Published on
Tuesday, March 23, 2021
byCEPR Blog
Are Debt Whiners Fools or Just Liars?
The national debt is a meaningless number.
byDean Baker
The debt whiners are fond of telling stories about how the debt is a burden
on our children, or how the debt can lead to financial crisis and other bad
things, but these claims are inventions, not economic realities. (Photo:
Getty/Stock Photo/eyegelb)
The debt whiners are fond of telling stories about how the debt is a burden
on our children, or how the debt can lead to financial crisis and other bad
things, but these claims are inventions, not economic realities. (Photo:
Getty/Stock Photo/eyegelb)
I keep asking this question because whining over the government debt looks
to be a huge growth sector in the next year or two, or perhaps until
Republicans retake the White House. I regularly ridicule debt whining,
because, unlike its cousin, deficit whining, it has no basis in economic
reality.
Before again showing why the debt is a meaningless number, let me contrast
it with the budget deficit, which can be a real cause for concern. The way
in which deficits can pose a problem is that a large deficit can push the
economy beyond its ability to produce goods and services.
This is a textbook story that happens to be accurate. The point at which the
economy is being pushed too far by a budget deficit is not easy to determine
and it varies hugely over the course of the business cycle.
When the economy is in a severe slump, there is plenty of excess capacity
and unemployed workers, and therefore little basis for concern that a
deficit is creating more demand than the economy can supply. However, near
the peak of a business cycle, when the unemployment rate is already low, a
large budget deficit can create demand that the economy is unable to meet.
The consequences of excessive demand are hard to know at this point. One
possible consequence is that the Federal Reserve Board decides to raise
interest rates. This will reduce demand by reducing housing construction and
to a lesser extent lowering public and private investment. It also is likely
to raise the value of the dollar, which leads to a larger trade deficit,
which will also lower demand.
But suppose the Fed doesn't raise the rate. Fed Chair Jay Powell indicated
that he plans to keep short-term rates near zero for the immediate future.
In the old days, we would have thought that would create serious problems
with inflation, but that is less clear now.
First, the economy is far more internationalized, which means that is easier
for excess demand in the United States to simply spill over to increased
demand for imports, rather than driving up domestic prices. This is pretty
much the story that we see if a single state has very strong demand.
If Ohio were to have a booming economy, it would mostly translate into
higher demand for a wide range of goods and services from neighboring
states, not an inflationary spiral in Ohio. This is likely to be the case
with any excess demand that results from large budget deficits here.
The other major difference between the economy of today and the economy of
the 1970s, the last time we saw an inflationary spiral, is that unions are
much weaker today. This means workers have far less bargaining power.
While this is a big part of the story of the growth of wage inequality over
the last four decades, it does mean that we are less likely to see the sort
of wage-price spiral we saw in the 1970s. If we do see a rise in prices due
to excess demand, it is likely that workers today will be able to respond by
demanding higher wages.
For these reasons, whether or not the large budget deficits that we are now
seeing will lead to problems with inflation is an open question. I have
argued that it is worth pressing the economy to try to get back to full
employment quickly, as well as do many of the positive things included in
the American Recovery Act, such as increasing the child tax credit and
enhancing the subsidies in the health care exchanges. But there is a real
basis for concern about inflation.
The Debt Is Not a Measure of Anything
While deficits are potentially a problem, the debt is not, first and
foremost because it doesn't really measure anything. The debt whiners are
fond of telling stories about how the debt is a burden on our children, or
how the debt can lead to financial crisis and other bad things, but these
claims are inventions, not economic realities.
Interest that we pay on the debt can be a burden, but it is dwarfed by other
factors like productivity growth. (The impact of ten years of even modest
productivity growth swamps an increment to debt service that we pass onto to
our kids from higher deficits today.) Furthermore, debt service burdens at
present and the near-term future will almost certainly be much smaller than
what we saw in the 1990s.
The debt whiners only care about the debt issued by the national government,
they don't care at all about the burden of patent and copyright monopolies.
But there is another aspect to this story that our debt whiners desperately
do not want anyone to talk about. Direct spending is only one way in which
the government pays for things. We also pay for things, like coronavirus
vaccines, by giving out patents or copyright monopolies.
These monopolies can be very costly. In the case of the coronavirus
vaccines, they mean that we are paying roughly ten times as much for each
vaccine as we would in a free market. Vaccines that would likely cost around
$2 a shot instead cost us $20. And, they may cost us even more in future
years if we need boosters after the pandemic is over.
