Rethinking public debt

13 Jul, 2020 at 13:43 | Posted in Economics | 13 Comments


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.

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.

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


  1. Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. Stephanie Kelton

    Being inherently risk-free, the debt of a monetary sovereign like the US should return at most ZERO percent MINUS overhead costs = NEGATIVE.

    Otherwise we have welfare proportional to account balance rather than according to need.

    • Agreed. In fact the “permanent zero interest rate” (on govt debt) idea is more or less official MMT policy I think. Milton Friedman went along with that idea, though he though war-time could be an exception. I agree with the idea, though I’d always retain interest rate hikes as an emergency measure to be used just occasionally.

  2. The current practice is to use the economy and people to serve or balance the budget. The budget should be used to balance the economy and serve the people.

    As I have pointed out before, when the first governor of the fledgling Bank of Canada, Graham Towers, was asked about the mounting debt for the WWII war effort, he said it was not a concern because it was a private sector asset. The finance minister at the time, J. L. Ilsley then mused in parliament, if that is the case, how do we make the debt an asset of the people.

  3. From this:
    By Richard Vague.
    Private debt is a beneficial and essential part of any economy. However, as it increases, it can bring two problems. The first is dramatic. Very rapid or “runaway” private debt growth often brings financial crises. Runaway private debt growth brought the 2008 crisis in the United States, the 1991 crisis in Japan, and the 1997 crisis across Asia, to name just three. And just as runaway debt for a country as a whole is predictive of calamity for that country, runaway debt for a subcategory of debt, such as oil and gas or commercial real estate, is predictive of problems within that subcategory.
    The second problem it brings is much more subtle and insidious: When too high, private debt becomes a drag on economic growth. It chips away at the margin of growth trends. Though different researchers cite different levels, a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth.

    Then this:
    The story is similar for private debt. Private debt deleveraging has usually only been possible because of offsetting public debt increases. Japan’s private debt ratio reached a whopping 221 percent in the lead up to its 1990s crisis. But luckily for Japan, its public debt ratio at that time was only 86 percent. In the two decades following Japan’s crisis, private debt has deleveraged from 221 percent to 170 percent (which is still too high), but that deleveraging was enabled by a massive increase in the public debt ratio from 86 percent to 246 percent. Private debt declined by ¥260 trillion, but public debt grew by ¥810 trillion, and the combined impact of this debt increase was growth of zero in nominal GDP.
    And finally:
    The good news is that history suggests a fourth way. The process of elimination in the preceding paragraphs leads one to consider an obvious but largely overlooked way: private debt restructuring. It is the primary mechanism through which the absolute level of private debt can be reduced without directly and negatively affecting GDP. The easiest and most direct way to increase consumer spending (or demand) is to cut consumer debt. The easiest and most direct way to increase business investing is to cut business debt.
    End Vague out takes.

    So history empirically teaches converting private debt into public debt per MMT through sectoral balance wont work. Debt write down through some sort of Jubilee or restructuring of private debt without its conversion to public debt should work.

  4. “Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. Stephanie Kelton”
    Did Stephanie K. actually say this?
    If she did, she is contradicting MMT.
    Taxes aren’t supposed to fund anything.

    • “Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt.”
      Looks like Lars said this.

      • I think this is a statement of effect E.g. political choice and not one of functionality, hence why the subject matter is convoluted due to hangovers from the past. In my view its akin to banks still using old IBM mainframes, high overhead costs vs the – fear of risk – factor in migration.


        Whichever way there is a lot of backside exposed and who wants to own the potential down side.

        • “who wants to own the potential down side.”
          The Fed.

          • Its congress that “owns” that responsibility and not the FED.

            • Right now, the Fed is trying to keep US debt yields up, not down … Congress and the public are woefully ignorant about how banks profit from yield arbitrage. But even flat curves don’t matter if you use butterfly trades. Instead of the rigamarole we have now with the Fed doing things Congress has no inkling about, Congress should just tell the Fed to implement basic income on its balance sheet …
              My point is that there are plenty of buyers for US debt, and interest rates keep going down despite massive supply increase. The Fed (not taxes) is the ultimate downside insurance. Markets accept this and we should take advantage by using the Fed’s power of unlimited liquidity to fund good ideas such as basic income.

      • Either way, Lars is back to the gulag for 6 months of re-education.

  5. “two over-arching macroeconomic goals — full employment and price stability.”
    The problem is that these two goals assume ergodicity. Employment was full before the recent pandemic, but many wages were needlessly stagnant; a few may benefit from full employment but, just like Ole Petersen’s diagrams showing an average ensemble increasing while the majority of individual time-series decrease, most of us do not benefit from full employment.
    Stable prices also assumes ergodicity: the ensemble average may remain stable while rent increases so much as to drive many of us into homelessness.
    Much better macroeconomic goals: basic income and automatic inflation adjustments.

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