Possible Counterargument to Government Debt Chart

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    Prof. Murphy,

    Thanks for this course, which was fascinating and which I will go through at least once again.

    I wrote a blog post about your arguments on government debt (with a hopefully subtle plug for the site) refuting the Krugmanites on the “we owe it to ourselves” argument. Without reproducing your chart with Al, Bob, Christy, etc., which I thought would be stealing your intellectual property, I described the concept in prose (and told people to join Liberty Classroom to see the chart, which makes the point more clearly than my prose could).

    A commenter had the following observation in response, and it seems like a facially plausible counterargument. I wondered what you might think of it. Here’s what the commenter said:

    There are plenty of quibbles that I have, but I’ll focus on the last one: The apple analogy neglects the fact that GDP is constantly growing. That is, Al, Bob, Christy, and everyone else are planting new apple trees the whole time.

    Let’s say that Bob has four apple trees. If the government borrowed three apples from Bob and gives them to Al, but Bob also plants four new apple trees that Christy then inherits, then when the government borrows six apples from Christy, it’s borrowing twice as many apples, but Christy also has twice as many total apples to borrow. The only way that you end up with not enough apples to borrow is if the government tries to increase its borrowing at a higher rate than Christy, Dave, etc. are planting new apple trees.

    In economic terms, that means that the number we should be watching isn’t the total amount borrowed, but the percentage of GDP borrowed. In the U.S., that percentage has been as high as around 120% (ca. 1945; wars are expensive!). It dropped as low as around 30% in the 1970s, and is now back up to a bit over 100%.

    That may sound high, but it’s pretty middle-of-the-road for a developed nation. Indeed, the analogy isn’t perfect, but I don’t know anyone who would say that a person making $100k/year can’t afford a $100k mortgage.

    Doesn’t he have something of a point? I thought that the upshot of your chart is that, as the absolute sum of interest grows over time, eventually the interest payments will be so high that the government can’t simply roll it all over. They have to start taxing the populace to pay that interest — and they even tax the people who are owed the interest. So people pay the government in taxes, and the government turns around and uses that tax money to pay much of the interest on the bonds.

    But if the economy is growing at a rate commensurate with the rate of growth of debt (and therefore also the rate of growth of interest owed, assuming interest rates stay constant), maybe we never get in that situation where the government can’t roll it over. Isn’t the overall growth of the economy something that might undercut the force of the argument that your chart makes?

    Interested in your thoughts.


    Thanks for the note. A few responses:

    (1) I appreciate your concern for privacy, but feel free to post the chart. I have it on my blog etc.:



    I also spell it out in a YouTube lecture here:

    (2) Your friend (?) is partially right, that so long as government debt/GDP stays put, then we’re not necessarily in a crisis.

    (3) However, using income/mortgage as an analogy is bad. For one thing, the federal government doesn’t take in 100% of GDP as tax revenue. For another thing, a mortgage is a secured debt (with the value of the house backing it up). So if your friend had said, “If a brother runs up a credit card debt equal to 100% of the combined income that he and his two other brothers earn,” then yes that would be closer to Uncle Sam’s position right now, and that would indeed be a fiscal crisis.

    (4) Your interpretation of my goal is a bit off. I was *not* trying to prove that government debt in the real world is going to lead to a crisis. Rather, I was merely showing that the popular argument–namely, “Gov’t debt isn’t a burden on future generations so long as they hold the debt internally”–is a non sequitur. That’s why I rule out saving and investment altogether, to keep things really simple and isolate the essence of the fallacy.

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