Politics, The Economy

To be honest, I’m in way over my head on this word. For one thing, there are so many different kinds of debt that people talk about. Just restricting ourselves to the economic sense of the word, there is constant talk in the news of a wide variety of debt-related issues: public debt, third world debt, personal debt, etc. Not to mention the different types of debt within each of these categories.

Robert Eisner wrote this useful article on debt in The Concise Encyclopedia of Economics, in which he clarifies the differences between personal and public debt:

… if it wishes, the federal government can always create what money it needs to service its debt. In this fundamental sense, then, federal debt is different from private debt or, for that matter, the debt of state and local governments, which do not have the power to create money. Thus the federal government has no reason ever to default on its debt or declare bankruptcy.

The federal debt held by the public differs in another fundamental sense from private debt. For every private creditor there is a debtor who knows he is a debtor. Therefore private debt is, from the standpoint of aggregate wealth or the net worth of the private sector, a wash; the liability of one individual or business is the asset of another. The net debt of the federal government held by the public, however, is an asset of the private sector, of state and local governments, or of the rest of the world. But few people think of themselves as the debtor when the federal government goes into further debt by selling a bond. This means that the bigger the federal debt, the wealthier citizens who own the bonds feel and, hence, the more they are likely to spend. Thus the fundamental importance, for good or for bad, of the federal debt is likely to be its effect on private spending.

All this means that some of the hysteria over the national debt is misplaced. For instance, it just seems like bad economics to be quoting Cicero on this:

The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled.”

But while a certain amount of public debt might be a good thing, there are real dangers when the debt mounts so high that it affects the ability of the government to even regulate fiscal policy. For one thing, increased government borrowing depresses bond prices, which Krugman argues is the same as raising long-term interest rates.” Usually the government tries to lower those to increase spending. So some debt increases spending, but too much seems to hurt it.

How much is too much? Well, right now we have about $6 trillion in public debt, but according to a Treasury report from last year” that could go up to $44 trillion! How then can we afford Bush’s tax cuts? Well, we can’t. Not only has Bush used gimmicks to postpone most of the cost of these tax cuts until after 2008,” but it has also stopped talking about 10-year projections and now officially looks only five years ahead.”

Why would they do this? The widely accepted explanation is that it is a Republican strategy to bankrupt the system. Why? Because that is the only politically viable way to achieve their aims of dismantling social security and medicare:

The underlying strategy here is all too familiar: Instead of challenging popular liberal programs directly, the Republicans are creating fiscal conditions that make those programs unsustainable. In 1981 the Reagan administration slashed taxes, deliberately intending — as Ronald Reagan’s budget director, David Stockman, later disclosed — to starve the federal government of funds, force reductions in domestic spending and keep new liberal initiatives off the agenda. Republicans dominated national policy for a decade as a result. That the tax cuts plunged the country into a fiscal disaster was merely a side effect of a policy that conservatives continue to hold up as a model of presidential leadership.

In the June 12th issue of The New York Review of Books, Gordon S. Wood reviewed two recent books on debt. Republic of Debtors: Bankruptcy in the Age of American Independence by Burce H. Mann, and A Free Nation Deep in Debt: The Financial Roots of Democracy by James Macdonald. They are two very different books. The first one is a social history of private debt, full of interesting facts. It turns out, for instance, that the earliest prisons were for debtors who were basically held ransom until such a time as relatives could come up with the money to get them out. They even had to pay for their own food in prison, unless they were lucky enough to receive food from some charity organization.

But I am more interested here in discussing the second book, which looks at the link between debt and democracy. He shows that, contrary to Cicero, debt has tended to promote democracy:

That is, governments that were borrowing discovered that identifying their interest more closely with that of their subjects or citizens who were doing the lending was the easiest and cheapest way of raising money; and they could best do this by allowing their subjects or citizens to have a representative say in governing.

But Macdonald also points to the limits of this argument. As Wood writes, in today’s global markets, The percentage of US government bonds owned by individual American citizens is now under 10 percent.” And he concludes with a Macdonald’s own closing words:

…the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved.

No wonder Bush is cutting taxes — because he can.