The false analogy between private and public debt

3 Sep, 2015 at 17:17 | Posted in Economics | 6 Comments

national debt5One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external. It is owed by one person to others. That is what makes it burdensome. Because it is interpersonal the proper analogy is not to national debt but to international debt…. But this does not hold for national debt which is owed by the nation to citizens of the same nation. There is no external creditor. We owe it to ourselves.

A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

6 Comments

  1. JKH, I’m glad we agree on Barro’s Ricardian Equivalence, but it just makes your claim “Wealth drops because bonds disappear. That’s a burden on the future generation (private sector) as a whole.” more puzzling.
    .
    I take “burden” to indicate an event adverse to welfare, or the capacity to satisfy wants. It is not clear to me why a decrease in tax-funded wealth would be a burden on society “as a whole” in any and all future circumstances. Are we to suppose that wealth is always and everywhere an unalloyed good thing? That a society can never have too much wealth for its own good?

    Comment by Bruce Wilder— 8 Sep, 2015 #

  2. This story is well known and preached by the MMTers as disciples of Lerner.

    Unfortunately it’s not quite right or consistent – even in MMT’s own context.

    The key criterion is whether there is a government surplus – not who is paying to whom.

    A government surplus reduces outstanding debt and thereby reduces the “net financial asset” position of the private sector with the government, as the MMTers like to say (assuming a closed economy for simplicity).

    That’s a reduction in private sector wealth, other things equal, even by the MMTers own concepts.

    Which would seem to qualify as a burden on the private sector.

    The mere fact that the money is paid from a future generation to itself doesn’t disprove the potential for a future generational burden.

    There is obviously no net burden in the sense discussed if new bonds are issued to replace maturing bonds, and the holders of maturing bonds are different from the buyers of new bonds. Both are in the future.

    But this is not the case if future taxpayers pay off bonds on a net basis.

    If there is a budget surplus, outstanding bonds are reduced.

    So private sector wealth drops, other things equal, even by the MMTers own definition. Wealth drops because bonds disappear.

    That’s a burden on the future generation (private sector) as a whole.

    There are some quasi-mainstream economists who occasionally have a go at this with an overlapping generations model, in an attempt to make the same point (e.g. Rowe, Murphy). But that’s a very roundabout approach to what is a pretty simple idea.

    Comment by JKH— 5 Sep, 2015 #

    • “A government surplus reduces outstanding debt . . . That’s a reduction in private sector wealth, other things equal, even by the MMTers own concepts. . . . Which would seem to qualify as a burden on the private sector.”
      .
      The immediate exchange is of one form of government debt for another. In the case of a government surplus, such that the total debt is being reduced, this collapses into the government creating for itself an asset in the form of taxes, taxes being a debt owed by the private sector, and the private sector extinguishing that debt against the debt of the government to the private sector. The debt owed to the government (taxes) are extinguished on net by the debt owed by the government (bonds).
      .
      It would qualify as “a burden” if this exchange of paper claims affected utilization of the real productive capacity of the economy adversely.
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      Conservatives often claim that all taxes constitute a burden, in the sense that taxes are typically placed on productive economic activity and necessarily (by extension of the law of diminishing returns and similar arguments) discourage and reduce productive economic activity, by blunting the incentives to engage in those activities.
      .
      By Barro’s Ricardian equivalence and rational expectations, should the government run a surplus and pay down debt, taxpayers would anticipate that this policy foreshadowed lower taxes in the future and act in the present as if a burden were lifted. (This is idiotic, but it is consistently idiotic, making it an arch template of conservative argumentation.)
      .
      Lerner, following Keynes, argued that full utilization of the productive capacity of the economy required management of aggregate demand. The ability to fully utilize the productive capacity of the economy in the present moment — any present moment — may be adversely affected by fluctuations in the desire of people (the private sector) to hold financial assets and/or to spend variously on consumption or investment.
      .
      If the government were to run a surplus at a time of full employment, and use the surplus to reduce the marketable national debt in the hands of the private sector at a time, when it was not much wanted for its promise of financial security, it is difficult to see where the burden would fall. Under such conditions, Barro’s fairy tale rendering would apply in full: people should act as if a burden were lifted, anticipating a reduction in future taxes.

      Comment by Bruce Wilder— 6 Sep, 2015 #

      • “By Barro’s Ricardian equivalence and rational expectations, should the government run a surplus and pay down debt, taxpayers would anticipate that this policy foreshadowed lower taxes in the future and act in the present as if a burden were lifted. (This is idiotic, but it is consistently idiotic, making it an arch template of conservative argumentation.)”

        Ricardian equivalence is a tautology and a non-idea in effect at the macro level, since the debt already constitutes the cumulative private sector saving that is available as necessary to prepare for any contingent repayment of the debt. The actual maturity of debt provides for the means of contingent repayment.

        Perhaps that’s consistent with the consistency you note above.

        Point taken on the full employment situation, although any reduction in government debt at any employment level means a reduction in nominal private sector wealth, other things equal.

        (I’m not sure how to analyze consistently the effect of a full employment debt reduction on real private sector wealth.)

        Rephrasing my earlier point, it’s about this:

        “Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.”

        That really won’t do. The same intra-generational payment takes place whether the payment is for a tax (and perhaps a marginal surplus) or for the refunding of a bond maturity (assuming the buyer of the new is different from the holder of the old).

        But the aggregate private sector (nominal) wealth effect is very different.

        Comment by JKH— 6 Sep, 2015 #

    • Sure, gov’t surpluses can be problematic, but that only means that gov’t surpluses are a problem, not that gov’t debt is a problem.

      Comment by Min— 8 Sep, 2015 #

      • To be clear, I don’t mean that gov’t surpluses are always problematic, just that they can be, just as gov’t deficits can be problematic. But gov’t debt per se is not problematic, as we have set things up.

        Comment by Min— 8 Sep, 2015 #


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