Pay now or pay later

Or don’t pay at all?

If you purchase something with a credit card, the seller is charged a swipe fee of 2 to 4 percent. The seller has to raise prices to cover the fee, so you end up paying it.

If you purchase the same item with a debit card, the seller is typically charged much less. Federal law places a cap of 21 cents per transaction.

Why the difference?

Part of the answer is that federal law. But the larger part is the cost and risk to the bank or credit union behind the credit card. Each time you use a credit card, you borrow money from its bank. You have to pay for the use of that money. And there’s a risk you might not pay the money back. So the bank charges a risk premium. There’s no use cost or risk premium with a debit card. You are paying with your own money.

Much of life can be understood in terms of this difference between credit cards and debit cards. It's the difference between paying now and paying later.

In many cases the extra cost of paying later is worthwhile. The money is invested in something productive that covers the added cost and more besides. You buy a car that gets you to work. You go to law school or medical school. 

But in other cases it’s smarter to resist the temptation of paying later. Credit cards allow people to buy things they wouldn't buy if they had to pay up front. I can’t afford a vacation right now, but I’ll put it on the card.  

The currency isn't always cash. It can be effort. I'll sleep this morning and go to the gym tomorrow. Whether cash or other, the rationale is that repayment will be easier in the future.

Sometimes this is true. I take out a mortgage with a monthly payment that strains my budget, on the premise that my income will increase and the payment will become comparatively lighter.

But often this is delusive. I'm under a lot of stress this week, so I’ll stop smoking next week. But next week turns out to be just as stressful. I'll start saving for retirement next year when I'm making more money. But in the meantime I develop more expensive habits.

The temptation to postpone payment can become irresistible when there’s a prospect somebody else will wind up footing the bill. For an individual, personal bankruptcy saddles creditors with unpaid balances. In former times, debts were conveyed at death from debtors to their heirs. Stephen Austin founded an American colony in Texas to pay off a debt he inherited from his father. But that practice has largely disappeared, and dead debtors' creditors get stuck.

Buying now and paying later has become an entrenched habit with the American government since the New Deal of the 1930s. Or perhaps since the 1830s, the last time the federal government was not in debt. Every generation since Andrew Jackson has dined out on the expectation that subsequent generations will pony up.

Until now they always have. That is, creditors of the government have never not been paid. But especially of late, payment has been funded by new debt. It's doubtful this recycling can go on forever. 

Yet there's no obvious endpoint. Your credit card company continues to extend you credit as long as you make the monthly payments. You'll die someday, and the last bill probably won't be paid. But governments don't die, at least not with the predictability of humans.

In fact, when governments do die, as by revolution, they often repudiate their predecessors’ debts. The creditors try to prevent this. The United States government refused to recognize the government of the Soviet Union for years, in part because Lenin's revolutionary regime refused to honor the debts of the czar. Eventually other issues, including World War II, caused the US government to stop trying to collect.

Another technique of dodging debt repayment is less dramatic. Without explicitly repudiating debt, a government can engineer the depreciation of its currency—by printing lots of it, for example. The German government did this swiftly in the 1920s. The United States government has been doing it gradually since the 1960s. A 30-year treasury bond bought in 1960 lost more than three-quarters of its purchasing power by maturity in 1990. A new 30-year bond bought in 1990 lost half of its purchasing power by 2020. Thus almost nine-tenths of the real value of the debt vanished in 60 years. Except that it didn't vanish. It was transferred from the bondholders to the government. 

There were mitigating factors. The government paid interest along the way. And investors learned to demand an inflation premium. In the other direction, inflation worked additionally to the government’s benefit as rising incomes pushed individuals into higher tax brackets, which Congress was slow to adjust.

Central bankers and treasury secretaries warn of danger from the rising federal debt. They sound like your parents telling you to eat your vegetables. Political candidates offer to treat you to dessert, saying they’ll put it on someone else’s tab.

Wanna guess who wins this debate?