 1967 piece on, using his term, on rent seeking. Obviously, when you are transferring monetary claims, at some point, they are going to result in resource use. The problem with the 'it's not a burden if we owe it to ourselves' discussion in language is that it conjures up the image of people the wrong impression that if government borrows, and if the holders of the debt are citizens of the same country of the government that issued the debt, then it's a free lunch. Then we can get for all these things without anyone having to pay for it. It's not a burden. And the fact that, the fact that politicians are spending other people's money--and in this case are spending the money of people many of whom are not even voting yet--that means they are going to overspend. That means that they will spend less prudently; and they will spend more than they would if the people who were enjoying the actual resource transfers had actually to pay for them. Directly.
1:20:39Russ: And that brings us to the last point I want to talk about. Which is expectations. We have not talked about the fact that people look ahead. They anticipate consequences in the future that might be set in motion today. The classic issue that's raised in this area is debated as Ricardian Equivalence. Guest: Named after David Ricardo. Guest: David Ricardo. And what people are often talking about there is whether current taxpayers, anticipating higher future taxes, offset the alleged stimulative effects of government spending by saving more to pay off their future taxes. And a lot of people are skeptical about that. But what I think no one is skeptical about, and I just want to bring this in as a footnote to the political economy point you are making, I think a lot of future taxpayers are alive today and know who they are. I may have agreed with you a little too quickly on. Obviously, the big debate that's going on right now in America is that people look at large increases in government spending financed by debt and realize--I'm not going to end the discussion right now with how they respond today. But they are certainly aware of it. and part of the reason they are opposed to it is they do realize they are going to have to pay for it. Guest: Right. And with their--in a sense what they are opposed to is, to the extent that that's true, then it proves Buchanan. They want to keep the level of spending and debt down because they know it's not a free lunch. Russ: Yeah, correct. Guest: And look, on your Ricardian equivalence point, I think it's become more of a historical--I think it's more of a sort of intellectual curiosity than a substantive point. I mean, it may be real in some sense; it may exist in some sense. It does exist. But it detracts from Buchanan's main point. The point is, whoever pays the taxes in the future--there will be taxes that are raised in the future to pay off the current debt. It's possible for people today, and caring about their children and grandchildren, to in fact then set aside more money today than they otherwise would and pass it along. In which case, in those particular instances, that burden is borne by people alive today. And the people who write the checks just happen--the people in the future just happen to be the ones who write the checks. And they just passing along wealth lent to them, given to them, bequeathed to them by their prescient forebears. But the reason that's not empirically important, I think, the very reason politicians so readily borrow and spend today is because people today don't want--they want the goodies today and they don't want to pay for them. Russ: Yeah. Whether it's going to end up being them or their children, it's further down the road. An impulse to push that down there. Guest: Yes. Russ: My guest today has been Don Boudreaux. Don, thanks for being part of EconTalk. Guest: Always a pleasure. I'm indebted.