Justin Wolfers Answers Your Questions on the National Debt | The Professor Is In

Welcome to Platypus Economics. Last week we officially launched with
a video diving into the federal budget deficit, and today
we're going to respond to audience questions and comments related
to that video. I'm Megan Connors, I'm justin Wolfus, and
this is the professor is in. So we had a
lot of questions and comments about this video. In particular,
a lot of people wanted to know more about interest payments.
Who exactly is the government borrowing from and where do
those interest payments go? So can you start off by
explaining that a bit more?
Yeah? Now, look, first of all, I just love the
people were into it. We're talking about fiscal policy and
people had all soo ITTs of won key questions, So
thank you. Okay, So, first of all, the government owes money.
We borrow money because we take in less than we
spend and you make up the difference by borrowing because
all the contractors want to be paid fair enough. Where
does that come from? The government can't just go to
the bank. Because it went to a local bank and
said I would like to borrow several trillion dollars, most
banks can't do it. So what they do instead and
The problem is the government's big and any one bank
is small. So what they do is they go to
the bond market. Now, what's the bond market. The government
basically says, hey, I'm going to sell you a piece
of paper, this piece of paper. I will give you
one hundred and five dollars for this piece of paper
in a year's time, how much you're willing to buy
it for. And people might be willing to buy it
for one hundred bucks, all right, So that means now
the government gets a hundred bucks, but in a year's
time has to give someone one hundred and five. That
means the government just borrowed money in that case at
a five percent interest rate. Seems a very complicated way
of doing things. Well, the reason we do it through
the bond market is the government can sell that piece
of paper and lots of different people and lots of
different banks, and lots of different financial institutions. So the
fact that the US government is big doesn't really matters
so much because now it's selling those pieces of paper
or implicitly borrowing from people and institutions around the world.
All right, that's just the foundation. The question was where
did the interest of payments go, which is exactly the
same as saying who does it sell the bonds to?
And here's the really interesting thing. Turns out, roughly speaking,
I don't have the precise number. Two thirds of our
debt of the government's dead is owed to Americans. That
might really change how you think about things, because you
hear a lot of rhetoric that sort of sometimes it's
almost nationalist tone, like we can't afford to owe this
much money to China. We don't actually to the American government,
owes it to the American people. And guess what the
American government is the American people. Huh. All of a sudden,
it feels a whole lot less, like a ton of
other people have a ton of leverage over us. You
could even go, if you want to get into the
jab political part, what if the Chinese decided they didn't
want to buy our bonds anymore. Well, first of all,
they're not buying that many, so they're not lending us
that much. And the other he is, the rest of
the world's out there. As long as we're offering a
pretty good interest rate. People like money, and so therefore
they're going to come and lend to us rather than
lend to someone else as long as we offer the
right instrate. So if China word a walk away, we
might end up paying slightly higher interest. But remember, actually
the biggest lenders to the American government is the American people.
We had a couple of people ask like, can't the
government just print money? And I think most people are
aware that there are downsides to printing money, but there
are also downsides to higher interest payments. So how do
those downsides like compare against each other and shake out?
Yeah, my son asked the same question. Actually he said
on points he is a creative economic thinker. Let's put
it that way. But you know, the president has put
a lot of creative thinkers in charge, not necessarily, you know,
more than my thirteen year old different question. There are
two ways we could pay for this. Go out borrow
money and use that to pay our contractors and public
servants and all of that. We just print more money.
It's true, we do own a big money printer that
would work. So think of these as just two alternative ways.
And then the question is what's the most what best
serves the United States? So printing money sounds like it's free,
but it's not. Sometimes when you fall down the intellectual
rabbit hole of thinking about money, it's worth remembering, at
the end of the day, the economy is people and
goods and services, and money just helps facilitate all of that.
And there are people in goods and services moving across
space and across time, and so printing more pieces of
paper doesn't in any fundamental level change the fact that
we have only so many people and so much stuff
and so much space. What does it do? Well, If
you print more money, then there's more money chasing the
same amount of goods. And the way that ends up
working is the price of the goods goes up. And
that's we've got a word for that. We call that inflation.
So when we borrow money, we repaid from tax revenues,
income tax things like that, progressive taxes that get the
rich more than the poor, and that are designed, we hope,
in a sophisticated way. I understand there are problems the
other way of doing as we print money. Printing money
causes inflation. Inflation means that the money that's left in
your wallet's now worthless. Implicitly, then you've just paid a tax.
We can call that the inflation tax. And so now
this brings everything into a like for like thing. Would
we rather fund the debt with an inflation tax or
income tax? The thing about an income tax is we
can tax the rich more than a poor. The thing
about an inflation tax is a taxes you in proportion
to the number of dollar bills you have in your wallet,
and so it might have very different implications. With an
income tax, we can do things like create special carve
outs where there are specific types of social policies we
want to pursue parts of the economy that we want
to improve, and so on. The inflation tax will not
be progressive. It can't charge a different inflation taxes to
different people, different sectors of the economy, and so on.
You might like it because it's kind of mechanical and
it gets all of the political lobbying out of the way.
But then there's a different problem, which is, as soon
as the government can do this, then you start worrying
it will do it. Once it starts doing it, I
know how much they're going to tax me this year,
but what are they going to do next year? Now,
all of a sudden, I've got a reason to stop
you holding onto money. And if people aren't willing to
hold onto money, it becomes really hard to run an economy.
