It's budget time, again. This means that the deficit hawks will be out in force warning us about the devastating debt burden that we are passing on to our children. So that this Halloween fright gang doesn't needlessly cause any kids to lose sleep, here's what parents can tell their children.
First, it is important to tell your kids that the national debt is not in any way a measure of intergenerational transfers from the young to the old. Debt is also an asset to the people who own the bonds. At some point, everyone who is alive today will be dead, which means that the bonds they own will be passed on to their or someone else's children and grandchildren.
Our children and grandchildren might owe the debt, but they will also be receiving the interest paid on the debt. There can be an issue of distribution within future generations (e.g. Bill Gates' descendants own all the debt) but that is a question of inequality within generations, not between generations. So when you hear the deficit hawks ranting about the $15 trillion debt that we are passing on to our kids, you can tell your children that we are passing on $15 trillion in government bonds to our children.
Of course some of the debt is held by foreigners. Many of the deficit hawks have been harping on the China menace, running scary ads about how the Chinese are going to own the United States in 20 or 30 years. While the debt service paid on the bonds held by foreigners will be a drain in future years, there are two important points to keep in mind. First, the outflow on interest payments on bonds held by foreigners is still quite small by any measure.
The second and more important point is that foreign ownership of government bonds and U.S. assets more generally is determined by the trade deficit, not the budget deficit. It is our $600 billion annual trade deficit that gives China and other countries the means to buy up government bonds and other U.S. assets.
The trade deficit is in turn primarily the result of an over-valued dollar. This means that if the deficit hawks were really worried about foreigners owning too much of the U.S. economy then they should be railing about the over-valued dollar, not the budget deficit. When the deficit hawks rant about China owning the U.S., they are either confused or being dishonest.
There are certainly times when deficits can make our children poorer than they otherwise would be. If the economy were operating near its potential, and the deficits had the effect of raising interest rates and pulling money away from private investment, then the economy would be less productive in the future as a result of the deficit.
However, the relevant measure here is not the deficit or debt, but productivity growth: the rate at which the economy is getting more efficient. Productivity has continued to grow at close to a 2.5 percent annual rate, meaning that the economy is getting more efficient at a relatively rapid pace.
This is not surprising, since it is absurd to imagine that current deficits are pulling money away from private investment. Interest rates are at near-rock-bottom levels. Given the huge amounts of excess capacity in most sectors, it is likely that the deficits are actually increasing investment by increasing demand. In this sense, deficits are making our children richer. This would be even more true insofar as the deficits are being run to build infrastructure or to finance education and training, all of which will make the economy more productive in the future.
There is an issue with the debt that is worth discussing: The country will have to raise tax revenues to finance its annual interest payment. This does impose an economic cost, since taxes are at least somewhat distortionary. However, this problem is enormously overplayed.
Suppose that we eliminated $1 trillion of our debt burden by selling off public roads and allowing private companies to charge tolls. Are future generations better off by this huge reduction in the debt burden? They aren't in any obvious way. In fact, depending on the terms of the deal, selling off public assets to reduce the debt could in fact lead to much higher economic costs for future generations. These costs just would not show up as public debt.
This point should sound familiar to people. There have been several prominent cases of asset sales of exactly this sort. For example, Indiana's governor Mitch Daniels sold off the Indiana toll road to reduce that state's debt. In my home town, former Mayor Richard Daley sold off a 75-year lease of Chicago's parking meters to a consortium led by Morgan Stanley. This reduced the city's debt, but did not necessarily benefit either current or future generations of Chicagoans.
There are other ways in which the government imposes future burdens that are not at all captured in budget numbers. Patent and copyright monopolies are, in effect, a way that the government allows individuals and corporations to get a claim to future income flows to promote innovation and creative work.
The more items that are subject to such protection, the greater the burden will be on future generations. We pay roughly $300 billion a year for prescription drugs that would sell for $30 billion a year in a free market without patent protection. This is equivalent to a tax of $270 billion on prescription drugs (@1.8 percent of GDP) that is paid to the drug companies because of a government imposed patent monopoly.
There is an endless list of issues like patent protection and the sale of public assets that will have a large impact on the well being of future generations. If the deficit hawks really cared about our children's well being, they would be talking not just about deficits, but all the issues that affect the health of the economy and society that we will pass on to future generations.
However, concern for our children's well being is not their real agenda. The deficit hawks want to scare them in order to advance a very different agenda. Watch what they do.
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This is not a valid point. All inventions come from one mind. They might be further developed by a team but the core invention does not come from a team.
Until the inventor discloses the invention it is not a “public asset”. Historically inventions were kept secret. In order to get inventors to disclose the invention government offers the inventor an incentive in the form of a patent. After grant of the patent the invention is a public asset subject to a lien of exclusive rights for the term of the patent.
A patent is not a tax, rather it and the income it produces is payment for a valuable service which has been rendered. If society stops paying inventors for the service we render we will no longer disclose inventions.
Nor should I care that that number is in addition to total debt over $15 Trillion and projections that by 2021 federal debt will be over $20 trillion (http://1.usa.gov/nviSti).
Getting control of vital links in our interestates would be an excellent way for a foreign power to get control of our country. The GOP will definitely make this foreign take-over possible.
Liberals & Democrats are terrible at making points and controlling the debate.
