Rethinking public debt

16 Aug, 2020 at 11:01 | Posted in Economics | 12 Comments

wrong-focusPublic debt is normally — as emphasized again and again by MMT economists — 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.

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.

This 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 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. Price stability assumes ergodicity: it assumes everyone experiences the same average price inflation. In reality, some benefit from inflation or it would not occur. Inflation swaps are a way for inflation makers to harvest inflation insurance premiums so that inflation takers are assured prices won’t rise above their tolerance level. Inflation swaps are the market’s way of handling the non-ergodicity of prices.
    Employment is also ergodic. The average wage is not the median. The well-being of those with employment is often so far below the expected average well-being that people with good jobs commit suicide, self-medicate, etc.
    It is surprising that a non-ergodic economist nevertheless is marries to ergodic phenomena such as employment and price stability.
    “In the aggregate plus and minus have to balance.”
    Except rehypothecation means the same asset appears on two or more balance sheets. Finance makes money emerge …

  2. Total debt, the sum of total private debt and public debt remains remarkably constant over time, growing in tandem with GDP.

    When total debt grows ahead of GDP there is hell to pay because the debt service costs exceed income for private debt and total debt To GDP is stubbornly resistant to change. MMT does a poor job of acknowledging this.

    • the essay by Michael Hudson, with Dirk Bezemer, Steve Keen and T.Sabri Öncü, makes critically important points. thank you for linking to it.
      I would add that it is not the quantity that matters so much as the integrity. Excessive quantity on the private side is a symptom of the decay of integrity.
      On the public side, it is how the state goes about levying taxes. The right thing to do, in general, is to tax economic rents heavily while minimizing the burden of taxes where the effect on effort or choice is likely to be felt badly. Tax monopolies, location, the very lucky; leave bread alone.
      It is a problem, though, when, as in the U.S. the richest people and the most profitable business corporations pay very little in taxes even while the public debt balloons out and the public debt is used profligately to redeem toxic debt instruments issued willy nilly by criminal conspiracies constituted as the largest banks.

      • MMT points out that the Debt to GDP ratio is meaningless and I would argue that we should not be using the GDP as a measure — it was never designed to be used that way — of progress. A major disaster like an earthquake or hurricane or typhoon massively increases the GDP in the ensuing cleanup and rebuilding. In any case, the Debt to GDP ratio of Japan is 240% which is more than twice what other countries consider to be a problem but does not appear to be a problem there.

  3. This part is a charm: “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.”
    Who are these “members”, Lars?

    • Well, I haven’t thought of aggregate book-keeping identities as charming, but OK. Nothing deep or intriguing intended. In the aggregate plus and minus have to balance. The really interesting and controversial issue — when the basic aggregate identities are understood — is the distributional one.

      • Thanks for the reply, Lars.
        Exactly. The critical issue is the distributional one. And my question to you would be:
        Why does a government need to offer investment opportunities for wealthy people to acquire the resources for carrying out its functions?

        • Do we know that it is an investment opportunity ONLY for wealthy people? The minister of Finance during WWII mused that if the debt is a private sector asset, how do we make it an asset of the people?

          In Canada banks hold about 14% of the debt (having never held more than about 24% in total over the decades) and over 50% is held by “residents” of Canada — whatever that means. Instead of getting bogged down in assumptions about who holds the debt do we not need an analysis? The variance of foreign holders of Canada’s debt has ranged from over 20% (if memory serves) to as low as 4% over the decades.

          Again in Canada, the Canada Pension Plan, amongst other large pension plans, holds large portions of the debt while the fund managers look for other investment opportunities for those short term holdings. Other opportunities often include the banks that hold part of the debt also.

          I would hazard a guess that BlackRock also holds a large portion of many national debts but I do not know that for a fact. More research seems to be needed.

          • Such empirical research would be indeed interesting. Like you, I am just making an educated guess here. People who struggle to pay down their debts or to meet their basic needs are probably not the ones who wake up someday and say to themselves: I think I am going to divert some of my income from consumption into buying government bonds.

            • Every worker employed in Canada is required to contribute to the Canada Pension Plan for about 8-10 months a year with matching contributions by employers. Even self-employed workers can contribute. Many large employers especially in the public sector have other pension plans again with matching contributions by employers. I contributed for 35 years to OMERS, teachers have OTIP, and others have different plans not to mention the RRSPs. When these are defined benefit programmes, the payouts are inflation protected with annual increases based on inflation figures. Again partly funded by the purchase of government debt in the form of bonds and t’bills and thus again for ordinary Canadians.

              So that is a massive amount of money every month that must be invested as well as disbursed. The obvious choice for that is bonds and t’bills until a better investment appears. Thus, that portion of the debt is an asset held on behalf of ordinary Canadians. It is rolled over every month because the CPP continues to collect from ordinary Canadians.

              Should the government fund the construction of hospitals, airports, roads, universities, schools, colleges or other infrastructure financed by selling bonds that is also an asset of ordinary Canadians.

              Should the Bank of Canada hold those bonds — some of which it is required to do — the interest paid to the BoC is returned to the government minus the the costs of of their operations. Again an asset for ordinary Canadians.

              • Yes, but who has to pay the pensions when they are due? The bread that a retiree will eat in 10 or 20 years, or the resources consumed during his/her winter vacation in the Caribbean, are not produced now and kept for this moment. They will be made at that precise moment and will be transferred by some sort of mechanism. Pension funds are one of the possible options.

                • The pension fund will have hopefully invested in products with a healthy return growing exponentially over the years. My plans provide a return of 5-10% which means they will double in 7-14 years. No problems. You still seem to be ignoring that debts are also assets. Government debts are private sector assets which can grow. As well, the things in which they invest in NOW provide goods and services to people NOW. I contributed to CPP for 52 years and other funds for 35 years all of which grew exponentially during that time. More than doubling at 5% every 14 years. More than doubling in seven years some times.

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