Since the incomparable William F. Buckley, Jr., has already dealt with this subject in 1958, I defer to his inimitable style in introducing the subject of today’s column:
Halfway through the second term of Franklin Roosevelt, the New Deal braintrusters began to worry about mounting popular concern over the national debt.… Indeed, Franklin Roosevelt had talked himself into office, in 1932, in part by promising to hack away at a debt which, even under the frugal Mr. Hoover, the people tended to think of as grown to menacing size.… And then, suddenly, the academic community came to the rescue. Economists across the length and breadth of the land were electrified by a theory of debt introduced in England by John Maynard Keynes. The politicians wrung their hands in gratitude. Depicting the intoxicating political consequences of Lord Keynes’s discovery, the wry cartoonist of the Washington Times Herald drew a memorable picture. In the center, sitting on a throne in front of a maypole, was a jubilant FDR, cigarette tilted up almost vertically, a grin on his face that stretched from ear to ear. Dancing about him in a circle, hands clasped together, their faces glowing with ecstasy, the braintrusters, vested in academic robes, sang the magical incantation, the great discovery of Lord Keynes: “We owe it to ourselves.”
With five talismanic words, the planners had disposed of the problem of deficit spending…. Tax and tax, spend and spend, elect and elect…
After being pinned to the wall in such eloquent fashion like a rare butterfly, you would think the conceit that “We owe the national debt to ourselves” would have been long retired to some museum of rhetorical antiquities. But no, we find that even today the doctrine is still vigorously alive, at least in the mind of Paul Krugman, the lunatic columnist of the New York Times who has just published another 300-page volume that can be digested into three words: “Spend, spend, spend” — the government, that is.
I admit I stopped reading Krugman a long time ago. You can only listen to a one-track mind for so long before it loses any further informational value. It all reminds me of the scene in Woody Allen’s Take the Money and Run where Virgil Starkwell, the inept career bank robber, drops a rock on the foot of a prison guard and is “locked in solitary confinement for a week with an insurance salesman” whom we last see disappearing into the hole with Woody propounding, “Now you’re gonna need life. I think term would be best. Then we’re going to want to cover you for accidents.…” That’s what Paul Krugman sounds like.
Fortunately, the New York Post’s Kyle Smith has stuck his head into the maelstrom and reports in his Sunday column last week what Krugman is up to these days. Wouldn’t you know, he finds the Nobel Laureate still flogging that same 1930s horse:
“People think of debt’s role in the economy as if it were the same as what debt means for an individual: There’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.”
In actuality, “We owe it to ourselves” is one of those deceiving little pieces of rhetoric whereby liberals put their arm around your and pat you on the back while picking your pocket. Let’s try an illustration. Imagine for a moment that you have taken out a 30-year mortgage on a house and owe the bank $300,000. Two years into your payments you lose some of your income and start falling behind. After three months the bank sends you a note saying that if the situation isn’t straightened out within another three months, they may have to foreclose.
Do you think it would be possible to go into the vice president’s office, put your arm around his shoulder and say, “Look, what’s the difference whether I pay you or not? I mean, we owe it to ourselves, don’t we?”
We don’t owe the national debt to ourselves. Some of us owe it to others. Those who owe are generally called “wage earners,” “taxpayers,” or “U.S. citizens.” Those who are owed are called “lenders” and “bondholders.” Now there may be some taxpayers who are also bondholders and bondholders who are also U.S. citizens, but the two groups are not identical. Reneging on any of the debt will produce an unequal outcome — what Krugman would call a “real transfer of resources.”
Look at it another way. A second class of stakeholders in this game is government employees who have a claim on pension rights that stretch far, far into the future. When the day comes — and it may not be long — that governments find they are having difficulty in meeting these obligations, will it be possible for them to brush off pensioners by saying, “Look, you don’t really need a check right now. I mean, we’d just be paying ourselves, right?”
