If you hadn’t noticed over the course of the last few weeks, Paul Krugman appears to be making a move closer to the MMT position that government debt is not something that constrains a government in the same way that it constrains a household. He writes:
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.
He cites the fact that the US government owes most of the debt to ourselves – our own citizens. He also cites that foreign governments own quite a bit of debt, but that “most” of it is owed to ourselves. The conclusion is that debt for a government is not a burden in the same way it is for a household. Nick Rowe and several others have chimed in saying that Dr. Krugman is wrong. I don’t think either of them are quite thinking about this entirely right.
First of all, bond markets are a relic of fixed exchange rate eras. Today, the bond market in the USA serves as a tool that helps the Fed hit its overnight target rate. Remember, for a nation that is sovereign in its currency in a floating exchange rate system there is no such thing as that country being able to “run out of” money (see here if you’re confused already). The USA has a printing press. It can’t run out of US dollars. And it doesn’t borrow dollars that it can create at will. Like the scorekeeper at a football game, the US government is just changing points on the board when it spends and taxes. Spending adds points. Taxing removes points.
The point is, there isn’t a big bowl of points that the scorekeeper reaches into before putting points on the board. Likewise, the governments deficit is the non-governments surplus. This is an accounting identity. If the US government creates no money then there are no dollars for the private sector to use. If the government spends $100 into the economy then the government has a $100 deficit and the non-government has a $100 surplus (excuse the simplicity of the example here). This is why you never hear your grandmother say “I wish Uncle Sam would pay off the national debt so I could get rid of my damn savings bonds!” No, grandma’s savings bonds are the government’s deficit.
Further, there is nothing that China can do with their bond buying that somehow constrains the USA’s ability to spend. China buys US bonds due to the fact that they run a foreign trade policy of surpluses. This means China is a net importer of US dollars. China gets to employ millions of their citizens to make widgets for Americans, we send them pieces of paper with old dead white men on them, Americans get cheaper goods than they would if the same goods were made in the states and everyone goes home happy. What China can do with these pieces of paper is rather limited. They can leave them sitting around doing nothing or they can buy USD denominated assets. Of course, they can try to buy up US oil companies or US real estate (as the Japanese did back in the 80′s) or whatever, but those are high risk ventures that the US government doesn’t always allow. So what do they do? They swap their checking account for a savings account and buy US government bonds. Did the USA need them to buy the bonds? Of course not. And bond auctions don’t fail if foreigners don’t show up because they’re simple reserve drains (see here).
So what is the burden from all of this? It is not a debt burden. Our grandchildren don’t pay off the national debt any more so than grandma needs Uncle Sam to pay off the national debt so she can transfer her savings into a checking account. Technically, the US government could pay off the national debt, but that would simply remove a huge amount of private sector savings instruments which serve the private sector and the payments system in various ways. We know this following QE2. Theoretically, the Fed could have QE’d all the bonds up and swapped them for reserves. The Treasury could have stopped issuing bonds and spending would have continued as our scorekeeper continued to put points on the board. The net financial assets in the private sector would have remained the same (remember, QE is just an asset swap) and life would have gone on. Of course, there would be problems involved in removing all the US bonds (as Bill Clinton recognized back in his term when he ran his hugely mistaken budget surplus), but the point remains – one generation does not leave behind bonds or debt that get paid back.
What we leave to our grandchildren is a certain standard of living. Whether that standard of living is better or worse than ours is up to us. Remember, the burden on a sovereign currency issuer is always inflation and not solvency. It’s quite possible that the US government could print so much money in excess of our productive capacity that it causes ravaging hyperinflation that ruins an entire generation of living standards. We could make huge policy mistakes. We could become far less productive. We could incur foreign debts. We could do any multitude of things that ruins our grandchildren’s living standards. But what we won’t do is leave them with a bill that needs to be paid back. Instead, we will leave them with a certain living standard that is based on a multitude of factors based on the way our government spends and the way the private sector produces goods and services in the future.
Luckily, humans have an innate desire to improve and make progress. I wake up every single day thinking that the Cullen Roche of today will be just a tiny bit better than the Cullen Roche of yesterday. I get smarter (some days dumber), more productive, etc, etc and I attempt to pass my knowledge and understanding to other people (I don’t always succeed here!). We are, as a society, becoming better with time. We are becoming more innovative, more creative, more productive, etc. Our government and our money plays a key role in this progress. Do we want a society that makes great strides by becoming ultra productive? Or are we willing to sacrifice certain things (such as higher taxes now) in exchange for universal healthcare, a military, police offers, firefighters, etc? These are delicate choices that make up our living standards. And of course, the debate that rages is due to the fact that living standards are different things to different people. Some people want universal healthcare. Others just want to be protected by a military so we can get the government out of ours lives and let individuals live their lives. As a society, we ultimately choose what the majority (not everyone) wants and that’s the path we move down.
In general, I think a universal rule is that we should seek to give one another what I call the economic fountain of youth – time. Through greater productivity and innovation we can give our grandchildren the gift of time. We live much fuller lives than our ancestors did. We do in an hour what might have taken a day 100 years ago. And this is all thanks to innovation, creativity and productivity. As a society we need to utilize our government to decide on the best way to maximize this balance between what we’re willing to sacrifice in terms of societal needs (military, police officers, etc) and what we want the private markets to produce, create and innovate (government can help here to some extent). So, the burden we leave to our children and grandchildren is entirely up to us. But that burden is not one of debt. It is one that the current generation will decide upon based on what they believe is important and how hard they are willing to work to make life meaningful for future generations.