“We owe it to ourselves”

Economists/bloggers have been having an Internet debate over whether government debt has any true impact on an economy.

I know to us laypeople that sounds kind of crazy.  Of course it would.  But, us laypeople also give a lot of rope to economists — especially ones who have been adorned with Nobel prizes and write columns in newspapers — assuming they know their stuff, so I thought the topic might be worth addressing and might further my understanding of the topic as well.

Unfortunately, I don’t feel like many of the economists have done a good job of making the debate palatable for the general public.

I’ll try to lay it out the two key positions, as best as I understand, and would love to know if I got any of this wrong.

Position 1:  Government debt has no impact on the economy.  Since the government debt is borrowed from citizens (much of it, at least) and paid back by citizens, then it really “costs” nothing because we owe it to ourselves.

Position 2:  Government debt does create a burden, but it’s not what us rube laypeople think.  It’s not the debt that’s the burden.  Rather, it’s our reaction to the debt.  Because I know that my grandkids will have to pay back this debt, I save a more to pass on to them. That additional savings now is the true burden (which I think is actually equivalent to what us laypeople think too, but I’ll leave that one alone for now).

Here’s my take and I’d love to hear what I’m missing, because I’ll admit that I’m sure I’m missing something.

I believe Position 1 is wrong because it has one key flaw.  It’s the word “ourselves.”  What’s wrong with this line of thinking is what’s wrong with the field of macroeconomics, in general.

“Ourselves” is fiction.  It’s an aggregate, or sum, that means nothing.  Add up mine and Bill Gates’ wealth and you’ll find that our average wealth per person is around $20 billion.  The problem is that $20 billion exists nowhere in our reality.  I don’t have anywhere close to that wealth and Gates has all of it.  So, saying that Bill and I have $20 billion on average means nothing.

Let’s give a closer look to the fiction in Position #1.  I get a loan from Joe and force you to pay him back.  In macroeconomics, I would lump me, you and Joe, together and try to make you feel better about saddling you with the debt by telling you “We owe it to ourselves, so in net, we‘re not worse off.”

The only problem is that “in net” doesn’t exist anywhere except in my head.

You obviously are not better off.

Even if I did something spectacular with Joe’s loan that somehow benefited you, that doesn’t mean that Joe couldn’t have done something just as spectacular if he hadn’t loaned it to me.

So, what am I missing?

I’ve been working on this draft for a while.  I came across Don Boudreaux’s column on the subject and found that he makes the same argument here, which makes me feel  better that I’m on the right track.

I’d love to hear if I am missing something.  But, please do not use any examples that includes pizza deliveries from the future.

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