Public debt — how much is too much?

19 Oct, 2020 at 11:56 | Posted in Economics | 2 Comments

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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.

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?
No.

2 Comments

  1. In response to your bottom questions #4, when we look at how governments, for example the US, actually spend money, isn’t it fairly obvious that we are burdening future generations?
    For FY 2019:
    Mandatory spending was 2.7 trillion dollars and basically all of that is simple transfers (not investment)… Social Security, Medicare, Medicaid, Income Security, Veterans Benefits, etc

    For discretionary spending (1.4 trillion dollars), most of that is spent on the military (53% military spending, 6% Veterans). It seems fairly obvious to me that most of what we are going into debt for is current consumption, not current investment.

    Comment by Matt D— 21 Oct, 2020 #

  2. Dear Lars, I have been writing on this issue, especially in the context of developing countries, distinguishing between domestic and external debt, long before MMT, as well as critiquing inflation targeting. I was also one of the very few commentators who were warning against pre-mature fiscal consolidation in the wake of the GFC.
    “The G8 Finance Ministers and the ‘Green Shoots’ of Recovery: The Pitfalls and Perils of a Premature Exit Strategy”, 18 June, 2009, (with Iyanatul Islam), http://voxeu.org/debates/commentaries/g8-finance-ministers-and-green-shoots-recovery-pitfalls-and-perils-premature-exit-strategy

    Here are the links to some my commentaries which readers of your blogs may find interesting.

    “Is there an optimal debt-to-GDP ratio?” (with Iyanatul Islam), 9 November, 2010, http://voxeu.org/debates/commentaries/there-optimal-debt-gdp-ratio

    “Fiscal deficits – the myth of debt and inflation”, (with Neil Hart), 19 October, 2009, http://voxeu.org/debates/commentaries/fiscal-deficits-myth-debt-and-inflation

    “Crisis: Should we worry too much about fiscal deficits?”, (with Neil Hart), 21 September, 2009, http://voxeu.org/debates/commentaries/crisis-should-we-worry-too-much-about-fiscal-deficits

    “Fiscal Rules – Help or hindrance?” (with Iyanatul Islam), 4 October, 2012, http://www.voxeu.org/debates/commentaries/fiscal-rules-help-or-hindrance

    “An Optimal Public Debt-to-GDP Ratio?” G-24 Policy Brief No. 65 September 2012 (with Iyanatul Islam); http://www.g24.org/Publications/PolicyBriefs/PB65_Public%20Debt_Edited.pdf

    “Budgets Should Cater To The Will Of The People, Not To The Whims Of The Ratings Agencies”, 23 May, 2017, http://www.huffingtonpost.com.au/anis-chowdhury/budgets-should-cater-to-the-will-of-the-people-not-to-the-whim_a_22102536/?utm_hp_ref=au-homepage

    “Achieving A Surplus Is Not As Important As Investing In Australia’s Future”, 20 March 2017, http://www.huffingtonpost.com.au/anis-chowdhury/achieving-a-surplus-is-not-as-important-as-investing-in-australi_a_21902868/

    Comment by Anis Chowdhury— 20 Oct, 2020 #


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