We don’t Owe it to Ourselves

Richard Ebeling’s post over at ThinkMarkets has reminded me about one very dangerous meme that is even shared by many professional economists, including Lawrence Klein to whom Ebeling’s post is devoted. This meme is that public debt is something that “we owe to ourselves” and thus it presents no significant problem.

This is one of the many cases where people fall victim to what may be called money fetishism. Of course in purely monetary terms there is no problem with public debt because it is possible for the government in the end to print as much money as possible even if taxes are not sufficient to cover the public debt obligations.

This is true but it disregards the sheer magnitude of public debts, especially of its lion’s share constituted by pension and health care promises to the future retirees.  Monetary fetishism here obscures a very important point: the pension and health care claims are ultimately claims not for money but for real goods. When people retire and thus cease to work they reduce productivity of the economy.  At the same time the promises to them imply that the productivity of the economy may not fall significantly after their retirement. Thus, the only way to provide for their retirement is for them to increase the productivity of the economy prior to their retirement by improving the economy’s capital and getting a share in this improvement.

The pension and public medical “insurance” systems that are used in most of the countries are based on the so-called pay-as-you-go model where most if not all of the money taken from the current employees have for a long time not been invested but instead just redistributed to the (then) current retirees. This means that the increases in productivity of the economy over the lifetimes of current employees will almost definitely be insufficient to provide them with the lifestyles that they expect after retirement, unless the innovations of 3D printing, nano- and biotechnologies lift the debt boat. No amount of monetary sophistry may change this basic fact which is not dependent on money at all.

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