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The Bankrupt Debate Over Bankrupting Our Children

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Dean Baker
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Monday 11 May 2009  t r u t h o u t | Perspective

Suppose that the federal government decided to give every newborn baby $200,000. That might seem like an extremely generous gift. However, by the peculiar accounting of those who claim to be watchdogs for future generations, this policy would be bankrupting our kids.

If that is hard to understand then you haven't been reading The Washington Post or listening to the Blue Dog Democrats or following the work of the Peter G. Peterson Foundation. This crew, along with the other deficit hawks inside the beltway, has decided that the way to measure intergenerational equity is to measure the size of the national debt, and this gift to newborns will undoubtedly increase the size of the debt.

With a bit more than 400,000 kids born every year, this plan would add more than $1.6 trillion dollars to the national debt over the next two decades. No doubt the Peterson-Post crew would be decrying the unfairness of handing down this huge burden to our children.

In their quest to cut Social Security and Medicare they have promoted a nonsense worldview in which the metric of how well we are treating our children is the size of the national debt. In the Peterson-Post world view, programs that spend money to better the plight of our children. For example, improving the education system or rebuilding the infrastructure or developing clean energy technology all make our children worse off, since their main measure of intergenerational equity is the size of the government debt.

In reality, what determines the well-being of future generations is the whole world that we hand down to them: the public and private capital stock, the state of technical knowledge and the specific skills and education that we give the future workforce as well as the natural environment and resources.

If we let the capital stock deteriorate or destroy the natural environment, then our children and grandchildren should be furious at us, even if we hand them a country with zero debt. The national debt is not only a bad measure of the burden born by future generations; it is not even a measure of intergenerational equity at all.

At some point, everyone alive today will be dead. At that point, the government bonds that constitute the debt will be owned by our children or grandchildren. In other words, our children and grandchildren will be paying the interest burden to themselves. If future generations both receive and pay the interest on the debt, then how can it be, on net, a burden to them?

There is an issue of foreign ownership of debt. But this is due to the trade deficit, which is a result of the over-valued dollar and has no direct connection with the budget deficit. If we had the same overvalued dollar, but no budget deficit or even national debt, then we would be in the same situation relative to foreign investors, except that they would be buying up more of the private capital stock rather than public debt. The outcome for future generations would be the same; a larger share of future income would be paid out to foreigners.

However the Peterson-Post crowd doesn't want to talk about the overvalued dollar; that would offend the Wall Street crew. A lower dollar would give them less clout in the world, even if it would increase the competitiveness of US manufacturing and improve the economy that we hand down to our children. No, the Peterson-Post crew just wants to talk about cutting Social Security.

The Peterson-Post crew's line on the debt is just straight bad logic and bad economics. If the money being spent today helps boost the economy out of the downturn, then it will lead to more growth, an improved public and private capital stock, better technology and a richer, cleaner world for our children and grandchildren, even if it is a world that comes with more government debt.

Thinking people who care about future generations should be insisting that the government spend whatever is necessary to get the economy back on its feet, just as we spent as much as was necessary to win World War II. There is no serious prospect that we will face the same debt burden as we did after World War II, which happened to precede the most prosperous three decades in US history.

The Peterson-Post crew strongly disagrees with this analysis. But remember, these are people who somehow could not see the $8 trillion housing bubble that exploded the economy. Remember that fact.

Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR's Jobs Byte is published each month upon release of the Bureau of Labor Statistics' employment report.

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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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