Which are the best arguments for paying off the national debt and which are best for not doing so?

Hi
Given the flip-flopping politicians tend to do on the subject of paying off the national debt (for and against depending on whether they are in office or campaigning for office), what are the merits of paying it off and not paying off. I look forward to your feedback.

I’m not sure there really are any good arguments for paying off the national debt. The arguments to do so tend to be made by people who fail to understand the difference between being in debt in, say, a household and having a debt when you are a nation who controls your own currency…and, particularly when your currency is highly-valued and desired in the world economy.

That said, one does want to keep the deficit and debt from getting too large relative to the GDP, although there is still quite a bit of debate over what constitutes “too large”. At any rate, it is generally agreed upon that during good economic times is when one should shrink deficits…and even perhaps run a surplus, whereas during bad economic times, running a deficit can actually be the only thing that saves you from the vicious cycle of a demand contractions that leads to a major depression.

The debt is too large to pay off, I doubt any sane person expects otherwise. The trick is to not let the payments become unwieldy. So long as they can continue to meet interest payments as a practical matter. I seem to recall that the bulk of the debt “rolls over” approximately every four years, so it is also important that interest rates remain low.

One of the strongest reasons to reduce the debt and get the deficit under control is that the interest payments on the debt are transferring wealth from the poor to the rich.

(Easy to figure out: who buys bonds, and who doesn’t?)

We’re funneling trillions up the pyramid, right into the hands of the one-per-cent.

I don’t know if it is desirable to pay it off completely but there are extremely good reasons to keep it as low as possible and even pay it down. The main one is that it gives us a reserve to use when something really bad actually happens - I am talking about something like a World War, not the “crisis” of the day (which we always seem to have these days).

In the case of the U.S., it is also very much in our best interest to keep the Dollar as the world’s reserve currency and not have to finance our over-extravagance to foreign governments to maintain fiscal stability. Finally, the cost to service the debt is the one that no one can argue with and countries can and do get into deep trouble very quickly over the issue. Countries can and do collapse catastrophically when they mismanage their expenditures, debt and currency.

I never liked the argument that “national debt isn’t like household debt” because it mostly is except the tools used to address excessive debt are different. Nations can inflate their currency, lose international status or just collapse while households can declare bankruptcy. Both can suffer financial ruin if they spend beyond their means for long periods of time. To think otherwise for either is just a 5 year old’s fantasy about how any money works.

This doesn’t make any sense to me. I get that poor people don’t generally buy treasury bonds, but I don’t think savvy savvy investors - a.k.a. the top 1% - do either. They’re usually purchased by institutions, aren’t they? The main point I wanted to get to though is: how is this “transferring wealth from the poor”? They’re not the ones paying out the Treasury bonds.

Well Social Security owns over 2 trillion of US debt so not all the interest payments are going to the rich.

I think the biggest factor is that when you buy something on borrowed money, you pay the cost of the item plus the interest on the money you borrowed. You end up paying fifteen million dollars for a bridge that costs ten million dollars. I can see how we benefit from that.

Nonsense. The national debt is just under twenty trillion dollars. The federal government collects around three and a half trillion each year. So we bump taxes back up and collect an additional trillion each year and apply that to the debt. It’ll be paid off in twenty years.

LOL!!

You should run for office. You’d fit right in.

I don’t think anyone - even a super Keynesian economist - thinks that debt is an inherently good thing in and of itself.

But the debt will never be paid off because there will always be more urgent priorities. Suppose the U.S. suddenly had $100 billion to spend, out of nowhere. There’s wounded or homeless veterans, kids who can’t read, a terrible healthcare system, a military with worn-out vehicles and aircraft, bridges in bad need of repair or replacement, an environment in need of clean-up, etc. How could a politician possibly sell, “We need to reduce our debt from $18.4 trillion to $18.3 trillion,” when faced with all that?

Sure they are. Who else would did you imagine it was?

People paying taxes are, including poor people (even if they don’t pay an income tax, they still pay things like VAT). Lots of investors in fact buy bonds. And “institutions” buying bonds can be traded companies, like say, insurance companies or banks, whose shareholders are more likely to be rich than poor.

So, yes, paying the interests of the debt does result in a transfer from the poor to the wealthy, even though obviously not all the money come from the poor (wealthyy people pay taxes too) and not all the money goes to the rich (even people with small savings can hold bonds, or part of their retirement plan can be invested in bonds, etc…).

The taxes paid by the poor has got to be a very, very small percentage of the cost of servicing the debt. The bottom 50% of income earners pay about 3% of all income taxes, so maybe $6 billion of the $220 billion in debt servicing costs comes from the bottom 50%. That’s really not that much money.

And, of course, there’s no VAT in the US, so that doesn’t have anything to do with the issue.

Now, one could argue that the poor pay a higher percentage of payroll taxes, which is of course true. Most of the payroll taxes are basically spent immediately, but a shrinking percentage of those taxes do get rolled over through the trust fund into general revenues. But again, we aren’t talking about numbers that would move the needle very much in the “poor are making rich richer because bonds” department.

Correct. Since the poor don’t pay taxes, they aren’t paying the interest on the national debt. It would be more proper to say that the debt transfers wealth from the children and grandchildren of the middle- and upper-classes to the citizens of the moment, of all classes.

Regards,
Shodan

The poor generally don’t pay INCOME taxes, but they pay many other types of taxes. I wish conservatives would stop using this inaccurate talking point.

I don’t know where we draw the line on “the poor”. In my mind, it’s a good bit lower than “bottom 50%”. Maybe bottom 10% or 20%, and those people are paying virtually nothing in income taxes (see details here).

We were talking about the federal debt. What taxes do the poor pay on the federal level? Capital gains tax? Inheritance tax? We don’t have a national sales tax. Most elderly households don’t pay Social Security tax on their benefits, and about 30% of workers are eligible for the Earned Income Tax Credit. (Cite.)

Regards,
Shodan

I readily admit that I’m using the broadest possible interpretation of the word “poor” to show that the “poor” are having an extremely minimal transfer of their wealth to the rich by virtue of the cost of servicing our debt. In fact, this overly generous definition of the poor was entirely intentional to illustrate how negligible the wealth transfer actually is.

Medicare and Social Security taxes. As I said before, the poor pay payroll taxes. It is a factual error to assert that the poor pay no taxes.

There is the Keynesian reason to pay down the debt. Under classical Keynesian theory the government should step up during periods of low demand to take up the slack and spend lots of money to get the country out of the recession. If the debts so incurred are not paid off during the periods of normal demand it becomes harder to stimulate the economy during the next recession.
In more neoclassical theory the money the government pays to borrow the money is money taken out of the economy by taxes. So current deficit spending is just future tax hikes. Since tax hikes depress the economy if we don’t pay off the debt we are depressing future economic growth.