The problem here is that modern governments are run by people who can’t make these kinds of calculations. This is especially true of the populists who congregate in the Democratic Party. Even the brightest of them see government as an entity above ordinary morality. In an article last week, for instance, USA Today revealed that the true size of the national debt is not the $16,000 per household that registers on the “Deficit Clock” but $42,000 per household — very near the average household income of $49,000. This is because, contrary to the rules that govern private companies and state and local governments, Congress does not require itself to include future health and retirement commitments on its books. That’s enough to take $3.7 trillion off the annual shortfall, chopping it from $5 trillion to $1.7 trillion.
What was really scary, however, was the comment of one Jim Horney, a former Senate budget staff expert now at the liberal Center on Budget and Policy Priorities. He told USA Today that “retirement programs should not count as part of the deficit because, unlike a business, Congress can change what it owes by cutting benefits or lifting taxes.” Did you get that? We can ignore future commitments to Medicare and Social Security because — what the heck — we can always just cut benefits or raise tax rates to something like 90 percent. All that will be required is the “political will.” Even liberals who can add and subtract generally don’t have the nerve to confront what they’re doing.
The national debt is not owed “to ourselves.” It is owed to bondholders who have loaned money on the understanding that they are going to be paid back. Even Democrats in the highest positions often have trouble grasping this reality. During the early days of the Clinton Administration, when the new President was being told he couldn’t borrow heedlessly to stimulate the economy, James Carville became famous for complaining, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Apparently it never occurred to Carville that there are real people out there buying those bonds.
The bond market is not an abstraction. It is a group of people who have loaned money to the government. As creditors, they are acutely aware of the unspoken words at the end of “We owe it to ourselves,” which are, “We owe it to ourselves, therefore we really don’t have to worry about paying it back.”
Now of course we’re a long way away from not paying anything back. As long as there is trouble in the world, as long as the stock market remains remain uncertain, as long as real estate is risky, as long as the full faith and credit of Tanzania or Portugal is open to question, there will investors eager to snap up U.S. Treasury Bonds. In fact with things falling apart among all those Eurozone countries who only “owe it to themselves,” interest rates on 30-year Treasuries are at their lowest rate in decades. But let’s look 30 years out to a time when some of those commitments will be coming due.
In 1938 or even 1978, it might still have been possible to argue “We owe it to ourselves.” Most bond holders were U.S. citizens who could always be stiff-armed because “their loss is our loss.” But that is no longer true. About 30 percent of the $16 trillion U.S. debt is now owned by foreigners. The Chinese government is the third largest creditor, behind the Federal Reserve and the Social Security Trust Fund, owning 8 percent of the total. The Chinese now hold more than all U.S. households combined. Japan, the UK, Brazil, Taiwan, and Hong Kong are also big lenders. Foreigners now own more than half the debt not held by some division of the U.S. government. If the debt continues to pile up at a rate of more than $1 trillion a year, paying it off will involve a “real transfer of resources.”
Yet as Greece is demonstrating now, the system won’t fall apart because we can’t pay our debts. It will eventually fall apart but because we won’t be able to go on borrowing to maintain our standard of living. The crisis will come to a head when investors decide to they don’t want to lend anymore. Then it will be impossible to meet day-to-day expenses. If a left-wing government takes control of Greece this month and renounces its obligations, Greece with not have enough money way to pay the hundreds of thousands of government employees and pensioners who receive a check each month. That’s when “We’re-all-in-this-together” finally bites back.
Now all this probably isn’t going to be enough to convince Paul Krugman that government deficits have real consequences. But I’ll tell you what. Next time you read one of his columns saying how spending borrowed money is the only way to end a recession, drop him a note saying the following:
Hey Paul, I’m having a little trouble paying the rent this month. Do you think you could loan me a couple of thousand dollars? It’ll carry me over and maybe in a while things will get better. And as far as paying you back — well, look, we’re all in this together, right? We’ll owe it to ourselves.
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