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Friday, April 26, 2024

Who benefits from the national debt?

A STAFF REPORT FROM THE STRAIGHT DOPE SCIENCE ADVISORY BOARD

By  Straight Dope Staff
   
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Dear Straight Dope: I recently visited the U.S. Mint website to find one of the state logos of the new quarters being put out. At that site I perused the FAQ section and found one of the answers troubling. The FAQ and answer is: What will the 50 State Quarters Program cost U.S. taxpayers? Nothing. In fact, the U.S. Government will make money on the 50 State Quarters Program. The cost to manufacture a quarter is about 5 cents, providing a profit of approximately 20 cents per coin. In a previous column Cecil explained why the Federal Reserve does not just make more money to pay off the national debt as: “If you double the amount of money in circulation without increasing the amount of underlying wealth, all you’ve done is make your currency worth half as much.” But the U.S. Mint is telling me that they are making money based on nothing more than what it costs to manufacture the money. What’s up with that? The real question I have, though, is about the national debt. Who does it serve for the U.S. to maintain a national debt? Is it the politicians who insist that a national debt is not a problem because they are the ones who are profiting from U.S. taxpayers paying interest (we must be paying that interest to someone)? Or is it some entity like the World Bank who prefers that a country stay in debt so that there is essentially indentured servitude by a whole country, making that country’s money worth more--in other words is the underlying wealth of the U.S. its indentured servitudeness? pfm, Albuquerque

hawthorne replies:

Before we get to your “real question,” pfm, let’s deal with the coins. Coins wear out. They get lost behind sofas and down drains. And people collect them–125 million people are collecting the State Quarters, according to the Mint. Issuing new coins is not “making more money” in any of these cases, so it’s not inflationary. Whether it raises revenue for the government depends. If you hand in your mangled quarter and the government swaps it for a shiny new one, clearly that’s cost the government about five cents (less scrap value). If the government replaces a lost coin, it’s spending a small amount to grab the (tiny) increase in value that would otherwise accrue to holders of money, the theory being that if money is withdrawn from circulation, the value of what’s left rises. (We note in passing that printing money to pay off debt would amount to a large tax on the holding of money.) If the coin disappears into the hands of collectors, the government makes a clear profit at no obvious expense to anyone.

On to your question about debt. If I may take the liberty of ignoring the paranoid element, you want to know what’s the deal with (i) having existing debt and (ii) adding to that debt by running a budget deficit. The key point is simple: Government debt is future taxation. As long as the government doesn’t repudiate the debt–unlikely for the U.S.–future taxes will have to be higher to service it.

In looking at the effects of this, I’m going to sidestep three issues to keep to a vaguely sensible length: (i) Whether it’s advisable to run deficits to stimulate a sluggish economy; (ii) whether it’s desirable to have an official bond market, a by-product of government debt; and (iii) whether the problems of measuring what’s going on in government accounts are so severe as to make it impossible to assess the generational effects of budgetary policy.

One view is that government debt doesn’t matter at all. Suppose you have a tax bill of $100. You could pay it now, or you could get a loan at, say, 10% interest and pay off the $110 loan next year. Or you could just keep paying interest and never pay off the loan. On this view, when the government runs a deficit and issues new debt, the private sector understands that this means that taxes will be higher in the future and makes provision for it by adjusting savings. Whether the accumulated debt is paid off or interest is paid on it forever makes no difference.

This view is known as “Ricardian equivalence” because it was first raised–and swiftly rejected–by the English economist David Ricardo in 1817. It has had a resurgence in recent times but has never been the mainstream view. Two common if contradictory objections: (i) People are too stupid or shortsighted to fully account for the future taxes implied by debt; and (ii) people aren’t stupid–they understand that taxes will be higher in the future but figure that they will be paid by someone else. There is evidence for both of these views. There’s even some in your question, pfm.

If Ricardian equivalence doesn’t hold, some of the burden of debt will fall on future generations. Whether that’s acceptable depends on what it’s spent on. Either we’re insisting that our descendants bear some of the cost of the massive infrastructure they’ll inherit from us, or we’re holding a big party for ourselves (or a favoured clique) and leaving them the bill.

hawthorne

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STAFF REPORTS ARE WRITTEN BY THE STRAIGHT DOPE SCIENCE ADVISORY BOARD, CECIL’S ONLINE AUXILIARY. THOUGH THE SDSAB DOES ITS BEST, THESE COLUMNS ARE EDITED BY ED ZOTTI, NOT CECIL, SO ACCURACYWISE YOU’D BETTER KEEP YOUR FINGERS CROSSED.