THE CASE FOR CLEANER INCOME ACCOUNTING.

Paul Krugman takes on some misconceptions about public debt.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Strictly speaking, families don't have to pay their debt back either, if they accumulate assets more rapidly (something that the mortgage-makers were too optimistic about in Professor Krugman's example) and have a good tax advisor. That's one purpose of a trust fund, to ensure that assets in the name of any one family member exist to cover that person's remaining liabilities at death.  The better analogy might be with a corporation, which can refinance old debt with new, and retain its credit rating as long as consumers buy its products.

But family mortgages are balance sheet items: there's an asset, the house, and a liability, the mortgage, and, with correct financial discipline, there's equity in the house.  The same principle applies to the corporation.  But not to the government.  Arguably, the money used to win World War II created an asset, the Pax Americana, which, although it depreciated, it made possible the conditions within which people could work and shop and pay their taxes.  Professor Krugman has the opportunity to make that point, but he opts not to.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

That's the return on investment.

There's also a peculiarity of holding government bonds for readers to contemplate.  Cash in the savings bonds, use the proceeds to pay your taxes, by buying the bonds you're effectively prepaying your taxes. Or cash in the bonds, use the proceeds as down payment on a house.  You've converted an asset into a different kind of asset, but the government's balance sheet, because it doesn't exist, doesn't show that, although your action has reduced the national debt.