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In Debt to Buchanan and Wagner

Here’s a letter to the New York Times:

The title of Paul Krugman’s most-recent column proclaims that nobody understands debt (Feb. 9).  Yet the one who doesn’t understand debt is Mr. Krugman.  Contrary to his argument, the potential problems caused by a government’s indebtedness do not vanish just because that debt is owed only to that government’s subjects.

Suppose Mr. Krugman borrows $1M from a Princeton colleague to buy a yacht.  The Krugman household must repay, with interest, $1M to that colleague.  This burden isn’t lightened one iota by the language trick of describing Mr. Krugman as a member of Princeton’s faculty and then declaring that, because his debt is owed to another Princetonian, the net debt burden on Princetonians is zero.  Mr. Krugman’s debt burden remains very real.  Yet in this case it’s likely a worthwhile burden to bear because Mr. Krugman committed himself to repay this debt with his own money.  We must assume that the value to him of having the yacht today is greater than the cost to him of repaying the money he borrowed to buy it.

The problem with public debt is that governments that borrow impose on other people – future taxpayers (many of whom don’t vote in today’s elections!) – the obligation to repay.  As a result, governments tend to borrow excessively and to spend the proceeds carelessly.  The costs to society of the resulting misuse and misdirection of resources are not in the least reduced by the fact that the debt is held internally.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


Krugman apparently is unaware of the important work on public debt by the late Jim Buchanan and my colleague Dick Wagner (especially this 1958 book by Jim and this 1977 volume written jointly by Jim and Dick).  I make this accusation not because Krugman disagrees with Jim’s and Dick’s analyses and conclusions but, rather, because Krugman consistently writes as if this Nobel-prize winning scholarship simply doesn’t exist.