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I got curious about this because I happened to pass by a list of countries with zero debt. Country debt seems like a major thing, but for a non-economics major like me, I don't exactly understand the implications of a country having debt.

More tax? Less progress? Exports are more necessary?

What difference does it make, for a normal citizen, if his/her country has debt or no debt?

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4 Answers 4

up vote 6 down vote accepted

1) Debt matters because it smoothes (or unsmoothes) taxes over time, which matters because the deadweight loss from taxation is (roughly) proportional not to the tax rate, but to the square of the tax rate.

2) Because family sizes are not homogeneous, government debt (which transfers the tax burden to future generations) can redistribute the tax burden across families. (Think, for example, about a taxpayer with no kids, or a family that has just immigrated.)

3) Government debt makes it easier to borrow --- it's better to pay 3% to government bondholders than 18% to your credit card company. This is possible because the penalty for not paying your taxes is considerably more severe than the penalty for not paying your credit card bill. (In effect, government debt resurrects the institution of the debtor's prison.)

4) There are of course issues with misperceptions, where debt can make people feel either richer or poorer than they really are, depending on whether they underestimate or overestimate their future tax burdens, and so can affect consumption paths in either direction.

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To the average citizen the difference between no government debt and a bit is irrelevant.

It becomes relevant when the debt is very large or when the government wants or needs to borrow and no one wants to lend.

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I've tried to mention some of the affects of high national debt on normal citizen.I think it would be helpful

  1. When the government doesn't have enough money to meet obligations and doesn't want to—or can't—borrow money, it just prints some. That's called "quantitative easing”. It creates inflation in the economy. It increases the value of goods and services.

  2. Government debt makes it more expensive to borrow. When you want to take out an auto loan or get a mortgage, you're competing with the government to borrow money. It means that rate of interest would be high.

  3. Government debt squeezes business and makes it harder to hire new employees. Government borrowing makes it more difficult for small business to borrow the money they need for expansion. The possibility of higher taxes discourages businesses from growing. The result: Fewer new employees are being hired. It raises unemployment.
  4. Government debt never dies. When you die, your kids do not inherit your debts unless they're on your accounts. That’s not true with government debts. That isn't repaid in your lifetime will be passed on to your children’s.
  5. Government spending for public welfare would be low that affects the living standard of people.
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Re #2: Government debt makes it less expensive to borrow, not more. I'd much rather pay 3% to T-bill holders than 18% to my credit card company. –  Steven Landsburg Jan 6 at 17:12
  1. Money does not have an intrinsic value - goods and services do.
  2. People only want money to exchange it for goods and services. Because money has no intrinsic value any country is capable of creating endless money supplies without resorting to incurring debts.
    The first consequence for country that decides to not create money supplies itself but instead let someone else create it, from whom that county then borrows, is the inevitable payback which for many countries in Europe is measured in tens of billions of $ per year. While part of the payback money does indeed comes from yet another debt (!), majority of the payback needs to be collected in taxes, so you can take it for granted that such a country country will impose higher taxes or else will have to cut the expenses.
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(-1). It is becoming frustrating to read again and again, in one form or the other, in one tone or the other, that humanity's solution to all materialistic problems lies in printing endless amounts of paper money. –  Alecos Papadopoulos Jan 6 at 15:25
    
@AlecosPapadopoulos Never heard of QEX?? The problem is not with increasing money supplies but who does it. Is it government, 'we the people' or is it someone else? Why do you think government cannot do QE itself?? –  matcheek Jan 6 at 15:33
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Since the issue of "printing paper money" appears to be a recurring theme here, it has to be treated properly, and not in the comments. I suggest therefore to you to post a question about it, including your thoughts on the matter, so that other users can address it in their answers. –  Alecos Papadopoulos Jan 6 at 15:37
    
@AlecosPapadopoulos thank you for your suggestion but neither me nor the OP was talking about 'printing money'. I was talking about 'money' which includes m0-mx and means, in essence, abolishing fractional reserve banking entirely as overwhelming majority of money nowadays is virtual money, not notes or bullion. –  matcheek Jan 6 at 15:43
    
"Printing money" is a left-over terminology for "creating money". Of course it doesn't matter whether it is actually in paper form or "electronic credits". My suggestion stands. –  Alecos Papadopoulos Jan 6 at 15:45

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