Time magazine’s cover is trying to scare economically illiterate people. Time’s reasoning is exactly the same as the absurd reasoning I used to calculate the numbers in the title above. The U.S. federal government owes 56% of its debt to Americans, so the US government would literally have to pay, “every American man, woman and child [$23,871] to erase” the government debt to Americans. Does that number make you feel any better? Unfortunately, the government probably won’t be paying much of that money to you. You probably don’t own that much government debt because the richest 3% of Americans hold 52% of total U.S. wealth (according to Fed data). Thus the US government will be paying the majority of that money to the richest 3%. Some of those wealthy investors love to pay for reminders (like Time just published for free) about that big debt we owe them so that the rest of us don’t forget. Time magazine’s reasoning appeals to a lot of those wealthy bond holders that want the average American to pay higher taxes (or maybe cut Social Security or other programs) to pay off the debt, and maybe they think they can scare us into accepting a bleaker future to pay them off, but the reality is that the median American isn’t currently obligated pay much of the money back because America still has somewhat progressive taxation. Unless they succeed in making taxation a lot less progressive, the wealthiest bond holders will pay the taxes to pay a lot of that money back to themselves.
It would be more accurate for me to state the amount that the government owes to the median American (closer to $0) rather than stating the mean amount of debt that the government owes us ($23,871). Time’s cover story would also be more accurate if it attempted to asses the median amount that taxpayers can expect to pay to cover the federal debt, but Time is trying to scare people with mean numbers. The median amount that Americans will pay would be a much more accurate and less alarming statistic because wealthier people pay more taxes, but even that number isn’t particularly relevant to the median American’s well-being for several reasons that Matt Yglesias explains. The Time cover story is by James Grant who has a long reputation as a flaky gold bug who has a tradition of making bad predictions about inflation. Paul Krugman notes that he is a…
Grant continues to pine for a return to the gold standard in the Time cover story. If Grant thinks that gold is better than government bonds, then he can just buy gold. He doesn’t have to force the entire U.S. economy to use gold for him to be able to have whatever security he thinks there is in having gold.
Grant’s story also says America is insolvent. He complains that the government can print money and that private investors are lending money to the U.S. government at, “an average of just 1.8%.” How can the government be “insolvent” when it has the power to print money. I wouldn’t be worried about my debts if I could legally print money. And why would private investors lend vast amounts of money to an “insolvent” government for just 1.8%? Grant is wrong. private lenders charge the U.S. government the lowest interest rates of anyone who borrows in dollars because investors put great faith in the solvency of the U.S. government.