You basically move back to a system of bart and
quite literally, if the inflation. This is what a hyper
inflation is. Money is such a horrible asset that no
one keeps it. And during a hyper inflation, what you
do is you get paid, the dollars hit your wallet
and you immediately run to the shops and buy your
groceries before the inflation tax eats it away, and so
your whole life gets reorganized around avoiding the inflation tax.
So look, when you've heard about this word hyprind very
very high rates of inflation. It almost always starts with
some genius tinpot dictator who says to himself, I know
how to get out of this current fiscal problem. I'm
going to print money, and it never ends well. The
US government debt right now is about thirty one trillion dollars, which, Megan,
I'm going to ask you to do some math while
I keep talking. Can I do that?
Sure?
Can you divide that by three hundred and thirty million
people for me? And I'll keep talking. Because what people
do is they take the debt and they divide by
the number of Americans, and then they say, therefore, this
is your share of the national debt. This is how
much you wow. Is that a good idea? I know
you're doing the long division, carry the four divide by
six quadruple it. All right, Megan, we're back from calculating.
What number do you have for me?
Roughly? Ninety four thousand, that's not rough.
If you're going to be rough, you'd say one hundred thousand.
That's precise, clean.
One hundred thousand roughly.
Okay, Well that sounds terrible. If you just told me
I owe someone an extra one hundred thousand dollars, I
feel awful, right, and you've made me miserable, And all
of a sudden, if I'm a fiscal hawk, I'm like,
oh my goodness, would someone just fix the national debt?
Now here's the thing. It's not just three hundred and
thirty million people who'll pay that because I just had kids.
I had them a little while ago. Actually I didn't
just have them while you were calculating. And my kids
are going to have kids, and their kids are going
to have kids, and all of those people can help
pay that off. And so now, all of a sudden,
that thirty one trillion dollars could be paid off by
literally a trillion people if you think about all the
future generations. Now you might say I don't want to
I don't want my kids and my grandkids and my
great grandkids to pay that off. But that's a different question.
And actually a lot of people have an intuition I
don't want my grandkids paying this off, But actually I disagree.
You See, the thing is we're not just going to
give our kids the debt. We're also going to give
them incredible assets. My kids, who haven't paid a dollar
of tax in their lives get to enter a country
where we have a school system and roads and police
and laws and courts, and we have set them up
for success. So yeah, they're going to get some of
the bill, but they're also going to get some of
the benefits. So I kind of feel okay about it.
But so the important thing is when you and I
are borrowing, we have to think about our lifetimes, and
so it's one person who has to pay or you know,
if you're in a partnership too, right, and we have
to pay it before we die.
That the government lives forever, and it's not just three
hundred and thirty million Americans. It's literally future generations, and
that fundamentally changes everything. The government can best its income
really easy well has to do is raise a tax rate.
The government can see any dollar anywhere in the economy
and say oh, I have that, and so its ability
to pay as much higher than its current revenue. The
government has incredible assets. The government owns all the national parks.
The government owns the right to tax any one any amount, anytime, anywhere.
Ever, are you the government thing we sell the national parks?
Is that what you're suggesting?
I am suggesting that when you think about debts, you
think about assets at the same time, and the national
parks are part of those assets. Look, if you borrow,
this is a similarity between the two. If you borrow
a lot of money in order to make an investment
that will yield future income, that makes it easy to
repay the loan. That's a good thing for you and
I to do. That's what business loans are like. That's
also a good thing for the government to do. And
so if the government is investing in infrastructure, that or
early childhood education, that will boost future incomes and therefore
future tax revenues, that's fantastic. If the government's borrowing to
repaint the bottom of a reflecting pool that's not yielding
future incomes, that's not making it easy for us to repay.
Humans our income over time, we tend to our annual
income tends to rise till about our forties and fifties,
and then it starts to fall after and we retire,
and then it goes away and eventually gets awfully close
to zero. The income to a government tends to rise
and rise and rise and rise, because we're of economic growth,
and so the government's ability to repay is continually changing.
Does the going off script a little bit?
But does the uh another script? Do we aerographic?
I had questions this is a new one, But does
like the demographic shift, like you know, yea looks like
we're about to start declining and population. Does that change
the way that you think about any of.
This in a super interesting way? And I'm hoping we
might do some work on this, Megan, because what we
have is the president, of course, is cut back dramatically
on immigration. And let me go back, Remember I said,
we have a debt and it doesn't have to be
paid by the current set of Americans. It can be
paid by a bunch of future Americans. If we don't
have immigration and population growth, the number of people who
can pay off that debt just went down. So that's
a funny thing. Every immigrant who comes into the country
inherits part of our debt in a because they're going
to have to pay taxes here. So if you want
the debt to be easy to repay, double the number
of Americans. I'm not being funny. The economic burden of
our debt is larger per American when we have fewer Americans.
So yeah, I think this is fascinating. I think this
is a big part of the immigration debate that we
just haven't even begun to talk about yet. And partly
it depends on who it is who's immigrating. So people
who are seventy years old, if they immigrate, they're not
going to have children, and they're got another work. So
while they sound like they're part of population, they're not
paying taxes, so therefore they're not paying off the debt.
But if people immigrate at age twenty, we're not going
to pay for their education, We're not going to pay
for the hospital stay that led to their birth. But
they they're going to spend their life on paying Texas.
Hey guess what, they just took on the burden a
part of our future national tit and it becomes easier
on the rest of us. Fun question, A.
Lot to think about, and yes, I agree. I would
love to pick that up in some of our future
videos and content. Thank you so much for taking the
time to answer these questions to our audience. We hope
that you enjoyed this episode of The Professor is In.
If you'd like justin to answer your question in a
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