Our government is currently indebted $22 trillion (not counting unfunded liabilities, which increases the debt to $122 trillion) [1]. But how does this debt manifest itself in terms of modern day purchasing power? Let us suppose that 98% of the workforce were currently employed and that the nation did not have any debt; then 98% of our labor force would be putting its effort towards production. Now let us suppose that 98% of the workforce were currently employed, and that the nation’s debt amounted to (as it does) $22 trillion (or 105% of GDP) [2]. Does that matter? Aren’t we producing the same amount of goods, after all? The issue comes when we examine who must pay for this debt; we will see that when the government services debt, it takes from the poor of the nation and gives to the rich.

Let us consider two people: both pay their taxes and live within their means.

The first person (which we will call Jack) is relatively poor; he works hard, provides for his family, but is unable to save. The second person (which we will call Jane) is a bit wealthier; she works hard, provides for her family, and retains some savings each year. What does she do with this money? In accordance with common wisdom, she initially puts it into a savings account [3]. After a modest wealth has amassed in this FDIC insured investment, she looks to more aggressive investments. She invests in government bonds, which yield higher interest rates than what she had been receiving in the bank.

What happens with time? In accordance with our current trends, the government does not pay down its debt, but increases it [4]. It isn’t even paying off the interest of its debt each year. With increased fiscal irresponsibility, the government must borrow more. To service its debt, it must tax more. Jack receives the same income each year. Already struggling to meet demands, he must now pay more in taxes. Perhaps he must downsize from even his modest residence into one where his children now share a room. He must find a way to pay the additional burden of the government’s debt.

Jane’s income, however, is increased by the interest of her savings. She, too, is paying higher taxes. But this burden is offset by the interest she is earning from her loan to the government. If she has been able to save enough (if she is wealthy enough), then her interest payments will completely cover the cost of the increase in tax payments and she will be able to save more still each year. If the government’s spending is too irresponsible, then it must pay a higher interest rate for its debt. And this would, correspondingly, increase the income Jane receives from her savings even further.

And there’s the rub. It is true that the nation will produce the same amount of goods. However, government debt has the consequence of removing purchasing power (removing the benefits of one’s labor) from the poor and redistributing it to the rich.

Government debt acts like a vacuum moving across the fabric of the nation and sucking up money, only to then dump it out on the wealthiest of individuals.

How large is this problem? The interest on debt issued to the Federal Government currently exceeds the annual budget of the military [4]. It is as if the Federal Government takes an amount equal to the cost of entire military (the cost of all of its ships, tanks, jets, planes, weapons, and high tech gadgets) out of the pockets of the poor and gives it to the rich every year. And that doesn’t include the interest paid on loans issued to state governments and local municipalities.

Any effort by the government to counteract this, any effort of redistribution from the rich to the poor, only exacerbates the problem. Firstly, this assumes that those lending to the government can be taxed by the government. Currently, much of our debt is issued by foreign entities which are unaffected by domestic tax policy. But, to the extent that the government can tax those who are lending to it, those taxes will reduce the supply of wealth that the government can borrow. This, according to the law of supply and demand, reduces the availability of money and increases the interest rate that the government must pay on its debt.

Said differently, if Jane were just wealthy enough to save under the previous tax policy, her savings would now be consumed by the additional taxes and she now finds herself to be in Jack’s situation. However, if Jane were wealthy enough, she could absorb these new taxes and benefit from the increased interest rate that the government must pay. This would be especially easy for Jane if she were from another country where she would not be responsible for the additional tax burden.

The government behavior that is most fair to the impoverished of the nation is to service its debt fully as quickly as possible; better still, it would be to never go into debt. This has been known for centuries. In “The Wealth of Nations”, the Scottish economist Adam Smith writes,

In the payment of the interest of the publick debt, it has been said, it is the right hand which pays the left. The money does not go out of the country. It is only a part of the revenue of one set of the inhabitants which is transferred to another, and the nation is not a farthing poorer. This supposes that the whole publick debt is owing to the inhabitants of the country, which happens not to be true. But though the whole debt were owing to the inhabitants of the country, it would not upon that account be less pernicious.

[1] http://www.usdebtclock.org/

[2] https://tradingeconomics.com/united-states/government-debt-to-gdp

[3] Kobliner, Get a Financial Life: Personal Finance in your Twenties and Thirties

[4] https://www.thebalance.com/us-deficit-by-year-3306306