January 22, 2012
Steven Rattner remains convinced that handing future generations trillions of dollars of government bonds imposes a burden on them and is very unhappy that I don’t see things that way. Let’s try this one more time.
Let’s say that we add $10 trillion to the national debt over the next decade. We’ll assume that it is owned domestically. That is of course not true, but the foreign ownership of debt is determined by our trade deficit, which in turn depends on the value of the dollar, not the budget deficit. Furthermore, no one is disputing that foreign ownership of U.S. assets (either government debt or private assets) will be a drain on the economy.
At some future point, everyone who owns this debt today will be dead. They will have no choice but to hand this debt on to members of the next generation, either their own heirs or someone else’s. (Note, contrary to Mr. Rattner’s assertion in his original NYT piece, the debt does not disappear, the ownership is transferred. [Sorry Mr. Rattner, you don’t get the $1 million prize.]) This means that future generations will be both paying and receiving debt service on $10 trillion of debt. How is this a burden on future generations as a whole?
Again, the taxes needed to pay the debt service do imply distortions, but the distortions will not be anywhere near the size of the debt. Furthermore, there are all sorts of distortions in the economy, many of which could be much larger, that we never think of as imposing a burden on future generations.
The most obvious are patent and copyright protections. By virtue of these government-granted monopolies, we force people in the future to spend hundreds of billions more per year to buy protected products like prescription drugs and computer software than they would pay in a free market. The additional costs associated with these protections have the same impact on the economy as a tax of the same size. Why are deficit hawks like Rattner completely unconcerned about the implicit tax burden of patents and copyrights that we are imposing on our children?
There is one other logical point where Mr. Rattner needs some education. I had suggested that the Fed could just hold the $3 trillion in assets currently on its books. In this case the interest on the debt is paid to the Fed and is refunded right back to the Treasury. Where is the burden on our kids?
Rattner responds by favorably quoting a blog commentator:
“You don’t know what the Fed will do or be able to do in the next generation.”
Of course I don’t know what the Fed will do, but this is a matter of public policy. Congress could mandate that the Fed will hold $3 trillion in assets and refund the interest to the Treasury. The Fed can raise reserve requirements (the favored tool of China’s central bank) to stem any inflationary impact from this decision. The point of raising this issue is that this is one way that we can issue debt today and impose no debt service burden on future generations. The debt service is paid from the government to the government. That’s pretty straightforward, isn’t it?
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