Maverick Philosopher

Footnotes to Plato from the foothills of the Superstition Mountains

Bad Economic Reasoning about the National Debt

Written in December, 2012.

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When I study the writings of professional economists I often have to shake my shaggy philosopher's head.  Try this passage on for size:

$16 trillion is the amount of Treasury debt outstanding at the moment. [It is around 36 trillion now.] The more relevant figure is the amount of debt the federal government owes to people and institutions other than itself. If, for some reason, I lent money to my wife and she promised to pay it back to me, we wouldn’t count that as part of the debt owed by our household. The debt owed to the public is about $10 trillion these days.

What a brainless analogy!  Suppose I loan wifey 100 semolians.  She issues me a 'debt instrument,' an IOU.  Has the family debt increased by $100?  Of course not.  It is no different in principle than if I took $100 out of my left pocket, deposited an IOU there, and placed the cash in my right pocket.  If I started with exactly $100 cash on my person I would end the game with exactly the same amount. 

But I do not stand to the government in the same relation that I stand to myself or to my family.  Suppose I buy $100 K worth of Treasury notes, thereby loaning the government that sum.  Has the Federal debt increased by $100 K?  Of course it has.  I am not part of the government.  Whether the government owes money to U. S. citizens or to the Chi-Coms makes no difference at all with respect to the amount of the debt.  The citizens plus the government do not form a "household" in the way my wife and I form a household.  Citizens and government are not all one big happy family.

The analogy is pathetic. Didn't Barack Hussein Obama say that the government is us? That is bullshit pure and simple out of the mouth of a master bullshitter.  

The author would have you think that "the more relevant figure" is $16 trillion minus $10 trillion = $6 trillion.  False, because based on a false analogy. 

This shows how ideologically infected the 'science' of economics is.  Only a leftist ideologue could make the collectivist assumption that I have just exposed.  The Marxian "From each according to his ability, to each according to his need" is a viable principle at the level of the family, but it is pernicious nonsense on stilts when applied to the state in its relation to the citizenry. 

But then I am no economist. Show me I'm wrong, and lunch is on me when next our paths cross.

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Bill Vallicella

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6 responses to “Bad Economic Reasoning about the National Debt”

  1. ostrich Avatar
    ostrich

    The quote says “The more relevant figure is the amount of debt the federal government owes to people and institutions other than itself.” If indeed there is lending and borrowing from the government to itself, then the household analogy holds.
    But the $100k you mention is the gov borrowing from people (yourself) and institutions other than the gov, so I don’t follow your objection to the argument.

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  2. ostrich Avatar
    ostrich

    PS here is the correct link to the article. The argument is more subtle, but I think still wrong. The government borrows money by issuing bonds, but expects to get the money back via taxation. The problem is that the tax income cannot be guaranteed. Typically if tax goes beyond a certain percentage of people’s income, there is political resistance, and the gov is voted out. The new gov, responding to taxpayers’ concerns, deflates the debt by inflating the currency. That is precisely what happened in the UK after WW2. Saddled with an enormous debt from the war, it escaped the burden by inflation.

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  3. BV Avatar
    BV

    You are missing the point. The author is trying to argue that the nat’l debt is less than it is because part of the debt is money owed to U. S. citizens. But the debt is what it is regardless of the party to whom the debt is owed.

    Reply
  4. oz Avatar
    oz

    Three comments are listed, but none (including mine) is showing up

    Reply
  5. BV Avatar
    BV

    Four are showing up on my end, three by you and one by me. Please confim.

    Reply
  6. ostrich Avatar
    ostrich

    Yes they are all visible now.
    On what the author is trying to argue (emphasis on ‘trying’). You need to read the para beginning ‘So where do Cox and Archer get $86 trillion? …’ The argument is that the stream of payments from Medicare withholding tax is effectively an asset for the gov, whose value is the present value of that stream of receipts. This asset can be netted against the liability represented by medicare payments, whose value is the present value of that stream of payments.
    Their reasoning is perfectly correct, in my opinion, although imperfectly expressed.

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