The national debt requires the government to make interest payments in the future. These interest payments represent money that the government cannot use for something else, including tax relief. To the extent that these payments are made to domestic investors, and are paid for with taxes collected from domestic taxpayers, the immediate net change in national wealth would be zero. This has been called owing money to ourselves. This would, however, have a redistribution effect, which could affect future real GDP in a number of ways. Wealth would be redistributed from the taxpayer class to the investor class. To the extent that these interest payments are made to foreign investors, they represent wealth leaving the domestic economy. This would be a reduction in the domestic standard of living. In this sense, having foreigners own government bonds, and therefore a sizable portion of the national debt, becomes a real issue, not just political rhetoric. However, the real effect of foreign ownership of domestic government bonds needs to be evaluated in terms of opportunity costs. If the money received from selling bonds to foreigners allowed for an increase in domestic output that would not have occurred otherwise, this creates a benefit to having foreign ownership. This benefit may very well outweigh the loss of wealth created later when the interest payments leave the country. economicsonlinetutor/deficits.html
Posted on: Sun, 10 Nov 2013 14:25:48 +0000
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