Like the mid-20th-century economists whose reasoning in terms of unwisely chosen aggregates led them to argue that public debt owed “to ourselves” is not much of a problem, Paul Krugman recognizes that one way that even such internally owed debt does pose a potential problem is if private productive activity is reduced by higher marginal tax rates made necessary for government to pay off the debt. Such a tax-induced reduction in productive output is a cost even of internally owed debt.
I ignore here the question of just how large or small this problem might be in reality. (To address this question adequately requires a discussion of the likely consequences of deficit financing on both the quantity and the quality of government projects funded with debt – and, hence, on the size of the debt burden passed on by current policymakers to future taxpayers.)
Instead, let’s be content to note that, on Krugman’s thesis, even this problem is avoidable. All that today’s government need do when faced with the need to raise marginal tax rates today in order to pay off yeterday’s debts is to default.
Insofar as we owe the debt to ourselves, default simply means that we choose not to repay ourselves. Right-hand owes left-hand; right-hand refuses to pay what it owes to left-hand – no big deal: the entity to which both hands are attached possesses the same amount of money with default as it would with payment. (Indeed, the entity possesses slightly more money with default, as the right-hand avoids dropping any money on the floor in its exercise of transferring funds to the left-hand.)
Now I doubt that Krugman (or any other adherent of the “we owe it to ourselves” school) would advise that default be generally used. The chief reason, of course, is that default today – while making all but today’s holders of mature debt better off – will greatly diminish government’s ability to borrow tomorrow. (The right-hand, alas, suffers a weird inability to understand that it’s part of the same relevant aggregate entity as the left-hand. This problem, though, is not one that we can pause to explore further.)
Why – on the “public debt is no significant burden insofar as we owe it to ourselves” hypothesis – should adherents of this hypothesis worry about any reduced ability of government to borrow in the future? Any money not loaned to government tomorrow is not loaned by us; we still have that money. It will be used by our right-hand if not by our left. But so what? We tomorrow still possess whatever money government tomorrow tried, but failed, to borrow. We refuse to lend to ourselves – no big deal.
If “we” is a relevant economic unit, how is “we” harmed by “us” refusing to lend to “us”?
John Winston sends to me, by e-mail, the following passage from this May 1958 speech by William F. Buckley; it’s spot-on in light of the rise in the mid-20th-century of two myths together run amok, one being aggregationist thinking getting out of control; the second being a rampant acceptance of man-in-the-street-like mistaken identification of money with real wealth – a myth, really, that only economists whose cleverness far outstripped their wisdom could have promulgated as a serious proposition – a proposition that some economists are again trying to resurrect (without, apparently, feeling obliged even as much to address Nobel-Prize-winning works that expose the myth for what it is: nonsense):
Halfway through the second term of Franklin Roosevelt, the New Deal braintrusters began to worry about mounting popular concern over the national debt. In those days the size of the national debt was on everyone’s mind. Indeed, Franklin Roosevelt had talked himself into office, in 1932, in part by promising to hack away at a debt which, even under the frugal Mr. Hoover, the people tended to think of as grown to menacing size. Mr. Roosevelt’s wisemen worried deeply about the mounting tension . . . And then, suddenly, the academic community came to the rescue. Economists across the length and breadth of the land were electrified by a theory of debt introduced in England by John Maynard Keynes. The politicians wrung their hands in gratitude. Depicting the intoxicating political consequences of Lord Keynes’s discovery, the wry cartoonist of the Washington Times Herald drew a memorable picture. In the center, sitting on a throne in front of a maypole, was a jubilant FDR, cigarette tilted up almost vertically, a grin on his face that stretched from ear to ear. Dancing about him in a circle, hands clasped together, their faces glowing with ecstasy, the braintrusters, vested in academic robes, sang the magical incantation, the great discovery of Lord Keynes: “We owe it to ourselves.”
With five talismanic words, the planners had disposed of the problem of deficit spending. Anyone thenceforward who worried about an increase in the national debt was just plain ignorant of the central insight of modern economics: What do we care how much we–the government–owe so long as we owe it to ourselves? On with the spending. Tax and tax, spend and spend, elect and elect . . .
Here’s a letter to the New York Times:
Paul Krugman is correct that public debt does not necessarily harm an economy (“Nobody Understands Debt,” Jan. 2). (No respected economist has ever said otherwise.) Mr. Krugman errs, however, by citing this fact as evidence for the mistaken conclusion that public debt held by fellow citizens is largely costless for the economy as a whole because it’s “money we owe to ourselves.”
When government spends money, resources that would otherwise have been used to produce valuable private-sector outputs are instead used to produce public-sector outputs. The values of these foregone private-sector outputs are a genuine cost of government projects regardless of government’s funding method, regardless of the merits of the government projects, and regardless of the nationalities of government’s creditors. And the private-sector outputs that are never produced because resources are instead used to produce public-sector outputs do not miraculously appear – they are not miraculously ‘unforegone’ – simply because the obligation to pay for public-sector outputs is deferred to the future or because the holders of the debt instruments are citizens of the same country as the taxpayers.
The argument in the above paragraph isn’t unique: it is elaborated in great detail in many of the works on public finance by another Nobel laureate economist, James Buchanan.* It’s discouraging that Mr. Krugman seems to be unfamiliar with Buchanan’s contributions.
Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
* Most famously, James M. Buchanan, Public Principles of Public Debt.
(Anticipating an objection: note that Krugman’s argument here does not depend upon the existence – the alleged costlessness – of large stocks of unemployed resources.)
I would think that, were he actually to read Buchanan’s work on this topic, Krugman would be embarrassed by his (Krugman’s) falling for the “we owe it to ourselves” myth.
