Tuesday, 29 September 2009

National debt is not a burden.

The leading article in today’s Times (London, 29th Sept 2009) trots out the old myth that the national debt will be a constraint on future economic growth and living standards. The article is entitled “An Economic Account”. Sometimes this nonsense takes the form of phrases like “a burden on our children”, and the idea is popular in Tory Party circles.

This blog is not the only work to claim that the national debt is not a burden. Others have made the same point and readers may prefer these other explanations. One is offered by Mark Harrison (Prof of Economics at Warwick) - see his 14th Jan post "Three Myths of the Credit Crunch". Another is offered by Samuel Brittan: The Myth of Taxpayer Cost.

The first somewhat awkward fact that advocates of the “burden” idea must face, is that the national debt is an ASSET so far as those who own government debt are concerned. Put that another way, government debt arises when governments decide to fund their spending by borrowing from a section of the population instead of taxing the population at large. In short, government debt is effectively a debt owed by one section of the population to another.

But exactly and precisely the same thing goes for mortgages (or other debts): the total of all UK mortgages is effectively “a debt owed by one section of the population to another”! But no one seems to regard mortgages as a constraint on economic growth.

Of course not all UK national debt is owned by Brits: about 20% is owned by foreigners. Now 20% is not a big proportion. Moreover Brits own a fair amount of foreign government debt, thus these two roughly speaking cancel out.

What exactly determines economic growth?

The factors that influence or promote economic growth and living standards are well known. Probably the most important is technological improvements. Now how exactly does the fact of one section of the population being indebted to another slow the pace of technological improvement? It doesn’t ! There is next to no cause – effect relationship here !

Another important determinant of economic growth is the standard of education. But this again is almost completely independent of the extent to which one lot of Brits owe money to another lot of Brits.

Another important determinant is labour market efficiency: again, nothing to do with indebtedness !

I’m not saying national debt is good.

Far from it. In this blog I argue that governments should stop borrowing: not because it impoverishes us, but because government debt is about as pointless as farting into cash dispensing machine. Government debt does not do much good. It doesn’t do a huge amount harm either: it’s just a waste of time and bureaucratic effort.

Whence the claim that debt is burden?

Presumably the argument is that government will have to spend taxpayers’ money on debt repayment and interest: money which could have been spent on health, education, etc. Therefore the population allegedly gets less lower grade hospitals and schools (or has to pay more in taxes, which reduces take home pay).

Well the flaw in this argument has already been more or less spelled out above. Payment of interest and capital repayments are just transfers from one section of the population to another. There is precisely and exactly no effect on the living standard of the population as a whole (except for the point made here namely that government debt is essentially a huge paper shuffling exercise which absorbs bureaucrats’ time.)

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