January 20, 2012
Steve Rattner is very upset. He tells NYT readers
“Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.
Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off.”
Wow, I really would like to find the person who believes that government bonds will disappear when the people who own them die off. I sure hope Rattner can convince readers that this is not true.
However the true statement here, that Rattner either does not understand or is trying to obscure, is that the debt itself is not an inter-generational burden. Since ownership of the debt will ultimately be passed on to future generations (ignoring the portion that is held by foreigners — which a function of the trade deficit), the debt itself is not a generational burden.
It can raise important issues of distribution within generations and the taxes needed to pay for the debt can create economic distortions, but many other things also lead to economic distortions (like patents and copyrights).
To carry this point a step further, since deficits that stimulate the economy today are likely to increase investment (especially if they are used to finance public investment and education), they are likely to make out children richer. Furthermore, the Fed could simply hold this debt and use higher reserve requirements in future years to stem an inflationary impact from a greater volume of reserves in the banking system. In that case, interest on the debt would be paid directly back to the Treasury. Where is the burden on our kids?
[Note: the million dollar prize is a joke.]
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