Thursday, February 10, 2005

The Real Meaning of the "National Debt"

UPDATED 02/12/05 (new text in bold)

The so-called national debt is really the debt of the government of the United States of America. I have written before about the debt and why it isn't all that important, in spite of the hysterics it invokes. Some writers (The Skeptical Optimist via EconoPundit, for instance) try to diminish the importance of put the debt in perspective by comparing its size with GDP, which they take as an indication of "our" is analogous to a standard measure of a private debtor's ability to service the debt.

I have two problems with that depiction of the debt. First, that depiction assumes it might be taken by as a suggestion that it's necessary to pay off the debt* -- as if it were a home mortgage -- which is a notion that I have previously debunked. (Steve Conover, The Skeptical Optimist, doesn't mean to suggest that the debt must be paid off. In fact, he has written several excellent pieces about the debt and why it needn't be repaid.**) My second objection arises from the first, and is more fundamental. The debt really is a measure of the extent to which spending by the U.S. government has exceeded taxes collected by the U.S. government since 1789. In other words, the damage has already been done: first, by government spending, which on balance diverts resources from productive uses; second, by the inflationary effects of government spending, which deficits merely aggravate. (For more on those two points, see the preceding post -- especially the final four paragraphs.)

The notion of paying off the debt -- or measuring "our" ability to pay it off -- is an unfortunate and inappropriate carryover from personal and corporate finance. (The notion persists in spite of the writings of sensible thinkers like Steve Conover.) We, the citizens of the United States, already have paid off the debt of the United States government by allowing that government to commandeer resources from the private sector -- a self-inflicted sacrifice that can be measured in the trillions of dollars, and which encompasses not only the debt but most of what government has spent on activities other than defense and justice. Why should we now worry about paying off the shadowy residue of the debt, which is nothing more than an approximate measure of the wasteful ways of the U.S. government? Who's going to make us fork over, the shade of John Gotti?

P.S. A reader says:

You leave out one small detail from your post – interest on the debt. That is not an accounting entry and is most definitely not “in the past.” It’s the present and the future and it’s very real. $135.46 billion in FY2005.

And of course, fluctuating interest rates notwithstanding, the debt is very good proxy of the national interest burden, which must be paid in cash today by taxpayers today.

My reply:

Interest on the debt is real -- but it's essentially a transfer payment from one set of persons (taxpayers) to another set of persons (those who hold the debt). Because the two groups overlap, it's sort of like robbing Peter to pay Peter and Paul. (Where's Mary when you need her?)


* The usual meaning of "debt service," in my experience, is "interest payment plus repayments of principal to creditors, that is, retirement of debt," which is the definition given in The New York Times Financial Glossary.

** Recommended articles and posts by Steve Conover:

Deficits, the National Debt, and Economic Growth: Summary

Deficits, the National Debt, and Economic Growth: Who Owes Whom? Think.

How to Neutralize the National Debt's Interest Burden

Deficits, the National Debt, and Economic Growth: We'll Never Have to Pay It Back