His column in today’s New York Times is a doozy. The subject is “fiscal illusion”, and here’s his example:
Say that you have $20,000 in Treasury bills. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that.
The illusion is this: A government bond represents both a current asset and a future liability, yet for most people, those future tax payments feel less concrete and less real than the dollars they’re holding in a money market account.
What is lacking here is not a subtle grasp of cutting edge theory, but the sort of elementary knowledge my students are asked to learn in the first few weeks of introductory macro.
Except in unusual circumstances, government debt is not paid off. To pay off such a debt would mean running fiscal surpluses equal to deficits. No government anywhere does this. Our grandchildren will not be taxed to pay off the fiscal debt we are accruing today, any more than we are taxed to pay off the debt our grandparents ran up during WWII. Every country in the world has public debt, and there will never come a “year of reckoning” when the whole world has to start running budget surpluses to pay it off.
And suppose we decided to jack up our taxes like TC says we must, and we pay down the whole thing—what then? We would have no treasury bonds out there for people to stuff into their portfolios. The only assets you could buy would be the risky stuff: you know, stocks, commercial loans, mortgage-backed securities. People would be pleading with governments to please, please run deficits again so we can have at least a few low-yielding but safe assets.
You might be tempted to say at this point, isn’t there a limit to how much public debt we can ring up? The answer is a definite yes. We need to monitor the fiscal space available to our economy and avoid getting in over our head. There is a lot of economic analysis dedicated to figuring out what these limits are and how to detect them before it’s too late. The New York Times could perform a public service by publishing thoughtful pieces by economists that discuss these questions in an informed manner.
Alas, that has nothing to do with the column at hand. TC is not making an argument about fiscal space or debt sustainability. He is saying that our treasury bonds are illusory because we will have to be taxed in the future to remove them from circulation. We are not talking about shades of opinion here, but the difference between having a basic idea of how economies work and flat-out ignorance.
Sorry: someone has to say this.