Don Boudreaux on Public Debt
Tuesday March 27th, 2012 • Posted by Emily Skarbek at 7:33am PDT • 2 Comments
Readers of MyGovCost will likely be interested in this week’s Econtalk podcast with Don Boudreaux on the nature and significance of public debt.
Roberts and Boudreaux begin by discussing debt at the household level and then work to draw out which lessons apply to the spending of a federal government. In doing so, the discussion addresses arguments put forth by Krugman and others that “we owe it to ourselves”. In this view there is no burden of the public debt as long as the purchasers of U.S. debt are fellow Americans.
Boudreaux discusses the work of James Buchanan, particularly Public Principles of Public Debt: A Defense and Restatement, arguing that there is a burden of the debt and it is borne by future taxpayers. Boudreaux argues that all public expenditures have a cost. The difference between tax and debt financing mechanisms determine who bears the burden of that cost.
Spending over revenue is politically attractive because it pushes the costs into the future. As we have discussed before, our current budget is DAFT because Debts Are Future Taxes. And because taxes lie in the future (and those who will pay for them may not be alive yet or clearly identified) it is easier for politicians to push-off making the necessary actions to balance the budget.
The current budget proposal put forth by Paul Ryan is a prime example. As Nick Gillespie of Reason Magazine explains in this short interview, if we don’t reduce spending below 19% of GDP – we are in a debt increasing scenario. Period.
The conversation over at Econtalk closes with a discussion of the role of expectations in both politics and economics of debt finance. I highly recommend this podcast for anyone interested in understanding these issues.
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Debt that we owe to ourselves is partially correct.
If we look at the 2 types of debt – debt held by the public, at about $10 trillion, and intragovernmental debt, at $5 trillion – the $5 trillion of debt is, in my opinion, debt we owe ourselves., debt that is owed to the collective.
It is the definition of “ourselves” that is important.
For practical purposes, ourselves is defined as everybody and nobody, for no one is being paid back this debt.
We know this debt was created by borrowing from various trust funds.
We also should know that this borrowing was not supposed to occur, particularly with the Social Security trust fund, which is about half of intragovernmental debt.
Instead of staying intact, in nonmarketable government securities, we found a way to strip the “untouchable” securities, intended solely for Social Security beneficiaries, to pay off real current expenses, and to lower real deficits.
All that remains in the debt we owe ourselves is a hollow artifact of what used to be principal and interest, stored wealth, a real trust fund.
What many people believe is that this intragovernmental debt is harmless, for it is backed by the full faith and credit of the U.S. Government. It is this arrogance that annoys me, this feeling that the Federal Government rises to almost a God-like quality. Indeed, there are even people who believe that the federal government breathes money into existence, as God created the world with 10 utterances.
There are even those who believe, due to this Creative power, that Medicare Part D is fully funded!
It is this inability to take debt seriously that is ruining our fiscal balance sheets, both household and government.
Even debt held by the public, which is an explicit liability, the highest of 4 levels of obligations to fulfill, is seen as an interest-only loan, with no ballooning of principal to be paid at anytime in the near or far future.
Don Levit