Is the U.S. debt really just money we owe to ourselves?

Paul Krugman:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

The columnist expresses a primal Keynesian concept here. Now putting aside that the U.S. government also owes money to non-Americans, is domestically-held debt just money “we owe to ourselves?” No, as public choice economist and Nobel laureate James Buchanan famously pointed out. Don Boudreaux explains:

A central point of Jim Buchanan’s debt-burden case is that even within national boundaries, the individuals whose taxes are raised today to pay interest or principal on a government bond are distinct from the bond holders who receive those payments.  The payer is not the payee, and that the latter might share national citizenship with the former is an economically irrelevant happenstance that cannot possibly make a government-debt burden disappear.

That American Mr. Smith’s taxes are raised to pay to retire a bond held by American Ms. Jones does not mean that this “internally held” debt isn’t burdensome.  Mr. Smith bears the burden – a burden that is not offset simply because the individual, Ms. Jones, who receives the proceeds of the taxes paid by Mr. Smith happens also to be an American.  The burden of this public debt for Mr. Smith would be changed not one iota if, a moment before he is taxed to pay off this bond, Ms. Jones were to switch her citizenship from American to Armenian.

And Arnold Kling, as it happens, also addresses this issue today’ over at The American.


8 thoughts on “Is the U.S. debt really just money we owe to ourselves?

  1. This would make sense if indeed there were two classes of citizens: lenders and borrowers. The fact is that most of us are borrowers in our house-buying, child-rearing years, and, one hopes, most of us will be lenders once the house is paid and kids move out.
    Ditto for the taxpayer role. I paid plenty of taxes in my working years. Now, as a retiree, I don’t, unless it is my choice to do so.
    And forget about the beleaguered future generations. The real risk in excessive govt spending is inflation that would erode the buying power of people like me who have no way to recover. I believe we can say Krugman had that one right. Even the WSJ has stopped worrying about runaway interest rates.
    I believe Krugman has the other part right, too. The priority today is get workers, particularly young workers, in jobs that pay taxes and support the loans they need to build households.

  2. the “debt” we owe ourselves is for taxes collected for earmarked purposes.

    For instance, we collect fuel taxes to build highways with but we put them in a trust fund until they can be obligated.

    When we put them in a trust fund – what we really do is give the money to the treasury to spend on bills and give the highways folks redeemable IOUs – no different than the IOUS we sell publically.

    so it’s a temporary loan from the highway fund so that the govt can defer selling more treasury notes to the pubic to finance debt – right away.

    but ultimately the highway folks have to be paid back and they are paid back by selling treasury notes to the public and the money then given back to the highway folks.

    the Military Retirement Trust Fund works the same way.

    as does Social Security .. Medicare and 100 more trust funds.

    this is not a difficult concept but I find that folks like AEI tend to not try to explain it in simple terms and for some “scholars” in AEI – outright misinformation and disinformation with regard to trust funds and how they really work.

  3. Is there any sort of study as to who in the US holds the debt? I know the Fed holds a lot of it. I would imagine that much of the debt is held by wealthy individuals as they are more likely to have excess earnings to save and invest – a portion of which will go to invest in government bonds.

    The argument above seems to believe that the bonds are held by middle class and poor Americans. I find that argument to be highly suspect. The more likely scenario is that many people pay higher taxes to pay themselves interest on government bonds.

  4. A little over $1 trillion of the U.S. debt is held by private investors, banks, trust funds, corporations et al. Foreign entities own about $5 trillion. Most of the rest is held for retirement by private and public pension funds and the Social Security trust fund, which hands over excess payroll taxes to the Treasury and takes back paper.

    So, yes, the middle class does in fact have more aggregate skin in the game than the wealthy.

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