The Debt Is Not a Measure of Generational Burdens

06/12/2012 05:00 pm ET | Updated Aug 12, 2012
  • Dean Baker Co-director, CEPR; author, 'The End of Loser Liberalism: Making Markets Progressive'

OK folks, today we are going to learn why the national debt tells us nothing about the burdens or benefits that we are bequeathing to future generations. This will require a few minutes of clear thinking, so for the moment put out of your head whatever nonsense you just heard from a politician or economic commentator about the debt or deficit.

Suppose that we have two economies at the same level of per capita income, both growing at the rate of 2.0 percent a year. Let's call them Germany and the United States. For simplicity we will say that both have zero growth in the labor force so that the growth is all due to productivity growth, meaning that each worker is producing 2.0 percent more for every hour that she works.

After 10 years, both economies will be roughly 20 percent richer. Now suppose that Germany reaches 2022 with zero public debt. It managed to run surpluses and still maintain healthy growth. By contrast, the United States had to run budget deficits to keep its economy moving. By 2022 its ratio of debt to GDP is 200 percent. That's not quite up there with Japan, but substantially larger than anything the United States will see anytime soon under almost any circumstances.

The next question is which country is richer? If you answered Germany, then you get an op-ed column in the Washington Post and an "F" in economics. You were just told that the countries started with economies of the same size and that they grew at the same rate. How could Germany be richer?

If your inner deficit hawk is screaming that the people in the United States will have to pay interest on this massive debt, whereas the people in Germany will have no comparable burden, then remember the interest on the debt is also paid out to people in the United States. This is a distributional question, not a question about the wealth of the country as a whole.

It's true that we can have foreign ownership of the debt, but let's assume for the moment that is not the case. As it stands, the vast majority of U.S. debt is in fact held by people in the United States. Furthermore, the trade deficit is what determines foreigners' claims on U.S. assets, whether it be government bonds or stock in private companies. Anyone concerned about foreign ownership of government debt is looking at the wrong issue if they are focused on the budget deficit.

Suppose we are concerned about distribution. We could in principle be taxing the holders of the debt to pay for the interest they receive. That is what progressive taxation is all about. If income gets skewed because some people hold large amounts of financial assets, including government debt, and others have none, then we can always redistribute from the wealthy to the less wealthy through taxation.

As a practical political matter this is often difficult, since the wealthy will use their money to obstruct efforts to tax them. However, the key issue here is inequality, not government debt. We can have a large amount of government debt and still have a country where income and wealth are relatively equally distributed.

Let's play with this one a bit more. Suppose the U.S. government sold off the right to tax certain items. It could raise a lot of money to pay off its debt this way. Would the country then be better off because it is debt free? Of course this would be silly, since people would still be paying taxes; they would just be paying them to private corporations instead of the government.

If the idea of selling off the right to tax certain items sounds strange, then you haven't been paying attention. Governments do it all the time. Chicago recently sold off the receipts on its parking meters for 75 years. Indiana sold off its toll roads.

More importantly, the government grants patent and copyright monopolies for long periods of time. In the case of prescription drugs, the Centers for Medicare and Medicaid Services project that we will spend more than $4 trillion over the next decade for drugs that would likely cost less than $400 billion in a free market, a gap of more than $3.6 trillion.

To put this in perspective, the government is currently paying about 2.7 percent interest on 30-year government bonds. If we equate the additional revenue going to drug companies because of government-granted patent monopolies to interest payments on government debt, it would take more than $11 trillion debt (at 70 percent of GDP) to impose an interest burden on U.S. taxpayers that is comparable to the burden created by patent monopolies on prescription drugs. In other words, patent monopolies on prescription drugs impose roughly the same burden on taxpayers as the entire publicly held debt.

The moral of this story should be that you can find absolutely nothing about the burden on future generations by looking at the government's debt. Those who rant about the government debt and claim that it will bankrupt our children are really just trying to tell you that they don't know anything about the economy.