Bogus Arguments about the Burden of the Debt

The first time I ran across the point that Dean Baker makes

here about the burden of the debt was in the late 1980s teaching principles
of economics from Baumol and Blinder’s textbook. Here’s a summary of the point
from

this old post (and a later, but dated, edition of the text — the point Dean makes is
Argument 1 — there is quite a bit more, including an example to illustrate the
point and additional comments from Dean Baker, in the post):

… Let’s start with a textbook treatment from Baumol and Blinder’s
Macroeconomics text (9th ed.):

Bogus Arguments about the Burden of the Debt

Having gained some perspective on the facts, let us now turn to some of
the arguments advanced by those who claim that budget deficits place an
intolerable burden on future generations.

Argument I Our children and grandchildren will be burdened by
heavy interest payments, which will necessitate higher taxes.

Answer It is certainly true that a higher debt means higher
interest payments and, therefore, higher taxes on our children and
grandchildren. But think who will own the bonds and therefore receive the
higher interest payments as income: our children and grandchildren! Thus,
one group of future Americans will be making interest payments to another
group of future Americans. So we conclude that:

As long as the national debt is owned by domestic citizens, as the
majority of the U.S. debt is, future interest payments transfer money
from one group of Americans to another. These transfers mayor may not be
desirable, but they hardly constitute a burden on the nation as a whole.

However, this argument is valid-and worrisome-for the portion of our debt
that is held by foreigners, a share that has been growing rapidly… Paying interest on this portion of the debt will burden
future Americans in a concrete way: For years to come, a portion of
America’s GDP will have to be sent abroad to pay interest on the debts we
incurred in the 1980s, 1990s, and 2000s. For this reason, many thoughtful
observers are becoming concerned that the United States is borrowing too
much from abroad.

Another valid element of this argument is that the taxes that will have
to be raised to pay interest even to U.S. citizens may reduce the efficiency
of the economy.

Argument 2 Repaying the enormous debt will ruin the nation.

Answer A first answer to this argument merely rephrases the
answer to the previous one: Most of America’s debt is owed to Americans. But
this argument raises an even more fundamental point. Unlike a private
family, the nation need never payoff its debt. Instead, each time the
principal is due, the U.S. Treasury can simply “roll it over” by floating
more debt. Indeed, that was done routinely for decades.

Was this a bit of chicanery? How could the U.S. government get away with
making loans that it never intended to pay back? The answer lies in the
fallacy of comparing the U.S. government to a family or an individual.
People cannot borrow in perpetuity, because they will not live that long.
Sensible lenders will not extend long-term credit to very old people because
their heirs cannot be forced to pay up. But the U.S. government will never
“die” – at least, we hope not! So this problem does not arise. In this
respect, the government is in much the same position as a large corporation.
GE never pays off its debt. It, too, rolls it over by floating new debt all
the time.

Argument 3 Like any family or any business firm, a nation has a
limited capacity to borrow. If it exceeds this limit, it is in danger of
being unable to pay its creditors. It may go bankrupt with calamitous
consequences for everyone.

Answer This is another false analogy. While private debtors and
many foreign governments have to worry about defaulting on their debt, the
U.S. government does not. Why not? First, because it has enormous power to
raise revenues by taxation. If you had such power, you would never have to
fear bankruptcy either.

But once again, the statement raises a more fundamental point – one that
distinguishes the U.S. debt from that of most other nations. The
American national debt is an obligation to pay U.S. dollars: Each debt
certificate obligates the Treasury to pay the holder so many U.S. dollars on
a prescribed date. But the U.S. government is the source of these dollars.
It prints them! No nation need default on debts that call for repayment
in its own currency. If worse comes to worse, it can always print
whatever money it needs to pay off its creditors. This option is not open to
countries whose debts call for payment in U.S. dollars, as a number of
Southeast Asian countries learned in 1997 and Argentina learned in 2001.

It does not, of course, follow that acquiring more debt through budget
deficits is necessarily a good idea. Sometimes it is a very bad idea. As we
know, printing money to pay the debt will expand aggregate demand and cause
inflation. In addition, as we will learn in Chapter 18, printing more
dollars should make the international value of the dollar fall. We may not
relish either of these outcomes. The point is not that budget deficits are
either good or bad; they can be either under the appropriate circumstances.
Rather, the point is that worrying about a possible default on the national
debt is unnecessary and even foolish. …

Nick Rowe take issue with the claim in Argument 1 here:

The burden of the (bad monetary policy) on future generations

Brad Delong responds:

The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging…

Dean Baker also responds:

Brad DeLong Beats Me to Responding to Nick Rowe