Warren Mosler takes me to task for worrying about whether the United States can become Greece.
My basic argument was not really all that controversial.
We cannot become Greece in the sense that, without aid from Europe’s more prosperous nations, the government of Greece will not have had enough euros to make its debt payment in March. Our government can never “run short” of dollars the way the Greek government can run short of euros.
But, if we peel back this purely monetary consideration, we can become Greece in that we may someday find ourselves producing wealth insufficient to live prosperously. For Greece, this came in the form of being unable to make debt payments and public expenditures at old levels.
For us, this outcome is unlikely given that our government borrows in dollars it controls. But we could, for instance, find ourselves unable to properly care for our elderly retired population because the workers aren’t productive enough. In other words, the prosperity of future generations will depend on what they are able to produce.
What Mosler doesn’t like is my reference to a “debt burden” in my closing paragraph.
“But our debt burden can become unsustainable — requiring either inflation or voluntary default — if our productivity does not improve as our debt grows,” Mosler writes.
Mosler doesn’t believe that it is possible for government debt to impose a burden on future generations. This position has a long history (click here for Nick Rowe’s account of the history). For several decades it was the official opinion of just about all sophisticated people. Only uneducated people believed public debt imposed a burden on future generations.
Since this runs contrary to the way almost all our politicians talk about the national debt, let me explain. The “no burden” position isn’t really so odd when you begin with the fact that the current generation cannot really increase its current resources by taking them from the future. Recall that we don’t have time machines. When the government borrows to spend now, it doesn’t steal cars from 2022 and bring them back to the present day. And in 2022, the government won’t have to send cars back into the past, depriving future citizens of those cars. As Mosler points out, future generations will be able to consumer all that they produce.
James Buchanan waded into this debate and declared the common man was right and the pinhead academics wrong. Future generations are indeed burdened by public debt, Buchanan argued. Controversy ensued and filled the pages of academic journals for several years. The sophisticated folks came to believe that future taxpayers would be burdened by higher taxes that will be imposed to meet debt payment obligations. These taxes are not merely transfers from taxpayers to bond holders. They are a net burden on society because, without them, taxpayers could have invested the capital in productive enterprises.
Thus, if the public investment financed by debt has a lower return than the private investment it displaces, society is worse off.
(If you’re really into this stuff, I recommend you read Franco Modigliani's 1961 paper “Long-Run Implications of Alternative Fiscal Policies and the Burden of National Debt.”)
Believe it or not, this is still an open controversy among academics.
They never really settled the debate—they just stopped talking to each other about it. (There are also variances, such as the theory that there is no burden because the present generation saves in anticipation of those future taxes.)
You don’t have to get far into all this, however. I meant something quite simple. In a system such as ours, payment on the debt can become a burden. The government may find itself short on revenues because the economy has slowed, while also unable to cut spending, raise taxes or issue more debt for political reasons—see our recent run in with the debt ceiling. At this point, the government would either have to make the debt payment by inflating the money supply with new dollars or refuse to make payments when they are due. This is what I meant by the lack of productivity leading to an “inflate or default" choice.
Of course, if the economy had been growing fast enough, no new taxes or spending cuts would be necessary to finance the debt payment. So productivity can help us avoid inflate or default.
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