March 22, 2021
I keep asking this question because whining over the government debt looks to be a huge growth sector in the next year or two, or perhaps until Republicans retake the White House. I regularly ridicule debt whining, because, unlike its cousin, deficit whining, it has no basis in economic reality.
Before again showing why the debt is a meaningless number, let me contrast it with the budget deficit, which can be a real cause for concern. The way in which deficits can pose a problem is that a large deficit can push the economy beyond its ability to produce goods and services.
This is a textbook story that happens to be accurate. The point at which the economy is being pushed too far by a budget deficit is not easy to determine and it varies hugely over the course of the business cycle.
When the economy is in a severe slump, there is plenty of excess capacity and unemployed workers, and therefore little basis for concern that a deficit is creating more demand than the economy can supply. However, near the peak of a business cycle, when the unemployment rate is already low, a large budget deficit can create demand that the economy is unable to meet.
The consequences of excessive demand are hard to know at this point. One possible consequence is that the Federal Reserve Board decides to raise interest rates. This will reduce demand by reducing housing construction and to a lesser extent lowering public and private investment. It also is likely to raise the value of the dollar, which leads to a larger trade deficit, which will also lower demand.
But suppose the Fed doesn’t raise the rate. Fed Chair Jay Powell indicated that he plans to keep short-term rates near zero for the immediate future. In the old days, we would have thought that would create serious problems with inflation, but that is less clear now.
First, the economy is far more internationalized, which means that is easier for excess demand in the United States to simply spill over to increased demand for imports, rather than driving up domestic prices. This is pretty much the story that we see if a single state has very strong demand.
If Ohio were to have a booming economy, it would mostly translate into higher demand for a wide range of goods and services from neighboring states, not an inflationary spiral in Ohio. This is likely to be the case with any excess demand that results from large budget deficits here.
The other major difference between the economy of today and the economy of the 1970s, the last time we saw an inflationary spiral, is that unions are much weaker today. This means workers have far less bargaining power.
While this is a big part of the story of the growth of wage inequality over the last four decades, it does mean that we are less likely to see the sort of wage-price spiral we saw in the 1970s. If we do see a rise in prices due to excess demand, it is unlikely that workers today will be able to respond by demanding higher wages.
For these reasons, whether or not the large budget deficits that we are now seeing will lead to problems with inflation is an open question. I have argued that it is worth pressing the economy to try to get back to full employment quickly, as well as do many of the positive things included in the American Recovery Act, such as increasing the child tax credit and enhancing the subsidies in the health care exchanges. But there is a real basis for concern about inflation.
The Debt Is Not a Measure of Anything
While deficits are potentially a problem, the debt is not, first and foremost because it doesn’t really measure anything. The debt whiners are fond of telling stories about how the debt is a burden on our children, or how the debt can lead to financial crisis and other bad things, but these claims are inventions, not economic realities.[1]
Interest that we pay on the debt can be a burden, but it is dwarfed by other factors like productivity growth. (The impact of ten years of even modest productivity growth swamps an increment to debt service that we pass onto to our kids from higher deficits today.) Furthermore, debt service burdens at present and the near-term future will almost certainly be much smaller than what we saw in the 1990s.
But there is another aspect to this story that our debt whiners desperately do not want anyone to talk about. Direct spending is only one way in which the government pays for things. We also pay for things, like coronavirus vaccines, by giving out patents or copyright monopolies.
These monopolies can be very costly. In the case of the coronavirus vaccines, they mean that we are paying roughly ten times as much for each vaccine as we would in a free market. Vaccines that would likely cost around $2 a shot instead cost us $20. And, they may cost us even more in future years if we need boosters after the pandemic is over.
These government-granted monopolies are effectively a form of government debt. Incredibly, I have literally never seen any of the debt whiners ever mention the hundreds of billions of dollars in rents paid out each year to drug companies, medical equipment suppliers, software companies, or other beneficiaries of these monopolies as part of the burden of the debt. This in spite of the fact that the rents from these monopolies are several times larger than the debt service that we pay out on the official debt.
But let’s flip the story over in the hope of teaching something to the debt whiners. Suppose that we looked to replace much or all of the debt that troubles them with new patent monopolies. Imagine that we sold off trillions of dollars worth of patent monopolies to pay off a large chunk of the debt.
If this sounds strange it is important to step back for a second and think of the logic of a patent or a copyright monopoly. While we ostensibly link the award of these monopolies to innovation or creative work, there is no necessary link.
At the point where the rents are being collected, a patent or copyright monopoly is simply a monopoly on a particular item. It doesn’t matter one iota whether the monopoly was awarded due to some brilliant innovation or whether it was awarded due to a payoff to a Trump friend or family member. The monopoly means that the holder gets to charge a price far above the free market price.
With this in mind, suppose the government decided to auction off monopoly selling rights to a number of goods and services. (We can even call them “patents” to make people feel better.) We surely could raise enough to pay off the national debt.
Just to take my favorite example, patent rents on prescription drugs will be over $400 billion this year. (I explain how I get this figure here.) Patents have a limited lifespan, but let’s imagine the ones we auction off to continue in perpetuity. The current interest rate on thirty-year Treasury bonds is roughly 3 percent. This means that to generate the $400 billion in rents earned on prescription drugs, we would need $12 trillion in Treasury bonds.
Therefore, the claim to patent right on prescription drugs lasting in perpetuity should be worth roughly $12 trillion. If we had this auction and got $12 trillion, we could reduce our national debt by an amount equal to 60 percent of GDP. That should make the debt whiners very happy.
In fact, we can go further. I calculated that total patent rents in the economy come to over $1 trillion a year. If we auctioned off these rights (again being carried on in perpetuity) it should raise more than $30 trillion, more than enough to eliminate the national debt altogether.
And, we aren’t limited to just auctioning off patent rents on the items where companies currently get them. We can auction off monopoly rights on anything, on selling cars, computers, bread, haircuts, anything. We can raise vast amounts of money through this route and make the debt whiners very happy.
Of course, these rents do have real economic costs. They create large economic distortions (think of tariffs of many thousand percent) and they create perverse incentives. We see this with the patent rents we currently have. For example, pharmaceutical companies misled physicians about the addictiveness of the new generation of opioids to maximize their sales. As economic theory predicts, patent monopolies give drug companies incentives to push their products as widely as possible, even if it means misleading doctors and the public about their safety and effectiveness.
But the debt whiners only care about the debt issued by the national government, they don’t care at all about the burden of patent and copyright monopolies. So, we can answer their concerns simply by issuing enough of these monopolies to bring the debt down to a level that makes them happy.
The National Debt is a Meaningless Number
Perhaps some folks will read the prior section and decide that we need to auction off a large number of monopolies to reduce the national debt. The sane ones will instead recognize that the debt is a largely meaningless number. It can imply larger debt service burdens, and that can be a problem, but this is a very small part of the economic picture, especially compared to items like patent rents that get almost no attention at all from economists. What really matters is the underlying strength of the economy and society that we pass on to future generations.
I have no idea if the debt whiners understand this point and try to obfuscate reality, or are just confused. As the old saying goes, “economists are not very good at economics.” But anyhow, the rest of the country need not take their debt whining seriously.
[1] One famous instance of debt mongering turned out to be literally an invention. The claim promoted by Carmen Reinhart and Ken Rogoff, that growth slowed when the debt-to-GDP ratio crossed 90 percent, turned out to based on an Excel spreadsheet error.
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