Is public debt — really — a burden on future generations?

20 Apr, 2019 at 18:48 | Posted in Economics | 9 Comments

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

To both Keynes and Lerner — as to today’s MMTers — it was evident that the state has the ability to promote full employment and a stable price level — and that it should use its powers to do so. If that means that it has to take on debt and underbalance its budget — so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.


  1. “even foreign loans can be beneficent for the economy if invested in the right way”
    I think this qualification, offered as an aside, is an unfortunate distraction from an argument that really ought to be pressed home without such distractions.
    The notions that a state borrowing from its own taxpayers creates “a burden” for the common wealth or that the future can have its collective freedom of action constrained by public debt draw on emotional associations most people have with debt, emotional associations born from painful personal experience.
    Economics, in proposing careful, logical analysis of the mechanisms of money and public finance, is introducing a realm of institutional action foreign to most people’s experience. And, honest economists must do this work in a contested political discourse where other less scrupulous but credentialed economists will wave their hands and continue to leverage those emotional associations to promote ignorance as a means to further the political interests of a few.
    Considering the challenge of the task, it seems to me that the appropriate emphasis is first on the irretrievable loss of the opportunities of the present moment, second on the fact that creating public debt creates in itself the means of paying the taxes that finance that debt, and third, that a marketable public debt financed by an efficient fiscal regime is itself a means of stabilizing the payments system.
    This last point — the usefulness of money as a stabilizing means of hedging and insurance — is not, imho, made often enough or clearly enough in discussions of money or macro policy.

  2. See
    Treasury new issues technically cover redemptions, so taxes don’t even have to fund borrowing; Treasury redemptions are less than new issues, so the new loans pay off the old and then some.

  3. Dear Lars,

    I have two questions:

    1. How to ensure that the debt is held only by residents?
    2. If these government investments are sound, as you assume, why not financed them by taxes?

    • 2. If these government investments are sound, as you assume, why not financed them by taxes?

      Possibly due to concerns about myths about scarcity along with user pays ideological framing.

    • Why not finance investment spending with taxes?
      The smart-ass (and technically correct) MMT answer is that the state with monetary sovereignty does not finance spending with taxes; it spends money into the economy, adding to the amount of money available to make demand into effective demand. The state creates the money the state needs to spend, and in the process creates additional money everyone else needs in order to spend as well, and if the economy is performing at less than resource capacity, that is, if effective aggregate demand has heretofore left resources including labor idle, then the additional money is needed to bring effective demand to levels of activity that fully employ the capacity of the economy. If the economy “overheats” from the addition of money, then taxes or borrowing are needed to extinguish the excess.
      This is the question posed by Ricardian Equivalence. If RE obtained, there would be no difference in the effect on total aggregate demand driving economic activity, of having the state draw it off by taxes or borrowing. RE never does obtain. Because people need money to save as well as to spend.
      You do not even begin to understand money until you realize that firms and households need money to save as well as to spend. (Money is much more than mere currency.)
      The state, as supplier of base money, has to supply money to save as well as spend.
      As it happens, a state that can efficiently tax economic rents is in a good position to match increasing expected tax revenues with successful investments in public goods such as scientific research, education and transportation or communication infrastructure that enhance productivity and efficiency, such that a virtuous cycle of public goods investment that pays for itself is conceivable, but that is another story.
      The state borrowing money in the form of marketable securities of various terms, the central bank making a market in same, supplies money in forms that facilitate saving as well as spending. Saving allows households and firms to reduce risk (or at least their aversion to risk, which is much the same thing as far as the willingness to spend and invest is concerned) facilitating higher levels of effective demand. As a source of “risk-free” liquidity, the marketable securities of the monetary sovereign are especially necessary to the stability of the banking and payments system thru which money-saving, credit and spending flow.
      I hope you do not my inserting my answer.

    • Why not finance via taxes? Both of the co-founders of MMT, Warren Mosler and Bill Mitchell have written articles arguing that government borrowing is totally unnecessary. Milton Friedman argued likewise.

      • Milton Friedman went thru a phase where he was all hot to eliminate fractional reserve banking, too. And, he never did recover from his infatuation with a Quantity Theory of Money. Mosler and Mitchell ought to know better.

