One More Time, Part II

by Don Boudreaux on January 11, 2013

in Debt and Deficits

Following up this earlier post, I will try here one more, and different, hypothetical to explain Jim Buchanan’s understanding of the burden of public debt.

Suzy is at Sam’s AutoMart, which accepts only cash in payment for the cars it sells.  While there Suzy agrees to buy a Camry for $20,000.  Reaching into her purse she discovers that she has no cash.  She runs home to fetch her money.  But Sam is impatient.  He calls Suzy and tells her “I need $20,000 now or I’ll sell the car to someone else.”

Happily for Suzy, her best friend Jane works just next door to Sam’s AutoMart.  Suzy, still at home searching for her wad of 20,000 dollar bills, calls Jane and asks Jane to pay $20,000 to Sam for the Camry.  Suzy promises to return to the AutoMart ASAP to repay Jane the $20,000.  Jane trusts Suzy.  So Jane gives $20,000 of her money to Sam, and Sam then signs the car’s title over to Suzy.  A few minutes later Suzy rushes in, gives $20,000 to Jane, and takes title and keys to the car.

Question: who paid for the car?  Or, asked differently, who bears the “burden” of paying for the car?  Answer: Suzy.  Sam didn’t pay for the car.  Nor did Jane pay for the car.  Suzy paid for the car.

Suppose that it happens that Suzy and Jane, although living in separate households, are the only two citizens of the tiny burgh Canesville.  What is the net price that the citizens of Canesville pay for the new car that Suzy now drives?  Answer: $20,000.

Now consider the few minutes between the time that Jane loaned money to Suzy (by advancing her $20,000 to Sam) and the time that Suzy repaid Jane the $20,000.  Imagine some scholar showing up on the scene, assessing the immediate situation, and proclaiming that the aggregate cost to citizens of Canesville of buying a new car is zero.

Ever-curious, Sam inquires into this scholar’s reasoning.  ”It’s obvious, sir,” replies the scholar.  ”Suzy will soon be out of $20,000, but Jane will soon have $20,000 more.  The citizens of Canesville owe the money to themselves.  So in the aggregate the car cost those citizens of Canesville nothing!  The outstanding debt of one of Canesville’s citizens, Suzy, is exactly offset by an outstanding account-receivable held by another of Canesville’s citizens, Jane.  So, my good man, it’s naive and quaint to worry, in situations such as this one, about the size of the outstanding debt.  That debt clearly represents no aggregate economic burden borne by the citizens of Canesville because every cent that the debtor will repay will be received by the creditor – both of whom are citizens of Canesville.  There is absolutely no need to worry that the citizens of Canesville, considered as a group, spent too much money buying cars from you.”

Sam, of course, is most happy to learn this news.

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