These government-granted monopolies are effectively a form of government
debt. Incredibly, I have literally never seen any of the debt whiners ever
mention the hundreds of billions of dollars in rents paid out each year to
drug companies, medical equipment suppliers, software companies, or other
beneficiaries of these monopolies as part of the burden of the debt. This in
spite of the fact that the rents from these monopolies are several times
larger than the debt service that we pay out on the official debt.
But let's flip the story over in the hope of teaching something to the debt
whiners. Suppose that we looked to replace much or all of the debt that
troubles them with new patent monopolies. Imagine that we sold off trillions
of dollars worth of patent monopolies to pay off a large chunk of the debt.
If this sounds strange it is important to step back for a second and think
of the logic of a patent or a copyright monopoly. While we ostensibly link
the award of these monopolies to innovation or creative work, there is no
necessary link.
At the point where the rents are being collected, a patent or copyright
monopoly is simply a monopoly on a particular item. It doesn't matter one
iota whether the monopoly was awarded due to some brilliant innovation or
whether it was awarded due to a payoff to a Trump friend or family member.
The monopoly means that the holder gets to charge a price far above the free
market price.
With this in mind, suppose the government decided to auction off monopoly
selling rights to a number of goods and services. (We can even call them
"patents" to make people feel better.) We surely could raise enough to pay
off the national debt.
Just to take my favorite example, patent rents on prescription drugs will be
over $400 billion this year. (I explain how I get this figure here.)
Patents have a limited lifespan, but let's imagine the ones we auction off
to continue in perpetuity. The current interest rate on thirty-year Treasury
bonds is roughly 3 percent. This means that to generate the $400 billion in
rents earned on prescription drugs, we would need $12 trillion in Treasury
bonds.
Therefore, the claim to patent right on prescription drugs lasting in
perpetuity should be worth roughly $12 trillion. If we had this auction and
got $12 trillion, we could reduce our national debt by an amount equal to 60
percent of GDP. That should make the debt whiners very happy.
In fact, we can go further. I calculated that total patent rents in the
economy come to over $1 trillion a year. If we auctioned off these rights
(again being carried on in perpetuity) it should raise more than $30
trillion, more than enough to eliminate the national debt altogether.
And, we aren't limited to just auctioning off patent rents on the items
where companies currently get them. We can auction off monopoly rights on
anything, on selling cars, computers, bread, haircuts, anything. We can
raise vast amounts of money through this route and make the debt whiners
very happy.
Of course, these rents do have real economic costs. They create large
economic distortions (think of tariffs of many thousand percent) and they
create perverse incentives. We see this with the patent rents we currently
have. For example, pharmaceutical companies misled physicians about the
addictiveness of the new generation of opioids to maximize their sales. As
economic theory predicts, patent monopolies give drug companies incentives
to push their products as widely as possible, even if it means misleading
doctors and the public about their safety and effectiveness.
But the debt whiners only care about the debt issued by the national
government, they don't care at all about the burden of patent and copyright
monopolies. So, we can answer their concerns simply by issuing enough of
these monopolies to bring the debt down to a level that makes them happy.
The National Debt is a Meaningless Number
Perhaps some folks will read the prior section and decide that we need to
auction off a large number of monopolies to reduce the national debt. The
sane ones will instead recognize that the debt is a largely meaningless
number. It can imply larger debt service burdens, and that can be a problem,
but this is a very small part of the economic picture, especially compared
to items like patent rents that get almost no attention at all from
economists. What really matters is the underlying strength of the economy
and society that we pass on to future generations.
I have no idea if the debt whiners understand this point and try to
obfuscate reality, or are just confused. As the old saying goes, "economists
are not very good at economics." But anyhow, the rest of the country need
not take their debt whining seriously.
Dean Baker
Dean Baker is the co-director of the Center for Economic and Policy Research
(CEPR). He is the author of several books, including "Getting Back to Full
Employment: A Better bargain for Working People," "The End of Loser
Liberalism: Making Markets Progressive," "The United States Since 1980,"
"Social Security: The Phony Crisis" (with Mark Weisbrot), and "The
Conservative Nanny State: How the Wealthy Use the Government to Stay Rich
and Get Richer." He also has a blog, "Beat the Press," where he discusses
the media's coverage of economic issues.