  4. This post exemplifies the pathetic muddle and confusion that still prevails among economists regarding the alleged “burdens” of national debt.
    Lerner was confused. Prof. Syll even more so. Me too, I was drowning, until very recently.
    But now:
    “I’m Free” [ The Who:- ]
    & “I can see for miles and miles”
    [ ]
    NB. The analysis below applies to the bonds of a currency issuing sovereign government, denominated in its own currency. It does not apply to bonds denominated in a foreign currency.
    Debt burdens denominated in the domestic currency of a sovereign government are a chimera, figments of the imagination. Contrary to Lerner and Prof. Syll, there are no such debt burdens! None whatsoever!
    There are no burdens on the present generation, none on future generations, none on bondholders and none on taxpayers.
    Zero burdens irrespective of whether bondholders are domestic citizens or foreigners, and irrespective of the locations of their residences.
    Zero burdens irrespective of future rates of inflation and irrespective of whether or not interest and redemption payments are index-linked.
    Zero burdens irrespective of whether loans are earmarked for particular projects and irrespective of the net benefits of projects in cost-benefit appraisals.
    And with no burden on anybody, there is no burden shifting between generations or between taxpayers and bondholders, or between any other groups in society.
    The guts of the explanation is as follows:
    (1) Government activities in bond markets (apart from coercive taxes and regulations) don’t affect the net worth of bondholders:
    – Bond sales reduce bondholders’ money balances
    but there is an equivalent increase in their bond holdings.
    – Bond redemptions increase bondholders’ money balances
    but there is a simultaneous equivalent reduction in the value of their
    bond holdings.
    This applies both to bond redemptions upon maturity
    and to redemptions prior to maturity. (The latter are sometimes called
    quantitative easing, debt monetisation or debt withdrawals.)
    – Interest payments increase bondholders’ money balances
    but there is a simultaneous equivalent reduction in the value
    of their bonds (due to the difference between the market prices of bonds
    cum-interest and ex-interest).
    – Debt Roll-Overs are a combination of bond redemptions and sales,
    so there is likewise no effect on the net worth of bondholders.
    (2) Bond acquisitions can be reversed quickly with only minor costs. Bonds can be exchanged for money by sales on financial markets or by using bonds as colateral to obtain loans from banks. Such portfolio adjustments can be usually effected within a few days, with costs due to commissions and taxes totalling merely a few percent.
    (3) Because of (1) & (2), bond sales, interest payments, redemptions, roll-overs, etc. have no significant effects on bondholders’ spending on consumption or investment goods.
    This implies no change in macro-economic demand or supply, and no changes in the resources available to the government or taxpayers. So there is no consequential need for any changes in taxation or government spending.
    (4) It follows from (3) that there are no burdens to taxpayers or to the beneficiaries of government expenditures, or to anyone else.


  5. Deficit spending is covered by floating bonds. The bonds represent govt debt. Each year the budget includes interest payments on the bonds and principle payments on mature bonds. So there is a sort of Ponzi scheme occurring. However, the Fed does simply print money to maintain the money in circulation which is often not accounted for from credit transaction that result in savings.

    The problem is political; supply side policies assert that tax cuts increase employment and therefore GDP and reducing the welfare costs covers the tax cuts, but they don’t and govt’s everywhere are spending beyond their tax revenues. This is not as it appears; tax cuts at one level of govt are passed to another: Fed to State to city to property owners, in short workers and residents are footing the bill for tax cuts and bonds to the investing class.

    The Republican Southern Strategy of bundling tax cuts with welfare reductions is a racist policy which couples education and housing for the poor with a dramatically expanded prison system and its attendant proliferation of police officers, courtrooms, lawyers for prosecutions and investigating departments, but to mention sentencing elongations. This is the root of deficit spending!

    Many other nations face the same problem of deficit spending but are unable to either float bonds or simply print money due to restrictions from International Banks: EEB, IMF, WB, etc. Thus, they are required to reduce their debt by imposing austerity cuts to public goods which impacts public service employment.

    Future generations ( we should speak of yearly cohorts since generation is a loose temporal term, 15, 16, 20 years?) are burdened by debt bc their taxes must pay for the 100%+ debt over GDP which many states are at now, including the US. The solution is to demand that corporations pay their taxes from their profits and not reducing productivity which is how that have national govt’s by the balls.

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