Debt in The Age

I have an opinion piece in The Age today about growing public debt.

[DDET Click to read]

Emotive opposition arguments make no sense

Joshua Gans

The Age, February 19, 2009

A debt burden will be on us, not our children. I can’t feel too guilty about that.

PROPOSE a stimulus package and the standard political response from any opposition — whether it be here, the US or what have you — is that it will generate a debt that our children will be forced to repay.

This is a nice emotional argument but does it make economic sense? When you think about it for more than a couple of seconds, you can see it all for the distraction it is. And I say that even for those of us who actually do have and care about our children.

It is not clear that historically, public debts incurred today are actually repaid by our children. A dollar today would have to wait at least three decades to be repaid for that to happen. But the Whitlam and Fraser debts were paid back in the 1980s and the Keating debt of the early 1990s was paid back by the end of the 1990s. There was a debt burden but it is on us, not our children. I can’t feel too guilty about that.

Let’s suppose, for the sake of argument, that if we incur debt today it has to be repaid by our children in the form of higher taxes or something. Suppose that I don’t like that and I hate what the Government is doing and agree with the Opposition response. If I really care, I don’t have to throw my hands in the air and wish for a neo-liberal, as they term it these days, homecoming. That would be too government-reliant, wouldn’t it?

Here is what I can do. I can put enough money aside into a savings account or, better still, buy government bonds to cover my children’s burden. I can then bequeath these to them and so when the debt comes due well, from my perspective today, they are no better off because of any largesse from my generation.

The point here is that, if I don’t like political behaviour creating more public debt, as it harms my children, I can deal with that. Of course, you might not have the money to put away in that manner. In that situation, if you have children, the Government is actually handing you some money so there is something to work with. Indeed, Malcolm Turnbull is objecting to that handout on the grounds you might be saving it and so it won’t stimulate the economy. But you can’t have it both ways. If that is the case, your children are fine. Otherwise the economy actually gets stimulated, which is the whole point. Hard to see a downside.

You might, of course, be in a different position whereby you don’t have the money — handout included — to put away so as to cover your children. In particular, you might have high hopes and expect them to move up the income scale and be bigger tax contributors and hence, debt repayers in the future. To that I say this, if you have been able to move them up the income distribution then I would say that you are bequeathing in some other way and so your children are more than covered. And if they don’t move up, based on our history of progressive taxation, it will be some other person’s children’s problem.

Arguing about debt burdens is meaningless, since there is no question that the world will provide us that credit and at a low interest rate. Instead, the Coalition and others should be arguing on the basis of pure cost-benefit analyses for each and every element of the stimulus package. And there are arguments to be had there that have been lost in the distraction of an appeal to an emotion and sound bites. We need an Opposition (both the Coalition and the Greens) that will stand up and argue about whether spending money on school libraries and halls is the best way to go and whether insulation will really to do the job of helping the environment when we already have emissions trading on the horizon. My guess is that those things are OK but I have come to that conclusion without any help from what should be a solid political discourse.

Finally, by way of disclosure, I haven’t purchased any extra government bonds and if I do, I don’t intend to bequeath them directly to my children. I either just don’t care or just don’t think they are going to inherit an unreasonable burden from our stimulus today.

Joshua Gans is a professor of economics at Melbourne Business School.

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9 thoughts on “Debt in The Age”

  1. Great article – quite convincing and clear, and will hopefully stop folks from buying into time-wasting rhetoric.  For what it’s worth, I’ve heard Bob Brown several times on the radio and TV arguing for more funding for specific projects on the basis that they are better value for money. 

    One example was his suggestion that more spending on bike lanes would give bang for buck, as they’re relatively cheap, improve general health levels, environmental quality, and boost sales and employment for local retailers of bikes and equipment.  Obviously it’s pitched at his constituency, but that’s to be expected, and whether or not you agree, it’s at least the kind of argument that’s worth having.

    I kept expecting Turnbull to cut the spin and spiel and get down to suggestions that would traditionally appeal to his constituents.  More spending on loans for startup capital for small businesses perhaps?  But it hasn’t happened anywhere that I’ve seen/heard.

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  2. “The Whitlam and Fraser debts were paid back in the 1980s”.
    Net debt was $16 billion in 1983-4, and was still $16 billion in 1990-91.
    Then we had Keating’s recession. After that, net debt didn’t fall back to pre-recession levels again until 2004.

    Net public debt didn’t reach zero until 2005.
    So that is more than twenty years to pay off the debt incurred by Fraser and Whitlam.

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  3. A big call by Professor Gans:
    Arguing about debt burdens is meaningless, since there is no question that the world will provide us that credit and at a low interest rate.
    Do you genuinely think this will continue to be the case?

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  4. One of the great successs of the Keynesian revolution was to convince people that public debt placed no burden on anyone apart from the current generation. But, of course, the whole idea of borrowing is to shift the burden into the future. Otherwise the entire debt expenditure could be financed by current taxation. Rather it is financed by future taxation. JS Mill and the classical economists argued that public debt had a double burden, on the current generation and future generations. James M. Buchanan argues otherwise but still identifies three fallacies surrounding public debt. The real-cost fallacy, the internal accounting fallacy and the transfer payment fallacy. Joshua seems to be making some combination of these. But most importantly, he is making a factual error. According to the budget papers (2008-09 paper 1, pg. 10-10) Net Public Debt was positive from the mid 1970s to the mid-naughties.

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  5. There is no factual error. Debt incurred by Fraser was paid off during the 1980s as the total level of debt did not rise. That is, it was being serviced. Paying a debt down is mixing up stock versus flows.

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  6. “But the Whitlam and Fraser debts were paid back in the 1980s and the Keating debt of the early 1990s was paid back by the end of the 1990s.”

    We can agree it was being serviced, but not paid back. The Keating debt was paid back by the end of the 1990s.

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  7. No wonder the good Professor Gans thinks that debt doesn’t matter.  He thinks servicing it is the same thing as paying it back. 

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