Washington is running America just like Bain Capital ran the businesses it invested in. Borrow heavily, send the money to the 1%ers who ran Bain. Cut costs through layoffs and reduced benefits and slashed investment. The short term bottom line looks good and Bain can squeeze out more money before the company is finally sucked dry and Bain walks away with a tidy profit while those that made the loans, bought the bonds, worked in the factories and towns where these companies resided are left with nothing.
That is today's America. The owners are squeezing this country dry. But we keep electing the management that makes it happen. In the end, we have no one to blame but ourselves. Or maybe it is our children who will be left with nothing and only have us to blame.
rosa
They are already speculating oil and food out of control. Forget about travelling.
You watch the US run up debt and you watch the economy begin to stagnate, and then things just continue to get worse and worse. Bush turns a surplus into a big deficit, and the economy promptly collapses. Obama deficit spends like a drunken sailor, and things continue to trend downward (except for the very rich, of course). The answer? More deficit spending. And there's lots of real fancy academic arguments, real complicated, that normal people just don't understand.
These exact guys gave Bush cover to cut taxes and spend like a lunatic and push interest rates artificially low and pump up the housing bubble. They want deficit spending, low interest rates, and loose money. Lots of what they say--such as that interest rates are market driven, when in fact they're set by the Fed--is misleading, manipulative, and wrong.
They're like Ron Paul--they're unrealistic ideology lunatics. Except Ron Paul is right more often.
Debt is OK because it comprises bonds that we pass on to our kids? Huh? I wasn't aware that most families were stockpiling savings bonds, or that bonds were the best form of investment as opposed to anything else. Not to mention loss in value due to inflation. That's like saying "sure we're handing you a major credit card bill, but just look at all the rewards points you get!".
Second: a completely irrelevant strawman argument on privatizing government assets. This is not done (principally) to trade assets for debt, it is to reduce the day-to-day spending by (presumably) moving to a more efficient private service. You can argue about whether that's effective, but to judge these measures solely on debt relief is asinine. Not to mention that it is not at all certain that more toll roads is a bad thing anyway. Perhaps charging the users of a common good - rather than everyone - will encourage less driving, or cleaner vehicles, or more public transportation.
Third: the patent protection is WHY there are prescription drugs in the first place. No one would invest the money required to try and fail repeatedly unless there was a promise of profit later. The companies that make the profit also have to eat the loss for every drug that DIDN'T make it. If you eliminate their patent monopoly then you're allowing the generic manufacturer to profit off of their sweat.
Secondly you're making the assumption that the private sector is more efficient. I believe that is the case in a true non-monopolized open market, but with utilities that can never be the case. There can only every be one road. Companies cannot choose to build more to meet demand or lower cost. So toll roads would inevitably cost the average more than the public sector. The public sector is not concerned with profit, just providing services.
Third you're forgetting that the majority of patented drugs were originally developed in universities and other public institutions. The private sector buys patents from the public sector and then decides to rape the populace over something they didn't even invent. We need serious patent reform. When one trades or sells a patent or copyright it shouldn't be valid for as much time as an original developer or owner would have. It's ridiculous that today the song Happy Birthday is copyrighted. The original creator has been long dead. These are just costs to society with no benefit except to the few who can suck these patents/copyrights up.
Thanks for explaining the reason patents exist. Why would any company spend hundreds of millions of dollars and decades of time on new products if competitors could simply step in a manufacture the same product when it came to market. Many years ago I worked for a small electronics firm and without patents to protect our R&D investment we would have been out of business in a heartbeat. Some products are so expensive and time consuming to develop that without patent protection it would irrational to make the investment in developing the product.
This statement is misleading as well. Yes the money that balances the current accounts flows into the US as investment. This money would be mostly in corporate stocks and other private investments if the Federal government did not spend so much money than they can ever get in taxes. When people from other countries purchase assets in the US this does not create debt. The trade deficit shifts the ownership for some of the debt from US citizens to people from other countries. The trade deficit does not create the debt.
Check into China tariff/duty rates. Last I checked they were 2.5%/25%. The GOVERNMENT will NEVER get much out of those investments, IT WILL just try to keep up with tax favored inflation driving, inflation of costs,, just like personal income, with default debt, and homes being exposed to undefended pirating by ntl bankers. Our resources and infrastructure WILL be exploited with American citizens bearing the tax burden.
What you get when untaxed intl interest can buy tax code. Racketeering from remote positions, favored over domestic industry.
This is a horribly distorting statement. Yes some of our children will own the debt and others will pay the debt. It is like saying I have debt on my home. The bank receives the payments, so draw a big circle around me and the bank and there is no debt. I can still lose my job and default on my home, but then the bank has my home so no harm done.
Default debt, using OUR property to run up our expenses.
THE BANKS create debt for Americans and essentially hold title to OUR property; what they haven't racketeered and physically pirated already.
There IS harm done. It is called treason; the enabling and offering up of our property to such NON-CITIZEN interests.
The US dollar may or may not have intrinsic value, but it has economic and monetary values which are what we should be talking about.
Intrinsic value does not always equal to economic and monetary values. Oxygen in the air does have intrinsic value but not likely ever to have monetary value unless gold marketers/scammers take over the control of the US economics and carry out their scoudrelous wishes.