It’s The Spending, Not Debt Stupid!

In excoriating mainstream media’s miasmatic logic, author and Professor Steven Landsburg eloquently explains why government debt isn’t the problem.

Instead, government spending is.

Writes Professor Landsburg, (bold emphasis mine)

This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.

Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.

In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.

That’s why I say that the government’s interest payments come right back to the pockets of American taxpayers. The government pays $3 a year as an alternative to taxing you $100 and paying down the debt. The choice to do that puts an extra $100 in your savings account, which earns you $3 a year. There’s the $3 a year coming right back to you. Notice that it comes back to you regardless of whether the government makes its interest payments to Americans, Chinese or Martians. All of the benefits come back to American taxpayers.

Of course, you might choose not to save that $100 the national debt is saving you. That’s fine. Then presumably you’re spending it on something that you value more than an interest flow of $3 a year. Congratulations. You’re a winner.

Or you might grumble that you have no savings vehicle that will pay you the same rate as the government’s paying on its debt. That’s where you’re wrong. You can save by buying government bonds. That will get you exactly the same rate the government’s paying on its debt.

Bottom line

Again Professor Landsburg,

If the government borrows an extra $10 trillion dollars tomorrow in order to cut taxes by $10 trillion, it will have to make, say, an extra $300 billion a year in interest payments (for which we are collectively responsible) and at the same time, we’ll collectively earn an extra $300 billion on our savings portfolios. No favor to the taxpayers, but no harm done either.

It’s important to understand this in order not to be bamboozled by tricksters who try to misdirect every conversation about government spending into a conversation about government debt. It’s spending, not debt, that can impoverish us, and that’s what we should be talking about.

This serves as another vivid example of how the mainstream (deliberately or unwittingly) misreads the effects as the cause, and of ignoring the alternative paths or choices of action (here taxes versus borrowing). For the latter, it has been a predilection for most to focus on the tangible (debt) and dismiss the intangible (tax). Unless you are aware of it, this part of our mental heuristics.

Applied to financial market analysis, this is a fundamental reason why many celebrity gurus got it so bad—most of them misread debt as the primary driver of people’s action via the “aggregate demand” channel. They ignored or underrated money's non-neutral role and the impact of globalization.

Of course, the Landsburg lecture on borrowing and taxation is universally applicable, which means such tradeoff applies to the Philippine government as well.

To paraphrase the famous US Bill Clinton quote, It’s the spending, not the debt stupid!