Debt, broadly speaking, is money we owe to ourselves

Question: Do deficits matter?
Position‹3 of 3: Moderate deficits are good, very high deficits lead to problems
Argument: Debt, broadly speaking, is money we owe to ourselves

Most debt that governments take on is owed to its own citizens. Debt is a liability, but every liability is someone else's asset. Debt involves a transfer from those who pay taxes to those who own bonds and the money stays in the economy.

The argument

On this view, most arguments about national debt inherit their alarm from a false analogy. Debt is understood by reference to what it means for an individual: a person who owes a great deal is in a genuinely bad position, since the money must be found from outside and handed to someone else. Applied to a national economy, proponents argue, that picture misleads, because the debt a country creates is basically money it owes to itself. The point turns on who the creditor is. National debt is rarely owed entirely to another country; most of it is held at home, and servicing it means payments collected from taxpayers and passed, via the government, to bondholders. Both sides of that transfer sit inside the same economy, and nothing leaves it. What changes is the distribution of resources among citizens – which taxpayers contribute and which bondholders receive – and that, on this account, is a distributional question about fairness within the country. It is a real question, but it is a separate one from whether the debt itself is good or bad, sustainable or unsustainable, and running the two together is what gives the household comparison its force. Once the two questions are prised apart, the moderate position follows. If deficits do not, in themselves, transfer wealth out of the nation, then running them at a moderate level is manageable: the obligations created are internal, and what remains is a question of distribution rather than of solvency. That defence has limits, however, and it is a defence of moderate deficits only. Very high deficits raise the distinct question of sustainability that the analogy obscures, and it is there – in the scale of the borrowing rather than in the existence of debt as such – that the problems begin.

Premises

[P1]People wrongly equate national debt with personal debt; while heavy debt harms an individual, national debt is largely money a country owes to itself. [P2] Debt is rarely owed entirely to another country—most is paid from taxpayers to bondholders via the government—so it raises distributional questions separate from whether debt itself is sustainable. [C] Therefore, because debt is largely money we owe ourselves, moderate deficits are manageable while only very high deficits lead to problems.

Counter-arguments

This argument ignores a few key issues: - Even when all debt is domestically held, this argument ignores strong distributional effects. Those who pay taxes will be transferring money to those who own bonds. For example, billionaires could be the bondholders and middle class people could be the taxpayers. - Even if the debt is all internally held, high deficits can still lead to excessive aggregate demand and higher inflation. - For some countries a high proportion of the debt is not held internally and is in fact owed to foreigners. This leads to currency crises and transfers money from locals to foreigners.

Rejecting the premises

[Rejecting P1] "We owe it to ourselves" treats a country as a single agent, and the premise's own next line concedes that it is not — taxpayers and bondholders are different people. That is not an aside but the substance of what the debt does. [Rejecting P2] Setting distribution aside is what requires justifying rather than a step in the argument, and the counter names two further consequences excluded by assumption: internally held debt can still add to demand and inflation, and in many countries a substantial share is held abroad, which makes the "ourselves" false as a matter of fact. Where the line between moderate and very high falls also never follows from anything offered.