… is from one of Steve Landsburg’s Dec. 24th replies – in a comments section at Steve’s blog – to Yoram Bauman’s argument that studying economics makes people more selfiish:
[A] lot of what we teach in economics has to do with seeing all the consequences of your actions, and evaluating their desirability on the basis of all those consequences. I’ve argued elsewhere that when we teach cost-benefit analysis, what we’re really doing is teaching compassion — that is, we’re teaching our students to stop and consider *all* the people who are affected by a given action or policy before deciding whether to support it.
Here’s a letter to the New York Times:
Sounding his familiar theme that private economic activity is mainly a negative-sum quest for “positional goods,” Robert Frank asserts that “many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts” (“Why 2 Paychecks Are Barely Enough,” Jan. 1).
Ignore Mr. Frank’s mysterious insistence that today’s larger and better-equipped houses are evidence of parents’ “fruitless” competition to live in neighborhoods with superior schools. (If parents are driven overwhelmingly by a desire to gain access to above-average schools, why do they waste money paying for more square footage and granite countertops?) Focus instead on what Mr. Frank’s thesis implies about the agency – government – that he calls upon to save us from self-destructive competitive urges that are allegedly unleashed by inadequately regulated and insufficiently taxed market forces.
If government were truly alert to the demands of its constituents, government-school quality would rise in response to parents’ demands for higher-quality schooling. School districts would compete to improve their quality relative to other districts. That Mr. Frank implicitly denies that government responds in this way should caution us against accepting his repeated calls to turn over to government more of our money and liberties.
Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
See also David Henderson’s reaction.
Reading Linda Lesky’s paper “Physician Migration to the United States and Canada: Criteria for Admission” (which is chapter 5 of High-Skilled Immigration in a Global Labor Market, Barry R. Chiswick, ed. (2011)), I learn on page 156 that
hospitals determine the specialty composition of their residency positions, but the total number of positions has been capped at 1998 levels since enactment of the 1997 Balanced Budget Amendment [sic; the correct name of this legislation, enacted in August 1997, is the "Balanced Budget Act"].
Who knew?
Question: why does a government ostensibly committed to increasing the supply of high-quality medical care cap the total number of residency positions available at hospitals in the United States?
Explanations based on economic ignorance to rational political myopia to raw public-choice forces suggest themselves.
UPDATE: Loyal Cafe patron Kevin Kennedy sent the following note to me by e-mail (pasted below with his kind permission):
They don’t actually cap the number of residents, they cap the number they are willing to pay for. Hospitals can add as many residents as they wish but above the cap they will not receive additional reimbursement. This is spelled out in immensely complicated medicare regulations defining funding for graduate medical education. We can applaud the cost-cutting impulse but of course the mechanism for getting there makes no sense and fails to reward innovation of any kind.
… is from page 190 of the 1955 edition of the Stuart Gilbert translation of Alexis de Tocqueville’s masterpiece The Old Regime and the French Revolution:
Thus every small holder had learned by personal experience how little heed was given to the rights of individuals when it was in the public interest to ride roughshod over them – a lesson he took care to keep in mind when it was a question of applying it to others for his own benefit.
… is from Mark Pennington’s December 19th blog post over at Pileus (original emphasis):
The OWS brigade along with the more mainstream left believe that greater regulation, more political control of markets and higher taxes on the wealthy will rebalance the system, breaking up the existing power structure. They fail miserably however to explain why the wealthy won’t use their current power to find ways of manipulating this increased intervention via continuous rent seeking. Adding yet more interventions and taxes which discourage the formation of new fortunes will simply provide additional opportunities for the current elite to avoid the ‘creative destruction’ characteristic of unfettered market competition.
May 2012 be filled with less cronyism and more capitalism; fewer special privileges and more competition; fewer Big Plans imposed from above and more extensive emergent orders bubbling up from – and out of – peaceful and creative responses to quotidian opportunities and ‘disequilibria,’ responses fueled by bourgeois virtues and dignity; less Man of System hubris and more regard for (to quote Thomas Sowell) the need for “elbow room” for men and women who, if peaceful, are entitled to “a refuge from the rampaging presumptions of their ‘betters.’”
Happy 2012 everyone.
Comes this e-mail in response to today’s Quotation of the Day; I withhold my correspondent’s name:
DB: So you telling us that facts are subjective. How convenient for you Austrians to dismiss facts which do not tell the story you want to tell to push your destructive ideology and slapstick economics. Stick to preaching brother and leave real science to Paul Krugman and other people capable of thinking at levels beyond that [sic] of two year olds.
Happy New Year.
I’ve no inclination now to rehash old methodological arguments. So I offer this observation from Steve Landsburg; it’s from page 124 of The Big Questions:
Everything we know “based on evidence” is actually based on evidence together with appropriate theory.
Yep. And much of what we “know,” even when based on solid evidence, is wrong when that evidence is combined with inappropriate theory – such as the theory (for that is all that it is) that everyone called “Americans” are so unified in history, thought, interests, preferences, information, understanding, and expectations that we can usefully be thought of – that we can usefully be discussed and analyzed – as if we, this aggregate of 300+ million individuals all eligible for passports issued by Uncle Sam, are pretty much, close-enough to being a single individual (or, at least, a family whose surname is “American”).
… is from page 161 of Fritz Machlup‘s 1964 collection International Payments, Debts, and Gold; in particular, it’s from Machlup’s chapter – written exclusively for inclusion in this volume – “The Mysterious Numbers Game of Balance-of-Payments Statistics”:
[T]here is insufficient realization of, or at least insufficient emphasis on, the impossibility of obtaining reliable and permanently relevant statistical counterparts for the theoretically important concepts.
See also this superb 1991 essay by Bob Higgs, in which he details problems with data collection and interpretation that are too often overlooked.
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