How can huge government debt not cause slower economic growth? At very least all of the money wasted on debt repayment could've been spent on incentive programs. Unless the borrowed money is invested in something that consistently returns more than the debt financing, I don't see how one could think a high debt/gdp ratio would be okay.
There are a number of things that are wrong with your argument:
1. Interest payments typically do not replace other government spending. This is simply not how politics works: Politicians, at least at the highest level of government, typically do not look at the budget in terms of how much is available, but in terms of how much should be spent.
2. From the perspective of the macroeconomy, interest payments are a zero-sum game. The money goes to other actors in the economy who spend it.
3. Government is always able to spend the money on programs in addition to interest payment. After all, the government runs the monetary system (I realize that this is hard to grok because it is so different from our own, private, experience with how money works, but the difference is significant.)
1. So when NASAs budget gets cut, it's not because there's not enough money available?
2. Other actors in the economy who spend it on what?? How is that supposed to be equal in economic growth to spending it directly on investment?
3. Similar to #1. If government is always able to spend money on programs in addition to interest payments, then why are programs ever cut? And why then would debt ever be a concern? You make it seem as though debt is completely irrelevant.
How does government debt slow growth? Explain the mechanism. (Bear in mind that "growth" is in GDP, a dubious measure in the first place. Hurricanes and cancer add to GDP.)
It's easy to see how slow growth can increase debt: expenses grow through inefficiency, inflation, or whatever, but revenue fails to keep up. So we get low growth driving up debt. I can buy that.
If you have a big mortgage to pay off, will that slow down your salary increases? How? Why? You may lament the fact your salary goes to paying interest on your mortgage, but if anything you're more motivated to increase your salary (the proportional benefits from raises are greater!)
In regards to your analogy: let's say you aren't salaried, but are self employed. Now you take on a a big mortgage, and spend you income on paying your mortgage instead of investing it in growing your business.
Government debt slows growth because you have to pay it back. The currency (you savings/income) may end up being devalued, or your taxes may have to go up.
You're only proving the opposing case with such a toothless argument. Generally speaking, debt is defined as something that is expected to be paid back. That's what makes it debt and not a gift.
In many cases, taking debt increases growth.
Maybe you took convertible debt or a loan to fund your startup? I don't imagine you told investors or bankers that taking on debt would slow the growth of your company. Did your 10-slide pitch deck show upward growth because you intend to stop growing as soon as they fund you? Why would investors lend you money if they knew your growth would slow down as soon as they did it?
Now, consider government. What happens when your community outgrows its roads? Do new businesses continue opening in that area? Do well-paid executives and engineers move to a city with lousy, outdated schools, poor telephone service, and minimal broadband Internet service?
I don't imagine you told investors or bankers that taking on debt would slow the growth of your company
Businesses use limited amounts of debt to fuel growth because they have a justifiable case that shows that the servicing of the debt is less than the returns on the investments made with the debt.
Often, businesses are wrong about whether or not their "justifiable case" is true. When wrong, their debt may just cut into the other assets on their balance sheet. Perhaps creditors will allow them to refinance so that their debt servicing is below their investment. Perhaps they'll go bankrupt. Perhaps they'll close their doors.
The US government 1. Has a really crappy track record of finding a return for its investments. 2. Will cause much more world disruption if it has guessed wrong on the whole "returns on investment vs debt servicing" equation.
Finally, businesses do not borrow money without limits. Their borrowing of money is based upon the amount of credit that outside parties give them. Given the US Government's downgrade in its rated ability to service its debt, shouldn't we be concerned that we're overextending ourselves?
They were downgraded on "willingness" to service their debt. Not ability. Notice that after the downgrade, interest rates went down. What does that tell you?
No, willingness to pay debt was never at issue. That was a red herring put out by the Administration and lapped up by an unquestioning media. We take in more than enough on a monthly basis to service our debt. Willingness to increase the debt ceiling to pay for government programs that we haven't actually borrowed the money for yet was the issue.
Interest rates are down worldwide and has more to do with inflation and "the savings glut". They say nothing particularly positive about the US Government's credit worthiness.
Like the authors, you have causality backwards. You're implying that I cannot find an example where inflation was almost 15% and interest rates were over 16% back in the 1980s. Fed interest rates were lowered after the 2008 crisis to limit deflation. Inflation did not cause low T-bill rates. In fact, logic would dictate that high inflation would increase Treasury rate expectations and the demand for inflation-protected TIPS.
