A few years ago I wrote a blog post about the budget deficit, which, let me be the first to admit, was written when I was somewhat more naive. I could hide the apologia for the Tory cuts agenda, which has, as it turned out to no-one’s actual surprise, aimed towards to less privileged in society, and pretend it never existed. But that would be wrong of me. My personal view has always been that deficit reduction, should it need to be done, be done by raising revenues foremost. My posts have, historically, been from the perspective of changing the systems we have so as to be less oppressive. It’s one that can be argued with, and certainly, there have been times when I’ve felt a little more revolutionary.
There’s a rather fallacious argument that makes its way in the email tubes by people of a conservative lean: what if the national debt was like a household debt? Let’s entertain it. For example, this quote from Dave Ramsey of “get-yourself-out-of-debt” TV show fame:
If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year and have $327,000 in credit card debt. They are currently proposing big spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand.
There are, of course, a lot of things wrong with this. For one, and this is the big one, nations lend at a much lower interest rate than individuals. Try 1%, 2% interest rates (and much below inflation). Even with a good credit rating, you’d be very hard-pressed to get an single-figure interest rate on a loan, let alone a 1% interest rate. Nations can also print their own money, individuals can’t. Nations can give themselves a raise, individuals (unless you’re self-employed, or super-rich) can’t. Most national debt is internal, most individual or household debt is external. There’s a lot more in this post from a thread devoted to silly chain emails.
But there is one thing that nations and individuals have in common: they can have debts that are several times their annual revenue.
It’s called a mortgage.
Every homeowner who took out a mortgage in the past ten years probably has a six-figure debt to repay. And I doubt that those same homeowners are on six figure incomes themselves. But a mortgage is seen by others as something one should have as a sign of adulthood.
Let’s continue on this path. Have you ever borrowed money to buy something which will save you money in the long run? Odds are you have. Say you asked a friend for £100 to buy a Kindle. You buy it and you pay him back £5 every week for six months. But then, three years later, you think: hey, I don’t need to buy bookcases, or the Kindle editions of books are cheaper than paperbacks. I’ve saved about £300! Scale it up a bit, and you understand why billions were spent on the Olympics, or will be spent on HS2, Crossrail, or the Northern Hub: because the benefits outweigh the costs considerably. And you better believe it: Network Rail won’t even consider projects with a benefit-cost ratio of less than about 1.2 (and most projects tend to have BCRs of 2, 3, or even more.)
And, this may seem controversial but if you think about it, it’s really not: it’s good to owe a little bit of money anyway. When I turned 18, I could apply for a credit card, and I did. I never come close to my credit limit, and the debt on it is always at a level in which I owe money to NatWest, but if they ever wanted to call the debt in early, I could easily pay back. And that’s good. In the future, if I need to borrow a substantial amount of money, my credit rating will reflect that I paid what was asked. The same arguably scales to the national level, even though nations that lend to others don’t tend to call debts in.
And, finally, deficit spending under inflation isn’t really adding to the debt. It’s like having a loan interest rate under your current account interest’s rate: you can pop the loan into your current account, pay off the loan plus interest, and still have a little bit of cash left. Individuals can’t really do this sort of arbitrage. I’m sure someone will prove me wrong, but banks don’t like lending money at rates below current account interest rates.
And, while this is a digression, it’s clear most people who talk about deficit/debt reduction aren’t concerned with debt reduction. It’s code for “fuck the poors” more than anything, in terms the voting populace can swallow and agree with against their interest. Why does Mitt Romney want to extend the Bush tax cuts, and why did his running mate vote for them, Medicare Part D, and two wars in the Middle East, when they immensely added to the debt? Because they want government small enough to fit into a woman’s uterus, the poor people who starve to death be damned.
So the crux is, debt is good if it’s manageable, especially for national debts as they tend to be much more manageable than individual debts, and it’s a shitty analogy anyway. Deficit spending can become out of control, but really, it’s best to see it as analogous to an investment if you really have to. Play low, make a few risky moves, but don’t be throwing your ten thousand pound chips on red.