Wednesday, February 13, 2013

Another way to look at the national debt. More comforting, less scary.

Another way to look at the national debt. More comforting, less scary.
One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. . . . So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later). The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse). A third groups a more vague form of comfort, such as “Another way to look at the national debt” by Zachary Karabell. . . .

Fabius Maximus' critique of Karabell's article is interesting, but more interesting are his* own opinions about the debt:
[G]overnment debt (eg, 30 year Treasury bonds) are not currency in any meaningful form. .They vary in price (currency is the standard of measurement). More importantly, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic. It is a political decision to do so, inflating away the value of the loans.

Which brings us to the key issue: we do not owe the debt to ourselves. We owe it to people and institutions, many whom great political power — and will exert it to see that they’re paid in real money. . . . The 1% are the creditors of the nation, both public and private debt. The late 19th deflation served their interests well, crushing the economic and political strength of the small farmer, craftsman, and merchant classes — debtors crushed by the increased value of their loans in real terms. The rise and bursting of the housing bubble and the great recession had a similarly beneficial effect for the 1%.

Economics were, are, and probably always will be tools of the 1%; economists are their handmaidens. . . .

[T]he money we borrowed has been largely squandered. Foreign wars, building a vast domestic security system to defend against non-existent threats, and gifts to the 1% and their corporations. Easy credit often leads to poor spending. Now that $6 trillion of spending is gone along with the winter’s snow, and only the debt remains.

*"Fabius Maximus" is a genderless collective pseudonym for the blog authors.

Fabius is both incorrect and correct. In purely economic terms, he is incorrect: the debt by itself is not much of a problem. We can have a pretty much arbitrarily high debt without reducing our production of real goods and services. Of course, we have spent real human time and energy on stuff we do not want — wars and the police state — instead of producing more real goods and services or affording people more leisure or work choice, and that real spending, however we account for it, is definitely an economic problem. But that we have accounted for that real waste (and some useful stuff too) by arbitrarily labeling it as "debt" is not an economic problem.

In political terms, Fabius is mostly correct, but the debt is as much a symptom of a deeper political problem as it is a political problem in its own right. Debt is not how the 1% gets its power, debt is how the 1% exercises its power. By calling the exercise of their power "debt," they are evoking our very deep cultural values of reciprocity and fairness. But of course there is no actual reciprocity or fairness in our dealings with the 1%.

Consider the King who passes a law saying that he wields absolute executive power. The problem is not the law itself; the problem is that the King can pass such a law. All the King is doing is being explicit about what is already true. In a similar sense, the national debt is just the 1% saying, "We demand $6 trillion of real goods and services." The demand itself is a problem, of course, but the underlying problem is that they can make that demand, and make it stick.

To deal with the debt by refusing to use the government's power to arbitrarily demand real goods and services to stimulate the economy in a recessionary gap is to simply cede veto power to the 1%. And to simply try to pay back the debt is again playing into the hands of the 1%. They're more than happy for the 99% to cut back consumption and government spending (and to correspondingly cut back production) so long as their own relative political power is not compromised.

Our problem is not extraordinary mismanagement of our economy, and the national debt is not a symptom of extraordinary economic mismanagement. It is, rather, a symptom of our political system, which has been and continues to be intentionally and explicitly designed to privilege the capitalist ruling class. As their political mismanagement grows, either the people will become dissatisfied and rebel, or they will undertake a catastrophic adventure. And then our institutions will change, hopefully for the better.


  1. I'm confused about the precise mechanism claimed. In what sense is the national debt a debt owed to the 1%? Do you mean that government bonds are literally owned by the 1%, or that the 1% wields political control over the use of the debt?

  2. Assuming that the distribution of ownership of government debt is roughly proportional to the distribution of wealth overall, according to Wikipedia, we would expect the top 1% to own about 34% of government debt held by households, with the top 20% holding about 85%. That does not, I think, count government debt held by domestic corporations, which are, of course, predominantly owned and operated by the top 1%.

    So yeah, the top 1% directly or indirectly literally owns a large proportion of US debt. Whether they can actually collect might be a different issue.


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