Once upon a time it was claimed that the government’s debt didn’t matter because we “owe it to ourselves.” Each government bond is a claim on taxpayers, and if all of the bondholders are taxpayers from the same country the size of the debt would be irrelevant to the total sum of the country’s financial wealth.
Bob Murphy did a good job some years ago dispelling several myths of this reasoning.
Not all taxpayers are the same – some will gain from the government’s debt and some will lose. For example, a poor immigrant working paycheck to paycheck to make ends meet will not see much advantage from the taxes he must pay to settle the debts of a past government.
Perhaps more importantly, the debt represents government consumption of resources which may have been devoted to better ends. Neta Crawford and Catherine Lutz of Brown University recently estimated that the combined direct costs of the defense projects wars in Iraq, Afghanistan and Pakistan over the last decade cost up to $4 trillion (and that’s just the actual costs incurred overseas, excluding lost lives and resources that could have otherwise been used.)
What about that government debt that we don’t owe ourselves? It matters a great deal, as it means that when it is repaid Americans will have to transfer financial wealth to foreigners.
This year the amount of foreign buyers of U.S. Treasury debt hit a new record high. The U.S. government owes foreigners $5.95 trillion. That’s nearly $20,000 for every man, woman and child in the country. The cynic in me wants to point out that only a small portion of those people are actually privately employed and paying taxes which will service this debt. If we just count those “lucky” few, the average private American worker is in debt over $50,000. And remember, this figure just includes debt owed to foreigners by the U.S. government that the taxpayer will need to pay back some day. There is still all the debt that the government owes to Americans, plus the private debt these people hold that will need repayment someday.
We don’t just “owe it to ourselves”. There are real costs to the U.S. government’s borrowing. I suspect that when the bills start coming due and Americans have to pay for this debt through higher taxes we’ll be asking whether all this deficit spending was really such a good idea.
(Originally posted at Mises Canada.)
