How worried should Americans be about public debt? My debate with Todd G. Buchholz on

How worried should Americans (indeed the rest of the world too) be about public debt. In this running exchange Todd G. Buchholz, White House director of economic policy for President George H.W. Bush, financier and author, and Yanis Varoufakis, academic economist, parliamentarian and author, answer the question. Invited to do so by debate forum, Todd kicked off the debate with this piece (see also below) and Yanis responded thus (also copied below).

TODD G. BUCHHOLZ’s Opening Salvo 

I wish I could believe that the tooth fairy really flies from pillow to pillow, that Elvis still lives, and that government debt doesn’t matter. Some people manage to believe in all three, and I’m sure they sleep better at night. I’m also sure that whenever confronted with absurdities, they can concoct all sorts of theories that seem plausible after a few drinks or puffs of suspect vegetation.

But to the rest of us, the U.S. and many of its G7 cohort look not just ill but veering towards broke. To offset the COVID-induced Great Cessation, the Federal Reserve and Congress have pumped in staggering sums of stimulus, fearing that the economy would otherwise sink like a dense dumpling in a bucket of broth at a 1930s soup kitchen. The 2020 budget deficit will hit about 16 percent of GDP, and the ratio of debt to GDP is hurdling over the 100 percent mark, numbers not seen since Franklin Roosevelt was photographed with a cigarette holder jauntily protruding from his patrician lips.

Assuming we eventually defeat COVID and do not devolve into a dystopic Terminator scene, can we avoid the fiscal cliff? Some people think we should not care about such things and that governments can keep borrowing without limit, as long as the central bank prints money. Such debt apologists are not necessarily original thinkers. They have many forerunners, some of them buried in the rubble of ancient Greece, where 4th century BC municipalities defaulted on debts to the Temple of Delos.

Want a more recent example? Take a flight to broken Venezuela, where debt is twice the GDP level and inflation should be displayed using scientific notation. In the 1960s and 70s, UK officials listened to such advice and recklessly borrowed. The country suffered raging inflation and a sinking currency. It was called the “sick man of Europe” (a phrase first applied by Czar Nicholas I to the crumbling Ottomans). In 1976, in an extraordinary conversion, Labour Prime Minister James Callaghan begged the IMF for a bailout, performed a fiscal about-face and declared to debt apologists, “I tell you in all candour that that option no longer exists.”

The age-old refrain from debt apologists is, “we owe the money to ourselves.” Two replies come to mind. First, we don’t just owe money to ourselves. About one-third of U.S. debt is in the hands of foreigners, including a trillion dollars to the Chinese. Second, even if we look solely at debt held by Americans, we should ask, “Who is we?” The lenders who in good faith bought U.S. Treasuries are not the same individuals who would benefit from tearing up the bonds or stomping their value down to nothing through inflation. This is a fallacy of composition.

A debt is a claim on the future. If you think it is imaginary, ask Elvis to sing Jailhouse Rock when he stops by your place tonight.


It takes great foolishness to be relaxed about mounting debt. But, then again, smart persons recognise that debt is to capitalism that which hell is to Christianity: Grossly unpleasant but absolutely essential, since without it the system (economic system or Christian belief system) does not work. So, yes, worrying about hell is part and parcel of being devout just as losing sleep over debt is the sensible thing to do under capitalism, especially during a crisis as great as the present one.

But, I am told by believers, freaking out about hell is not the best way to avoid ending up there. Hell, like debt, is a mere symptom of doing the wrong thing. And the wrong thing to do in a great depression, of the sort we are experiencing now, is exactly what Todd Buchholz is doing now: To freak out about public debt, carefully avoiding a single word regarding the private debt menace looming as families and companies face bankruptcy.

Too smart to put it in his own words, Todd whips up fear of public debt hoping that his readers will reach, all by themselves, the ‘obvious’ conclusion that it is time for austerian public spending cuts for the purpose of reining in the budget deficit.

It is not hard to mislead the public into this conclusion. When the going gets tough in our private lives, with our incomes tanking, you and I have a duty to tighten our belts and to say no to new loans. However, private finances are a terrible basis for thinking about public finance.

You and I are blessed with a wonderful independence between our expenses and our income. When, in response to being in the red, we cut down on our expenses, our budget goes back into the black because our income is independent of what we spend. Tragically, the Treasury is not blessed with this splendid independence between its tax revenues and public expenditure.

Suppose Todd succeeded in pushing everyone into an austerian mindset yielding budget cuts. At a time of falling private expenses (both on consumption and, more ominously, on investment), a subsequent reduction in public spending will mean that the sum of private and public expenditure will fall even faster. But what is this sum? National income! Thus, GDP falls faster when states cut spending in a middle of a slump – a catastrophe for families and companies.

So, by all means let’s worry about debt. But let us first understand that, in a recession, debt will drown us if, like Todd, we focus exclusively on public debt. Put differently, the more government tries to balance its books now, the harder it will be for persons and firms to balance theirs and, as a result, total debt will rise faster as total incomes fall further.

For this reason, a special place in hell (and possibly debtor’s prison!) is reserved for those who whip up fear of public debt in order to lure good, unsuspecting people into the fallacy of austerity.