Don’t worry about increasing government debt — we only owe it to ourselves! That has been the Keynesian refrain for many decades. The problem with it, as Don Boudreaux points out in the letter below, is that it completely ignores opportunity costs. Resources commandeered for governmental purposes are then unavailable for the private sector, which usually puts them to far better use. Is there some gene awry in the leftist brain that makes it forget one of the most fundamental concepts of economics? Here’s the letter:


Editor, The New York Times
620 Eighth Avenue
New York, NY  10018

Dear Editor:

Paul Krugman is correct that public debt does not necessarily harm an economy 
("Nobody Understands Debt," Jan. 2).  Mr. Krugman errs, however, by citing this 
fact as evidence for the mistaken conclusion that public debt held by fellow 
citizens is largely costless for the economy as a whole because it's "money we 
owe to ourselves."

When government spends money, resources that would otherwise have been used to 
produce valuable private-sector outputs are instead used to produce 
public-sector outputs.  The values of these foregone private-sector outputs are 
a genuine cost of government projects regardless of government's funding method, 
regardless of the merits of the government projects, and regardless of the 
nationalities of government's creditors.  And the private-sector outputs that 
are never produced because resources are instead used to produce public-sector 
outputs do not miraculously appear – they are not miraculously 'unforegone' – 
simply because the obligation to pay for public-sector outputs is deferred to 
the future or because the holders of the debt instruments are citizens of the 
same country as the taxpayers.

The argument in the above paragraph isn't unique: it is elaborated in great 
detail in many of the works on public finance by another Nobel laureate 
economist, James Buchanan.*  It's discouraging that Mr. Krugman seems to be 
unfamiliar with Buchanan's contributions.

Sincerely, 
Donald J. Boudreaux
Professor of Economics
George Mason University