The reason interest rates were low after Congress nearly defaulted on their debts is because federal bonds were considered a safer risk/reward than the markets. Wall Street trusted our treasury to pay its interest this last year more than they trusted blue chips to both hold their value and pay dividends with an unstable recovery. They were even holding onto T-bills while losing to inflation at times.
Every time the government gets involved in something, it destroys it. It perverts the economic efficiencies and causes a mess that "Oh darnit! We need a bigger government program to solve it!" Then, when it racks up failure after failure after failure trying to solve a problem; it never takes the blame for its intrusion by shutting the programs down and allowing for other solutions. It asks for more money, more authority, more regulations/laws. There is no testing in government for usefulness. There is no refactoring. It is the worst kind of spaghetti code that grows endlessly.
- I mean, we just had a Depression because of government's involvement in housing pricing and lending.
- Public Education. Ever increasing money spent, never increasing results.
- Student Loans and Higher Education pricing is the next disaster that they have brewed by getting involved.
- Healthcare, as bad as it was with the mess of state regulations it had on it is becoming astoundingly worse with Obamacare.
- Social Security, Medicare, etc. are all financial disasters that have created huge obligations that we will be unable to pay.
- Airport security has done nothing to make us safer since the TSA, but there it is. A huge behemoth that makes travel painful.
I'd add the Military in there as well since it's a huge money suck that is extraordinarily wasteful - but it's one of those few necessary evils that we don't have a choice on to some extent. Plus, since it's results oriented (kill or be killed) - it's actually gotten to be pretty good at what it does.
You make a great point - businesses have get money from bankers who expect a return. If government had that restriction on raising debt we wouldn't have a problem.
We are 5 years into massive deficit, and massive debt, how much better are the schools? Execs and engineers are migrating back to Detroit now? The biggest problem is that for all that debt, there is very little to show for it.
What if you take out a business loan instead of a mortgage? You're still taking on debt, but now the debt is fueling your growth and hopefully leading to higher wealth. It doesn't seem like an open and shut case to me.
Of course, if you feel like the Government spending is good investment and will bring a return, then no problem. If you think it is wasteful political payoff, then it is a problem.
The core problems is if the government taxes and extra $1000 dollars away from you that you would have used to grow your business, then spends it on debt service, or war, or something wasteful, that will slow growth.
Debt service that allows it to borrow more then spend more in the immediate. Wars that require massive amounts of spending on things that include manufactured goods. Something wasteful....which is open to significant interpretation in a lot of cases. Waste is part of any large organization. Government isn't alone there.
It's just not this simple. It never is. That's why these arguments about debt and economy keep breaking down.
I agree, except when the amount of debt gets so large, and goes way beyond the immediate. Then it becomes much more clear that it is a problem.
There is a case to be made that in 2008-2009, a big, debt financed, short term stimulus could have been helpful. But when that metastasizes into long term spending that doesn't look like it is going anywhere soon, and doesn't seem to be accomplishing anything, then it is worthwhile to sound the alarm.
Spending causes various kinds of deadweight loss: Outright waste, rent-seeking by negative-output industries, do-nothing jobs and does-nothing purchases, some regulations have large financial externalities, war and war accessories.
Taxes are mostly outside of government control, so more spending implies more debt. Reducing debt implies reducing spending, and therefore less loss.
You're right that it's not the debt itself (or even the spending) that matters, but it's a good enough proxy.
If I have a big mortgage to pay off that slows my growth because I'm wasting about 60% of that monthly expense solely on debt repayment. Without the big mortgage - and the same salary - I could be making monthly investments that actually produce income.
This is true in a sense, but we're not talking 60% vs. 0%, but 60% vs 55%, or (in fact) 7.2% vs. 7.1% (in the case of the US servicing its debt). The fact that we're talking about shaving a tiny amount of debt servicing by, say, gutting education seems more like "I'll save money by getting rid of my cable bill, but now I can't work from home".
The US spends 6% of the budget for interest on the debt, and 2% on education. Doesn't that say we are already deep into the problem, are already too deep in debt, and need to reprioritize? The bigger the debt is, the more legitimate spending will get squeezed. The longer we wait to address debt, the harder it will be to get out of the hole.
How many successful investors also live in their car? If not mortgage, then you'd have to pay rent. You could also save money but not eating, but how sustainable is that?
Most of government dept is owed to domestic creditors. And the creditors will either spend the interest or invest it. ( It is really hard to freeze money, essentially you need to bury cash in your backyard.) So the money simply stays in the economy.
