Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.I provide a summary of Lerner’s key points below:
(1) Lerner begins by pointing out that private debt is different from government debt (Lerner 1948: 255–256). In an aggregate sense, government debt is owed by citizens of a nation to other citizens of that nation. That idea is summed up in the phrase “we owe it to ourselves” (Lerner 1948: 256).
Lerner disposes early on of the “debt burdens our children” argument:“A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.” (Lerner 1948: 256).By contrast, debt owed to foreigners can be considered a burden (Lerner 1948: 256), because the debt is external, and to the extent that real goods and services will be demanded by foreigners, this is a real cost.
“In attempts to discredit the argument that we owe the national debt to ourselves it is often pointed out that the ‘we’ does not consist of the same people as the ‘ourselves’. The benefits from interest payments on the national debt do not accrue to every individual in exactly the same degree as the damage done to him by the additional taxes made necessary. That is why it is not possible to repudiate the whole national debt without hurting anybody. While this is undoubtedly true, all it means is that some people will be better off and some people will be worse off. Such a redistribution of wealth is involved in every significant happening in our closely interrelated economy, in every invention or discovery or act of enterprise. If there is some good general reason for incurring debt, the redistribution can be ignored because we have no more reason for supposing that the new distribution is worse than the old one than for assuming the opposite. That the distribution will be different is no more an argument against national debt than it is an argument in favor of it.
8. The growth of national debt may not only make some people richer and some people poorer, but may increase the inequality of distribution. This is because richer people can buy more government bonds and so get more of the interest payments without incurring a proportionately heavier burden of the taxes. Most people would agree that this is bad. But it is no necessary effect of an increasing national debt. If the additional taxes are more progressive — more concentrated on the rich — than the additional holdings of government bonds, the effect will be to diminish the inequality of income and wealth.” (Lerner 1948: 260–261).
(2) Lerner addresses the idea that, if taxes are raised to pay for interest payments on the debt, this might have a contractionary effect. While this might be true, Lerner points out that there is no reason why the government need raise taxes to meet its obligations in paying debt, if contractionary fiscal policy is not desired: the reality is that government can simply “roll over” debt with more borrowing (Lerner 1948: 258–259).
Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.
I assume that someone will now chime in with the typical Austrian/deficit hawk refrain: "But we owe the Chinese!!! BAAAAAW!!!"ReplyDelete
Before that happens let me just state clearly: any money "owed" to the Chinese is due to the current account deficit (trade deficit), not the government deficit. If you are concerned about this then consider devaluing the dollar (see: Plaza Accords) or engage in some sort of industrial policy. Otherwise, do shut up.
The money ends up being owed to the Chinese by the government because of the existence of Treasuries.Delete
If they didn't exist or weren't available to foreigners then the Chinese would have to hold their trade deficit dollars in private sector liabilities.
Which would have then have the advantage (from the US perspective) of being subject to the laws of bankruptcy. Private sector entities can go bust.
"By contrast, debt owed to foreigners can be considered a burden (Lerner 1948: 256), because the debt is external, and to the extent that real goods and services will be demanded by foreigners, this is a real cost."ReplyDelete
The problem there is that what Lerner is getting at is easy to twist into 'debt to foreigners is bad'
In an absolute sense he is correct, but the 'real burden' is only real to the extent that it 'crowds out' the real consumption of a domestic entity.
In other words it is only a burden once the economy has no further capacity to quantity expand.
And that happens when your economy is booming.
And even if the economy is booming its output might easily provide all that is needed domestically with plenty to spare for foreigners.Delete
Indeed, and the reasonable assumption of those who propose worrying about 'foreign holdings' tomorrow rather than today is that you will have that spare capacity.Delete
And that's because you will have continued spending today to make sure that investment was kept up.
What does it mean for the government to "roll over" its debt? I mean, as a statement about what it does with outstanding bonds. Does it simply mean that when one bond comes to maturity, the government issues another one equal to it?ReplyDelete
what about the risk of a currency crisis?ReplyDelete
with a large external debt, the risk of a sharp and large depreciation of the currency increases. This would be the equivalent of a large flat tax on the whole population.
" the risk of a sharp and large depreciation of the currency increases. "ReplyDelete
Why does it? The 'foreign sector' doesn't exist in isolation. What happens to your country affects everybody else in an interconnected world.
If there is a large trade deficit then there is a large trade surplus somewhere. And for there to be a large trade surplus somewhere the currency differential must be incorrect to allow it.
Have a think about how that comes about and how it is sustained in a floating system. And then you'll work out where most of the 'foreign savings' ends up.
countries imprting to the UK, for example, don't tend to want to accumulate most of their surplus in pounds. Instead exporters to the UK will demand payment in dollars. Unless the UK is accumulating dollars from somewhere, it must be accumulating dollar-denominated debts (in the private sector), no?
Doesn't that have an effect?
"Instead exporters to the UK will demand payment in dollars. "ReplyDelete
Do they? Most I deal with want Euros.
However when I import into the UK I normally pay in GBP and leave it to the seller to sort out the exchange problem - which he usually does by employing an intermediary such as Visa
It is the financing market - which has vastly greater flows than the trade market - that holds the differential. And where that is based and accounted for is a matter of historical accident than anything else. Finance is truly global.
The point is that your assumption is that trade happens and then debts accumulate.
That isn't what happens. They have to happen simultaneously. You have to have a match with an export or somebody prepared to accumulate the debt in the currency *or the excess import of goods/services cannot occur*.
If Visa, etc refuse to intermediate on my purchase of foreign goods/services then the deal falls through and it simply doesn't happen.
So when you are doing x-currency area sales, not only do you have to put in place the physical sale, you have to put in place the payment flow exchange as well with a money changer.