Debt Hurts Now

In a recent post about Greece, I said that the debt is not so much hurting future generations as it is hurting people right now.  I have discussed this before, and I think it is important enough to reiterate again.

The U.S. government has been racking up debt like crazy, particularly since 2008.  Of course, it was bad before then too, but not a trillion dollars per year bad.

Even the so-called surpluses in the last few years of the Clinton administration were just mostly surpluses in payroll taxes.  The Social Security taxes coming in were greater than the Social Security payments going out.  The difference was used in the general fund and to give us the supposed surpluses.  There is no doubt though that the much smaller deficits of the late 1990s were far preferable to anything since then.

When I hear people in the U.S. criticize the national debt, they will typically say that we are burdening future generations.  But this is only mildly true, and for different reasons than what is realized.

It hurts future generations only in the sense that it means less savings and private capital investment today.  We can thank our ancestors going back thousands of years for our current standard of living.  You can go back as far as forming a language, writing, and building simple shelters.

And if the Industrial Revolution had never taken place, or even taken place later than it had, then our standard of living would be far lower today than what it is.

So debt hurts future generations because there is less advancement in technology and less advancement in building capital goods than there otherwise would have been.

In terms of paying back the debt, we must consider an example.  First, the debt could end up like the way Greece’s debt is going: into default.  If the government defaults on the debt in the future, then it isn’t really burdening anybody.  It is bad for those holding the worthless “investments”, but that is money that was spent in the past on the government bonds.

What if the debt is never defaulted on?  Let’s say that Joe lends the government a million dollars for 30 years.  Now the bond has matured 30 years later and it is time for the government to pay him back his principal amount.  That money is coming from taxpayers.

This is a case of wealth redistribution, but the overall wealth of society hasn’t really changed.  The money is going from private hands (the taxpayers) to private hands (Joe).  Perhaps there is an argument to be made that it is a disincentive for production, but that would be about it.

Even if you count the debt from the Federal Reserve, the interest payments get remitted back to the Treasury.  And if debt matures and is not rolled over, then it means a contraction of the money supply, which is actually beneficial for anyone holding dollars.  Again, there is redistribution when there are interest payments or the paying back of maturing debt, but the money ends up back in private hands if the government doesn’t spend it.

The problem here is that Joe lent the government a million dollars 30 years ago.  That money could have gone into capital investment and put to good use.  Instead, it was used by the government to misallocate resources.

This is not to say that all of the money was completely wasted by the government.  It may have been or it may not have been.  It could have been used to build a road that is now used.  You can have a misallocation of resources without the resources being completely wasted.

This is the reason that debt hurts us in the present.  If the government runs a trillion-dollar surplus, it means the government is spending an extra trillion dollars that is not in private hands.  It is misallocating these resources to things that consumers mostly did not want or need.  If they did, they could have just bought it without having to go through the government.  It can also serve to discourage production, investment, and savings.

Are the Greek people worried about future generations right now?  The probably are not for the most part.  They are worried about now.  They are worried about paying the rent and putting food on the table.

This is not just due to debt, but the entire government apparatus.  It is a massive welfare state that cannot be sustained without outside handouts.

The debt is a burden now.  The Greeks should default on all of it.  From a libertarian standpoint, it is not a valid contract because it depends on the use of force on people to pay it back and these people did not sign the contract.

If the Greeks default on all of the debt, it will mean no more interest payments. It will also mean that few people/ governments will be willing to lend any more money for a while.  This is seen as a bad thing, but it would actually be a good thing.

Assuming Greece doesn’t turn to hyperinflation with its own currency (which is a big assumption), then the government will be forced to dramatically cut spending.  That is what is desperately needed there more than anything else.

To help the current generation, get rid of the debt now and stop accumulating any more.

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