Friday, October 12, 2012

The Burdens of Debt

Dean Baker shared a thought-provoking post on the nation's debt, challenging conventional wisdom:
A moment's reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates' grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution.
I agree with Baker that, right now, the government can borrow money at virtually no interest. Arguably an effective negative interest rate when inflation is taken into account. Were it possible to discuss debt in rational terms, Mitt Romney would talk about the strategy his company used to lard up acquired businesses with debt, supposedly forcing them to become more efficient but also enabling his firm to extract its massive fees and profits on its transactions.

Does Romney believe debt is always bad? Far from it, his personal history indicates that he is very concerned about household debt, but sees business debt as an entirely different animal. If he wants to run government "like a business", at least any business he's actually run, he would be declaring it foolish to not be grabbing up as much of that free money as we can stuff into our pockets.

Romney complains about and deliberately overstates the nation's debt to China, because it's a poll-tested, fear-based argument that works with his base. However, if he knows anything about trade, he knows that we run massive trade deficits each and every year, and that the trade deficit must be paid for with either public or private debt. If China is willing to give us free money to cover the difference, in essence paying us to buy its exports, does businessman Romney truly see that as a bad thing?

My problem with Baker's argument is not that I think that the money disappears, it's that I seem to place a higher value than he does on the "distributional issues" raised by servicing debt. That is, the more debt the nation holds, the more money it must raise from future taxpayers to service that debt. The balance sheet will say that the same amount taxpayers spend to service the debt is received by the holders of the debt, but if my personal experience holds I'll be the one writing that check not the one receiving the payment. Also, there's a tipping point at which the cost of servicing the debt becomes disproportionate, consuming revenue that is needed for other government activity, necessitating either cuts or additional borrowing.

I am more sympathetic to Baker's argument that the present deficits are largely a product of the recession, that there's no evidence that government borrowing is interfering with private borrowing, and that government imposes costs on people (often to the great joy of businesses) in many ways other than through deficit spending. I'm sympathetic to the argument that recessions are the times when you should worry less about deficits, and that the boom times are when we should be balancing the books. I'm convinced, both by logic and by the many failed austerity programs in Europe, of the argument that if they can be avoided a recession is not the time for austerity measures. I'm sympathetic to borrowing money to pay for the infrastructure we need to help our economy grow and flourish. At the same time I'm not able to disregard the "distributional consequences" for future generations. I might feel different if it were going to be my grandchildren who were receiving the payments as opposed to the ones making them but, alas, it won't be.

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