Ignore the Alarmists, the Public Debt Is No Burden At All

Many have written articles clamouring at and assailing the dreaded Public Debt of various municipalities, states, provinces and nations. When have economists, thinkers, politicians, and citizens not deplored the public debt and perceived burden inherent in these ornate pieces of paper issued and accumulating in ever greater amounts over the years? But is the Public Debt, so condemned and derided, the scourge all believe it to be?

In truth, the expanding public debt is no burden at all, whether public IOUs are passed along from generation to generation, or recalled and lenders repaid.

To grasp better the subject and settle the enduring controversy, one must turn to Ricardian Equivalence, a little known idea that confirms it makes no difference to resident citizens whether the government taxes or borrows to fund public expenditures.   

Suppose a government requires $100 for some public expenditure. It can tax or borrow to acquire the funds. If it tax, $100 leaves the bank accounts of resident citizens, specifically taxpayers, and the public good is supplied. If it borrow, again $100 leaves the bank accounts of resident citizens, specifically lenders, and the public good is supplied. Thus far there is no difference between Taxation and Borrowing.

However, in Borrowing there is added paperwork. A resident lender cedes $100 and receives a government IOU of $100. The IOU grows with interest, say to $300 after a term, whereupon the lender presents the IOU to the authorities who must settle the obligation.

Suppose the government in some straits decides to roll over the debt by finding another resident lender. With terms accepted, $300 transfers from a secondary lender to the initial lender in return for the IOU. One party is out $300 and the other has gained $300 leaving the aggregate finances of that jurisdiction unaltered in the exchange as -$300 & $300 sum to zero. The newly acquired IOU grows with further interest until a future settlement day.

Suppose the government decides instead to redeem the IOU. The government acquires $300 by taxing residents of the jurisdiction. The IOU is erased and the resident lender is enriched with $300, his initial principle of $100 along with interest of $200. In the transaction there are winners, the lender who gains $300, and losers, the taxpayers who lose $300, but in the aggregate there is no change.  

In conclusion, $100 initially leaves the bank accounts of resident citizens, whether taxed or borrowed, to fund a public expenditure. Future debt rollovers and debt repayments do not affect the aggregate finances of that jurisdiction. Why then do so many decry the impending disaster of public debt when repayment or rollover really has no effect on the collective assets, property and incomes of the resident citizens of a jurisdiction?

Some may argue that the resident taxpayers are bereft of $300 on the settlement of debt. True, but at the time the debt was issued taxpayers were spared surrender of any funds. In fact, they could have supplied funds to government as a loan earning a specified rate of interest, as perhaps some did, or perhaps they had better uses and created greater value for their money. Though all purportedly benefit from the use of the public good, resident taxpayers freely retained and directed $100 to present enjoyment whilst lenders freely sacrificed present enjoyment of $100 for future returns. Whether pain now and pleasure later, or pleasure now and pain later, it all balances out in the aggregate.

Therefore, if the burden of public debt does not afflict the aggregate finances of future generations, upon whom falls the damaging effects of $100 borrowed and expended by government?

There are always costs in the things that one does and there are always benefits. In an undertaking or venture it’s the inputs of the day: labour, equipment, material that are garnered and consumed. Individuals and firms, which are owned by people, labour at making benefits exceed costs. If the effort yields superior returns, that is greater sales or lower costs in the supply of goods, new or existing, the investment is accounted a success. If not, hopefully the financial future of the firm is not fatally impaired. Generally, firms and persons succeed in enlarging profits or wealth.

With public expenditures no such measure exists. Funds are borrowed, and resources are commandeered and consumed. But did the outcome justify the expenditure? Did citizens enjoy returns exceeding all costs?

Had the public expenditure produced real returns: lowered costs or increased income for business and labourers, or diminished prices for consumers, then one may declare the public expenditure a success. If government failed to elicit desired results, then all are impoverished, all suffer rather than thrive. Generally the latter is the case in public expenditures. Squander of resources is commonplace and pains are inflicted on those dwelling in the present, not in the future.

Is it wrong to think the detrimental effects of wasted funds apply solely to projects of borrowed monies?

Government has no money, no hoard of assets to call its own. What it spends is either confiscated from taxpayers or enticed from lenders. There is a taxed portion to the deficit and a borrowed portion, but all public expenditures are deficit or debt financed, unaccounted as these may be.

Waste is waste. The problem is not that the U.S. Federal Government is borrowing and spending $1 trillion. The problem is that the U.S. Federal Government is spending above $4.5 trillion with the latest figures, state and local counterparts adding a further $3.0 trillion, much of it in worthless endeavour.  U.S. citizens do not face a $1 trillion problem, nor a cumulative $23 trillion problem. They face perhaps a $100 trillion problem or the combined expenditures of U.S. governments at all levels since their inception. The crucial question is what we are getting for our money, for the labour, equipment, material that government consumes whether disbursed by tax revenues or bond issues?

History repeatedly assures us that public debts once incurred endure forever; That government, after seizing money from the Taxpayer, rarely direct tax revenues to repaying previous debts, preferring instead more spending. When it does make the attempt, the claims of the effort rarely match the results. The desire for greater government overcomes the weak impulse of debt reduction, and the debts once again pile up.

Public debt once issued is not a burden for future generations. However, the labour, material and equipment assigned to and consumed in dubious public projects impoverish the citizens of the day. Had they gone to valued projects or investments, public or private, yielding good returns, resident citizens would have been enriched. Economists, politicians, thinkers, and citizens should cease with pronouncements upon perils of public debts and instead concentrate upon questions of value in public expenditures – all of them.