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OpEdNews Op Eds    H2'ed 2/7/12

Debt, Toll Roads and Patents

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It's budget time, again. This means that the deficit hawks will be out in force warning us about the devastating debt burden that we are passing on to our children. So that this Halloween fright gang doesn't needlessly cause any kids to lose sleep, here's what parents can tell their children.

First, it is important to tell your kids that the national debt is not in any way a measure of inter-generational transfers from the young to the old. Debt is also an asset to the people who own the bonds. At some point, everyone who is alive today will be dead, which means that the bonds they own will be passed on to their or someone else's children and grandchildren.

Our children and grandchildren might owe the debt, but they will also be receiving the interest paid on the debt. There can be an issue of distribution within future generations (e.g. Bill Gates' descendants own all the debt) but that is a question of inequality within generations, not between generations. So when you hear the deficit hawks ranting about the $15 trillion debt that we are passing on to our kids, you can tell your children that we are passing on $15 trillion in government bonds to our children.

Of course some of the debt is held by foreigners. Many of the deficit hawks have been harping on the China menace, running scary ads about how the Chinese are going to own the United States in 20 or 30 years. While the debt service paid on the bonds held by foreigners will be a drain in future years, there are two important points to keep in mind. First, the outflow on interest payments on bonds held by foreigners is still quite small by any measure.

The second and more important point is that foreign ownership of government bonds and U.S. assets more generally is determined by the trade deficit, not the budget deficit. It is our $600 billion annual trade deficit that gives China and other countries the means to buy up government bonds and other U.S. assets.

The trade deficit is in turn primarily the result of an over-valued dollar. This means that if the deficit hawks were really worried about foreigners owning too much of the U.S. economy then they should be railing about the over-valued dollar, not the budget deficit. When the deficit hawks rant about China owning the U.S., they are either confused or being dishonest.

There are certainly times when deficits can make our children poorer than they otherwise would be. If the economy were operating near its potential, and the deficits had the effect of raising interest rates and pulling money away from private investment, then the economy would be less productive in the future as a result of the deficit.

However, the relevant measure here is not the deficit or debt, but productivity growth: the rate at which the economy is getting more efficient. Productivity has continued to grow at close to a 2.5 percent annual rate, meaning that the economy is getting more efficient at a relatively rapid pace.

This is not surprising, since it is absurd to imagine that current deficits are pulling money away from private investment. Interest rates are at near-rock-bottom levels. Given the huge amounts of excess capacity in most sectors, it is likely that the deficits are actually increasing investment by increasing demand. In this sense, deficits are making our children richer. This would be even more true insofar as the deficits are being run to build infrastructure or to finance education and training, all of which will make the economy more productive in the future.

There is an issue with the debt that is worth discussing: The country will have to raise tax revenues to finance its annual interest payment. This does impose an economic cost, since taxes are at least somewhat distortionary. However, this problem is enormously overplayed.

Suppose that we eliminated $1 trillion of our debt burden by selling off public roads and allowing private companies to charge tolls. Are future generations better off by this huge reduction in the debt burden? They aren't in any obvious way. In fact, depending on the terms of the deal, selling off public assets to reduce the debt could in fact lead to much higher economic costs for future generations. These costs just would not show up as public debt.

This point should sound familiar to people. There have been several prominent cases of asset sales of exactly this sort. For example, Indiana's governor Mitch Daniels sold off the Indiana toll road to reduce that state's debt. In my home town, former Mayor Richard Daley sold off a 75-year lease of Chicago's parking meters to a consortium led by Morgan Stanley. This reduced the city's debt, but did not necessarily benefit either current or future generations of Chicagoans.

There are other ways in which the government imposes future burdens that are not at all captured in budget numbers. Patent and copyright monopolies are, in effect, a way that the government allows individuals and corporations to get a claim to future income flows to promote innovation and creative work.

The more items that are subject to such protection, the greater the burden will be on future generations. We pay roughly $300 billion a year for prescription drugs that would sell for $30 billion a year in a free market without patent protection. This is equivalent to a tax of $270 billion on prescription drugs (@1.8 percent of GDP) that is paid to the drug companies because of a government imposed patent monopoly.

There is an endless list of issues like patent protection and the sale of public assets that will have a large impact on the well being of future generations. If the deficit hawks really cared about our children's well being, they would be talking not just about deficits, but all the issues that affect the health of the economy and society that we will pass on to future generations.

However, concern for our children's well being is not their real agenda. The deficit hawks want to scare them in order to advance a very different agenda. Watch what they do.
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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
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