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Since the onset of the financial crisis, public debt in the OECD countries has reached levels that are historically unprecedented outside of the World Wars. In the past several weeks alone, Greece finalized the terms of its latest austerity package, Puerto Rico defaulted on a bond payment for the first time in its history, and Ukraine narrowly averted the same outcome and is now attempting to renegotiate the terms of its massive debts — a familiar story to the rest of southern and eastern Europe. So should the American public be worried about a sovereign debt crisis of its own? “No!” scream exasperated liberal economists like Paul Krugman. Krugman argues that because the US can print and borrow in its own currency, and because interest rates are presently very low, national debt is unlikely to generate the same sort of difficulties. But Krugman goes much further than a dismissal of alarmism, defending the debt on the grounds that “one person’s debt is another person’s asset.” Rising debt therefore “could be a good sign.” Historical proof of this, he writes, is that “Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols (bonds).” The problem with the argument that Krugman and other mainstream liberals are making is not that it is necessarily wrong about the dangers of public debt, but that its primary objective has been to shout down conservatives who, as he puts it, have been “pushing the notion of a debt crisis as a way to attack Social Security and Medicare.” This is of course true. But liberals have been so intent on vanquishing their conservative adversaries that they’ve wound up defending the debt, and in doing so have ignored its regressive redistribution of both wealth and power. To return to Krugman’s example of nineteenth-century Britain, it may be true that the national debt did not hinder the country’s economic growth, but it did produce a substantial class of super-rich rentiers — an “aristocracy of finance,” in Marx’s terms — who were able to enrich themselves simply by collecting annuities on their bonds from the public purse. As Thomas Piketty and others have observed, the rising level of public debt in the US and elsewhere is likely contributing to growing wealth inequality, returning us to the same situation of mass poverty and concentrated wealth that characterized the nineteenth century in both Britain and the US. Indeed, Piketty is one of the only prominent liberal economists today who calls attention to the simple fact that public debt “often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending).” High levels of public debt may not generate a financial meltdown in the US. But because the problem is largely a result of the US government’s structural inability to raise as much money as it spends, it now may be poised to become a permanent crisis of wealth and power redistribution towards the top 1 percent of society.

Who Pays For IT How did we get here? The basic problem is that government budgets (both in the US and throughout the OECD) have risen throughout the neoliberal era while taxation has failed to keep up. (See Figure 1.) Most importantly, the progressive integration of the global capitalist system has rendered states less capable and less willing to tax capital. At the moment, the US federal government loses an estimated $150 billion to tax havens every year, ultimately costing every tax filer over a thousand dollars. The same trend has been particularly damaging in Europe, where the unified currency has made it easier than ever for liquid assets to escape taxation. As Piketty points out, this has made things difficult for a country like Greece, which “obviously has no way to levy a just and efficient tax on its own, since the wealthiest Greeks can easily move their money abroad, often to other European countries.” The even bigger problem, however, is that international integration has led states to compete for capital by consistently lowering their corporate tax rates. Consequently, tax policy has turned instead to the much less mobile incomes of the lower and middle classes. In the US, corporate taxation peaked in 1943, accounting for $1.47 of government revenue for every dollar paid by citizens’ income taxes. That ratio has declined precipitously since — so much so that in 2014, corporations paid only 23 cents for every dollar in individual income taxes. (See Figure 2.) This pattern has also been accentuated in Europe, where tax rates on corporate profit have fallen by nearly a third since the mid-1990s. These developments point to an important shift in the structure of public finances under neoliberalism. Government has not shrunk; it has grown slightly. But the flows of money have been radically altered. Welfare, public housing, and education programs have been gutted, while spending on prisons and corporate subsidies has exploded. To finance these new patterns of largesse, America’s tax system has become more and more regressive, giving major breaks to the wealthy and extracting greater sums from working people in exchange for fewer and fewer services.

Who Gets Paid To cover these funding gaps, the Treasury goes into debt by selling bonds to private and international investors. In 2007, the total value of this debt was equal to 35 percent of the US’s GDP. Today it is equal to 73 percent of GDP, or $13 trillion. An additional $5 trillion in bonds are held by government trust funds such as Social Security. When concerns about the regressive nature of the national debt are raised, its defenders often point to this tranche of government-held bonds to claim that the debt actually has a positive, progressive effect on wealth redistribution. The truth is that these two separate groups of bonds operate in completely different ways and cannot coherently be discussed as a single political issue. Excluding the government trust funds, there are three distinct groups of bondholders. Last year, they collected $260 billion in interest payments on the debt, or $700 million every single day. Foreign governments, mostly Japan and China, own 47 percent of the public debt. The Federal Reserve, as a result of quantitative easing, now owns 19 percent of the bonds. Almost all of the remainder (28 percent) is held by private interests, including individuals, commercial banks, insurance companies, mutual funds, and a few private pension funds. Because the wealthiest people and institutions in society overwhelmingly hold these bonds, there is no plausible argument that it operates in the general interests of Americans. In other words, when bonds become financial assets that are bought and sold on the open market, their obvious tendency is to redistribute wealth regressively. The only thing that distinguishes them from other forms of capital is that the dividends on them are paid in tax dollars. Harvard-based researcher Sandy Brian Hager characterizes this dynamic succinctly: Ownership of a government bond entitles its owner to a stream of interest payments. And if the class identity of government bondholders is somehow separate from the taxpayers that finance interest payments on the public debt, then income will be redistributed from the latter to the former. Hager’s research is the first comprehensive attempt in several years to map individuals’ ownership of US federal bonds, and his findings are startling. The top 1 percent of Americans now owns 42 percent of the total quantity of household bonds. This index was at a similarly high point in the 1920s, then dipped to under 20 percent in the late sixties, before rebounding to nearly the same high level of a century ago. (See Figure 3.) As Piketty’s work demonstrates, the 1 percent’s share of net wealth and income has followed a similar U-shaped curve over the past hundred years. Hager’s research shows that corporations’ bond holdings are similarly concentrated in the country’s top 2,500 companies, most of which represent finance, insurance, and real-estate interests. Although these corporations make up only 0.05 percent of corporate tax returns, Hager writes, “they now own 82 percent of the corporate share of the public debt.” Krugman’s facile suggestion that public debt is no big deal because it is “money that we owe to ourselves” is only true if we ignore the class basis of our economy. Some of it is indeed held by pensions and government trusts, but a lot of it is money that an extremely large group of people (the public) owes to a very small group of people (the 1 percent). To make matters worse, the structure of the debt has become even more regressive since the onset of the financial crisis. With the US borrowing such vast sums of money, the share held by pensions has declined, while the proportion held by mutual funds — which are held almost entirely by the wealthiest 10 percent of Americans — has increased substantially.