Debt, Schmet

The Nobel Prize in economics that Prof. Paul Krugman won isn’t technically a Nobel Prize, since it’s not one of the prizes Alfred Nobel created back in 1905. Krugman’s “Nobel Prize” (not “Noble Prize”) was actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, established in 1968 by a donation from Sweden’s central bank to the Nobel Foundation.

Nonetheless, Krugman is very smart and knows a lot about economics. From his New York Times newsletter:

I get a lot of hate mail; in fact, I worry if a column doesn’t generate a big backlash, because it suggests that I may have been off my game. But it’s interesting to see what generates the most hate. In general, writing “Donald Trump is a terrible person” gets a sort of collective shrug…The real vitriol tends to come over monetary and fiscal policy.

In particular, I don’t think anything I’ve written has angered as many people as my declaration five years ago that debt is money we owe to ourselves — a point I naïvely imagined would be self-evident once people thought about it. But it turns out that challenging the notion that government borrowing imposes a burden on our children and grandchildren deeply offends many people, even though that notion makes very little sense.

So I don’t really expect people to be persuaded when I say that the response to Covid-19 is a near-perfect demonstration of my point. But let’s give it a try, anyway.

Here’s where we are right now. To contain the coronavirus, we’ve effectively shut down a significant part of the economy. Around 10 percent of U.S. workers are or were employed in “leisure and hospitality,” which has basically been locked down; even more are employed in retail trade, much of which has also been locked down.

For those of us still drawing a paycheck, this is annoying but not much more than that; I dream of coffee shops and concerts, but those aren’t necessities. For those who made a living by providing banned services, however, the lockdown is a financial catastrophe.

So we’re providing disaster relief on a huge scale: unemployment insurance, aid to small businesses and more. It’s still inadequate, and a lot of the money still isn’t making it to the people who need it most. But put that on one side, and ask: How are we paying for it?

The immediate answer is that the federal government is borrowing the money. New projections from the Congressional Budget Office suggest that federal debt, as a share of G.D.P., will be around 30 points higher by the end of next year than it was at the end of 2019.

But who will that money be owed to? The answer is, me — and people like me. That is, those who are still receiving more or less their normal incomes are spending less and saving more — yes, we’re buying more groceries and booze, but that’s vastly outweighed by reduced spending on restaurants and vacations. And those savings are, one way or another, being recycled via the federal government into aid for those less fortunate.

Some of the recycling is direct: My wife and I have, in fact, bought some U.S. government bonds. Most of it is indirect: You put more money in your bank account, the bank accumulates extra reserves in its account at the Federal Reserve, and the Fed buys government bonds. But the details aren’t especially important. At a fundamental level, the government is helping one group of Americans by borrowing from another group of Americans.

You might ask how the money will be repaid; actually, the odds are that it never will be repaid, which is OK but that’s a story for another time. There are also potential problems created by a high level of federal debt, although to be honest it’s unlikely that U.S. debt will be a real problem any time soon.

The key point for now, however, is that this debt-financed disaster relief isn’t coming at the expense of America’s future growth; it’s not making the country poorer, and it’s not cheating future generations. The debt we’re incurring now is money we owe to ourselves.


Krugman knows, of course, that some of America’s debt is owed to foreign countries, but it’s less than most people think.

As of this month, U.S. federal debt is $24 trillion. One quarter of that or $6 trillion is called “intragovernmental” debt. It’s money that’s owed by U.S. government agencies to other U.S. agencies. For example, the Social Security administration owns half of the $6 trillion (because Social Security invests its excess cash in U.S. government bonds).

The other $18 billion of U.S. debt is called “public” debt. Two-thirds of it or $12 trillion is owned by Americans, either individuals, companies or other entities. Foreigners own the other third or $6 trillion.

Krugman would be more precise, therefore, if he said that 75% of the government’s debt is money we owe ourselves. Foreigners are owed 25%.

For more on debt from Prof. Krugman:

America came out of World War II with huge debts — and experienced an unprecedented economic boom.

Britain emerged from World War II with debt of 270 percent of G.D.P. It never paid that debt off — but the ratio of debt to G.D.P. fell 80 percent over the next generation anyway.