D is for Debt Part II: US Debt and Generational Justice

Policy makers in the U.S. love to talk about the burden of debts that they will leave behind for future generations.  One example often cited by debt hawks a family that has borrowed too large a mortgage and will have a hard time making the payments.  While it certainly paints strong visual, its wrong in two ways.

First, families have to pay back their debt–governments do not.  They need to make sure that the debt grows slower than their tax base.  The U.S. never repaid the debt from World War II, the debt just became irrelevant as the economy continued to grow and grow.  What policy makers need to focus on is not the debt, but strengthening the tax base and that includes getting people back to work…more likely by government driven Keynesian policies.

Second, an over borrowed family owes money to someone else, however the US debt is largely owed to the U.S.  This was clearly true of the debt incurred by winning WWII, which was much larger as a percentage of GDP, but that debt was owned by taxpayers in the form of war bonds.  That debt didn’t make the U.S. poorer in fact the post war generation experienced the greatest economic boom in wages and living standards in the nation’s history.

In the wake of the debt debates austerity is now in vogue and at stake is the U.S. economic future.  A part of the austerity fashion wave is the idea of generational justice.  It is said that the U.S. is passing on its children and grandchildren and as the debts become payable, future generations will be burdened by rising interest rates and lower living standards.

The economics of this are misleading.  The well-being of children and grandchildren in 2023 and 2033 is not a function of debt reduction but instead about putting economic growth back on track. If The U.S. reduces debt by cutting social spending and “tightening its belt” the economy will fall stagnate and lower wages.  The debt will out pace growth and there will be little money to invest in education, research and job-training.

Real generational justice would entail making sure that wages are adjusted for inflation, college loans rates are reduced and investment in growing markets needs to be maintained.  The next generation can and will produce for the U.S., they just want the same opportunities their parents enjoyed.