By Paul Krugman
Whenever I write about debt and deficits, I receive the same letter — OK, not exactly the same letter, but a number of letters with more or less the same gist. They read something like this: “If I borrow money from the bank, the bank expects me to pay the money back. Why isn’t the same true for the government? Why can we keep borrowing when we already owe $31 trillion?”
Just about every economist will reply that it’s misleading to make an analogy between household and government finances. But it seems to me that we often aren’t clear enough about why, perhaps because we don’t say it bluntly enough. So here’s the difference: You are going to get old and eventually die. The government isn’t.
I don’t mean that governments are immortal. Nothing is, and no doubt someday America will, as Rudyard Kipling put it, be “one with Nineveh and Tyre.” But individuals face a more or less predictable life cycle in which their earnings will eventually dwindle.
And lenders therefore demand that individual borrowers pay off their debts while they still have the income to do so.
Governments, on the other hand, normally see their revenues rise, generation after generation, as the economies they regulate and tax grow.
Governments, then, must service their debts — pay interest and repay principal when bonds come due — but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds, and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue.
In fact, when governments for one reason or another run up large debts, it is, as far as I can tell, unusual to pay those debts off.
The most famous example, albeit one that many people apparently don’t know about, is the debt America incurred to fight World War II. By the war’s end, this debt was around 100% of gross domestic product — roughly comparable to the debt level today. So how did we pay off that debt?
We didn’t. John F. Kennedy entered the White House with federal debt roughly the same as it was on V-J Day.
Why, then, wasn’t the 1960 election dominated by questions of how to pay off the national debt? Because although the dollar value of debt hadn’t gone down, economic growth and modest inflation meant that the ratio of debt to GDP had fallen by half.
This kind of thing could in some cases happen for an individual family: If people buy a house when they’re young then make substantial income gains, their mortgage payments may dwindle as a percentage of their income even before the mortgage is paid off. But it’s normal for governments, which can expect to see their tax receipts grow year after year with no end in sight.
Revisiting the story of America’s failure to repay World War II debt, I found myself wondering whether governments borrowing large sums that they never repay could be thought of as a newfangled, dubious innovation — hey, this is the 1950s we’re talking about, but there are people out there who are still predicting doom from Franklin D. Roosevelt’s decision to take us off the gold standard in 1933.
Well, governments have often borrowed to fight wars, sometimes on an impressive scale. By the end of the Napoleonic Wars, the British government’s debt, according to Bank of England estimates, was 184% of GDP — far above America’s debt at the end of World War II. Most of that debt, by the way, consisted of consols — perpetual bonds that pay interest forever but never require repayment of principal. Still, even those can be retired. So how did Britain pay off its Napoleonic debt? It didn’t.
British public debt in 1851, when Prince Albert opened the Crystal Palace exposition celebrating industrial and technological progress, was basically unchanged from its level when the Duke of Wellington won the Battle of Waterloo 36 years earlier. The idea that we should expect governments to pay off their debt isn’t just ill-informed, it’s also centuries out of date.
In fact, Britain’s willingness to let its Napoleonic debt just sit there is in a way even more remarkable than America’s later willingness to live with its World War II debt. After all, 19th century Britain didn’t experience sustained inflation, and although it was experiencing economic growth at a rate never before seen in history — hence the Crystal Palace — that growth was still fairly slow by later standards. As a result, debt relative to national income was still quite high in 1851: 130%t of GDP.
Yet, as far as I know, panicky moralizing about the debt didn’t dominate British politics, which seemed to adopt the attitude satirized in “1066 and All That”: “The National Debt is a very Good Thing and it would be dangerous to pay it off, for fear of Political Economy.” Instead, the public was preoccupied with issues such as the Great Stink of 1858.
In much more recent history, when governments were mistakenly pursuing fiscal austerity in the face of high unemployment, I used to accuse deficit scolds of being obsessed with Victorian virtues. I was, I now realize, being unfair to the Victorians.
So, for all those whose instinct is to assume that a responsible government would, like a responsible individual, pay off its debts as soon as it can, again: Governments aren’t like people. If death and taxes are the only sure things in life, well, death isn’t an issue for governments, and taxes are an asset — a growing asset — rather than a liability.