SOMEBODY Doesn’t Understand Debt

by Don Boudreaux on January 2, 2012

in Budget Issues, Debt and Deficits, Myths and Fallacies, Seen and Unseen

Here’s a letter to the New York Times:

Paul Krugman is correct that public debt does not necessarily harm an economy (“Nobody Understands Debt,” Jan. 2).  (No respected economist has ever said otherwise.)  Mr. Krugman errs, however, by citing this fact as evidence for the mistaken conclusion that public debt held by fellow citizens is largely costless for the economy as a whole because it’s “money we owe to ourselves.”

When government spends money, resources that would otherwise have been used to produce valuable private-sector outputs are instead used to produce public-sector outputs.  The values of these foregone private-sector outputs are a genuine cost of government projects regardless of government’s funding method, regardless of the merits of the government projects, and regardless of the nationalities of government’s creditors.  And the private-sector outputs that are never produced because resources are instead used to produce public-sector outputs do not miraculously appear – they are not miraculously ‘unforegone’ – simply because the obligation to pay for public-sector outputs is deferred to the future or because the holders of the debt instruments are citizens of the same country as the taxpayers.

The argument in the above paragraph isn’t unique: it is elaborated in great detail in many of the works on public finance by another Nobel laureate economist, James Buchanan.*  It’s discouraging that Mr. Krugman seems to be unfamiliar with Buchanan’s contributions.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

* Most famously, James M. Buchanan, Public Principles of Public Debt.

(Anticipating an objection: note that Krugman’s argument here does not depend upon the existence – the alleged costlessness – of large stocks of unemployed resources.)

I would think that, were he actually to read Buchanan’s work on this topic, Krugman would be embarrassed by his (Krugman’s) falling for the “we owe it to ourselves” myth.

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