The Burden of Government Debt

There has been an awful lot of discussion in recent months about whether government debt is a burden for future generations. The discussion has gone something like this: those who believe government debt is a burden claim that it is a burden because future generations have to repay taxes for present spending, those who believe that it is not claim that every debt is also credit, and so because the next generation will inherit not only the debt but also the credit, that government debt is not in itself a burden to future generations, unless it is largely owed to foreign creditors.

It is relatively easy to calculate what the monetary burden of government debt is. Credit inheritance and debt inheritance are not distributed uniformly. The credit inheritance is assumed strictly by bondholders, and the debt inheritance is assumed strictly by taxpayers. Each individual has a different burden, equalling their tax outlays, minus their income from government spending (the net tax position).

For an entire nation, everyone’s individual position is summed together. In a closed economy where the only lenders are domestic, the intergenerational monetary burden is zero. But that is by no means the entire story.

First, debts to foreign lenders are a real monetary burden, because the interest payments constitute a real transfer of money out of the nation. Second, while there may be little or no debt burden for the nation as a whole, interest constitutes a transfer of wealth between citizens of the nation, specifically as a transfer payment from future taxpayers to creditors. This adds up, at current levels, to nearly half a trillion of transfer payments per year from taxpayers to creditors. So while the intergenerational burden may technically add up to zero for the nation, it will not for individuals. The real burden is huge transfers from those who pay the tax to those who receive the spending, and those who receive the interest. So who loses out?

Here are the figures for 2009 showing net tax position for each income quintile:

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

What this data does not show are the reverse transfers via interest payments. There is no data (that I can find) on treasury interest payments received by income quintile, but assuming that the top quintile dominates income from interest (as they dominate ownership of financial assets, owning over 95% of all financial assets) this leaves the lower income quintiles benefiting from transfer payments, the top quintile benefiting from interest (as well as policies like bank bailouts, corporate subsidies, and quantitative easing, whose benefits overwhelmingly benefit the top quintile), and squeezing the taxpaying middle quintiles who receive neither the benefits of interest payments, nor significant welfare transfers.

To misquote George Orwell, when it comes to the national debt and who takes its burden, some pigs are definitely more equal than others.

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The Economics of the War on Terror

The cost of the global war on terror since the attacks of 9/11? Almost $4 trillion.

That’s almost half of what the U.S. has added in debt since 2001:


Without the war on terror, America’s national balance sheet would look much healthier.

So has it been worth it?

America’s free spending national security hawks, frothy at the mouth, might say yes.

But the deeper reality seems to be that terrorism is a relatively small — and some would say negligible — threat:

The chronic exaggeration of U.S. national security threats also extends to the security of individual Americans. Since 9/11, a total of 238 American citizens have died from terrorist attacks, or an average of 29 per year. To put that in some perspective, according to the Consumer Product Safety Commission, the average American is as likely to be crushed to death by televisions or furniture as they are to be killed by a terrorist. A recent study from Duke University found that, since 9/11, eleven Muslim Americans were involved in active terrorist plots in the United States, which killed thirty-three Americans. Over that same time period, there have been nearly 150,000 murders and over 300,000 suicides.

So should we declare war on people being crushed to death by televisions and furniture?

Most tellingly, from 1980 to 2005 only 6% of all terrorist events in the U.S. was Islamist in nature:

The spectacular imagery of 9/11 blinded American policymakers. Whether it was a case of guilt as a result of their failure in spite of the warnings to protect America, or whether it was that the events of 9/11 became an excuse to exercise preconceived (and in my view ill-conceived) foreign policy objectives, policymakers matched the spectacular image of 9/11 with an equally spectacular spending spree.

And yes — America has not been hit by a spectacular terrorist attack since. But it hadn’t really been hit by a spectacular terrorist attack before. 9/11 was  — whatever your wider view of the incident — a black swan event: high impact, and unprecedented. And the problem with black swan events is that very often they are not repeated, and so spending money to prevent future occurrences is more or less a waste of money.

America faces a whole swathe of real risks far far bigger than international terrorism including derivatives contagion, global trade fragility, climate instability, and electromagnetic pulses. We don’t know what the next calamitous black swan event will be. But I’m pretty sure that a whole boatload of money will be spent on preventing it after it has happened, just as trillions have been wasted on preventing jihadist terrorism after it has already done the damage.

And the biggest problem here is the spending. $4 trillion of productivity was wasted. Keynesian multipliers are irrelevant — the money would surely otherwise have still been spent, and on more productive and useful endeavours. That’s a pretty big opportunity cost.