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.