Why Debt Doesn’t Burden

A few recent Krugman posts making the point that domestically held government debt doesn’t create a “burden” on the country in the sense of draining it of real resources have proven surprisingly controversial. I think the point can maybe be more clearly made in reverse. Imagine a country with a balanced budget  and a large outstanding debt, all of which is held domestically. Tax revenue, in other words, exceeds spending on programs but the extra revenue is needed to pay down the existing debt. If the stock of debt is burdening the country, then it ought to be able to enrich itself by defaulting. Will that work?

Well, no. Certainly a default could set the stage for enriching specific people, since it would create budget room for a tax cut or new spending on a shiny supertrain. But the funds flowing into the pockets of taxpayers or train-builders would be coming out of the pockets of bondholders. A government borrowing money from its own citizens doesn’t gain access to any resources that wouldn’t have been available by conscripting them or raising taxes, and by the same token a country doesn’t enrich itself by refusing to make promised interest payments to its own citizens. It’s only when borrowing from or repaying foreigners that the country as a whole is gaining or losing access to real resources. None of which is to say that debt dynamics are a matter of indifference. Obviously people care quite a lot about which specific people possess the real resources, and how you arrange them can have profound implications for human welfare and long-term growth. But it’s bad growth policy or natural resource depletion that can immiserate the next generation, not the prospect of the next generation’s taxpayers transferring money to the next generation’s bondholders.