Carlo Clericetti – Italy: Debt Mystification

March 30, 2021 Economics, EU politics, Finance, Inequality, National Politics

Is debt really our biggest problem? Are we placing a burden on our children and future generations? The answer to both questions is a clear “no”, without a shadow of a doubt. Unfortunately, the European rules, now thankfully suspended, were drawn up from this mistaken perspective, and there is also the risk that we may want to return to something similar. That would be a bad move. In the meantime, some economists and many pundits should stop talking nonsense.

Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he  blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.

Cross-posted from MicroMega

Translated and edited by BRAVE NEW EUROPE

Not a day goes by that we don’t hear some economist on television blaming us for “passing on the enormous burden of the national debt to our children”. Commentators and pundits of all kinds repeat in chorus: the public debt is a monster that we have created, that continually threatens to devour us and bankrupt the state. It is our primary problem, the most dramatic, the most important. Our forces and our efforts must first and foremost aimed at reducing it, at any cost. At the cost of cutting the welfare state? Of course. At the cost of leaving a few million people out of work? What can you do… At the cost of having, in one of the richest countries in the world, a few million families in poverty? That’s the way of the world.

And yet: at the cost of imposing a wealth tax? Never! At the cost of raising taxes on the wealthiest ? Don’t joke, taxes must be reduced. But then it is not ‘at all costs’: only at certain costs.

But back to the “burden on future generations” nonsense. Let us assume for the moment that all our public debt is held by Italians. For the son of the dustman who will find himself with an indebted state, there will be the daughter of the lawyer who will inherit the government bonds bought by her father with his savings, i.e. she will inherit a debt. The relationship between the two is the interest that the state pays on the debt. The dustman’s son has no government bonds, so he is left empty-handed; the lawyer’s daughter, on the other hand, will have an income thanks to the coupons on the bonds bought by her father. She will not mind the fact that the state has gone into debt, thus providing her father with an opportunity to make his savings pay off. As we can see, we cannot reason with Trilussa’s average (Trilussa was a Roman poet, and one of his most famous poem says about averages: “If you eat two chickens and I none, the average says that we ate a chicken each”. The same if you say “Everyone who is born in Italy has a debt of a thousand euros”).

But then, does debt benefit the rich and harm the poor? Again, it depends. If that debt has been used to build roads, schools and hospitals, the dustman’s son will not receive interest but will have a range of services that he would not otherwise have had. And maybe that money has also been used to keep his father’s job, allowing him to live a decent life. Maybe some of that money has been used to create public enterprises, or to facilitate the life of private ones (e.g. by helping them to modernise). And in that case part of the legacy is to live in a healthier economy than it would otherwise have been.

So is debt always a good thing? No, if it is done to secure the support of clientele or to give bonuses to the already wealthy (who then, perhaps, with that money will buy government bonds, from which they will collect interest…). In short, public debt has redistributive effects, i.e. it shifts wealth from certain categories to others, but it is very difficult to determine who loses and who gains, which also depends on what and how many services the state provides, how the tax system is designed, etc. It certainly does not benefit one generation to the detriment of another, as Luigi Einaudi already noted:

“Much of the moral condemnation hurled by austere politicians against the public debt is due to the conviction of the immorality of enjoying the benefits of spending by us alive today and leaving the bill to our distant grandchildren. Posterity is involved; but in a way quite different from that imagined by the commonly held belief among the populace that the national debt is a trick to make grandchildren pay for the expenses incurred by the living. Unfortunately for the living, there is no way to make people who are yet to be born pay for any expense, large or small, private or public. (from “Myths and paradoxes of tax justice”).

A lesson forgotten? No, not by those who know about economics. This is a very recent tweet by Vitor Constâncio, former vice-president of the ECB:

“Domestic debt is debt held by residents. In the future when bonds are redeemed, members of the future generation will pay the taxes (if the debt is not rolled over) but other members of that generation receive the money of the redeemed bonds. It is not a burden on the generation”.