An expert panel discusses debt and inflation.
Borrowing is the means by which future wealth is moved into the present. It is not necessarily a bad thing, either individually or collectively. The question is whether the wealth transferred into the present is used to create or sustain value into the future.
Borrowing to pay for college, for example, can be good debt. Assuming college allows one to increase one’s future income greater than the cost of loan repayment in the future, then borrowing can make sense individually.
So, too, collectively. Borrowing to pay for public capital projects that generate future payoffs greater than the amount borrowed makes sense as well. Dams and infrastructure can be examples, provided expected future value is high enough. But investment does not need to be recognizable capital projects. Borrowing for the defense buildup in the early 1980s under Ronald Reagan could be plausibly justified even on a cost-benefit basis: On the one hand, compare what the on-going cost of continuing the Cold War would have been with the cost of a one-time buildup in the U.S. military sufficient to force the Soviet Union’s capitulation. While we don’t know whether the long, expensive wars in Iraq and Afghanistan would have been fought if the Cold War had not ended, at the time, in the early 1980s, it seems at least a fair argument that the costly arms buildup of the 1980s paid dividends far into the future.
But borrowing is also fraught with incentive problems, both personally and collective. Most people, misers excepted, have time preferences that value current consumption over future consumption. The current self tends to value filling its stomach relative to the future self’s stomach. If indulged too far, folks get their future selves into trouble by over committing future income to repay debt taken on for current consumption. The benefit to the current self is not commensurate to the cost the future self must pay.
The temptations for government debt are even worse. The intertemporal nature of debt intersects particularly perversely with the nature of government, with majoritarian politics, and with the problem of collective action.
Like corporations, and unlike human persons, governments do not in principle have finite lives. Debt obligations can go on and on. Unlike one’s personal debt obligations which ends with one’s life (or at least with one’s estate), government debt continues intergenerationally. And the intergenerational nature of government debt makes it a ripe candidate for the politics of faction.
We typically think of faction as the government taking from one currently existing group and inappropriately redistributing to another currently existing group. And it is a problem even without laying on an intertemporal dimension. For example, taxing everyone to pay for public schools that only the majority children can attend is a classic example of a factious outcome. By its very nature, majoritarian processes don’t work well to correct factious outcomes of this sort. Indeed, these outcomes result from the majoritarian process.
Government borrowing complicates the problem of faction by adding intertemporality to the already pathological mix.
The current generation can constitute itself a faction against the future, moving future resources into the present, and consuming them, without an expectation of maintaining or increasing the set of resources against which it has borrowed.
Indeed, majoritarian processes are even less apt to prevent intergenerational faction. When everyone exists already, then at least there’s a vocal minority, and at least some votes. Perhaps the Madisonian electoral or legislative instability of majority coalitions formed from groups of minorities might offer some protection. But adding in the intertemporal issue, those who might be burdened with paying off current borrowing might still be non-voters below the age of 18, or might not even be born yet. (And we can nod at the philosophical question of obligations to as yet non-existent people as we tiptoe around it.)
So, too, American political institutions are even less effective in protecting against the consequences of intergenerational faction than they are at protecting against the consequences of extant faction. While judges might intervene to protect some minority groups against majoritarian predation, future generations are not specially protected classes.
Despite their popularity at the state level, constitutional balanced budget amendments don’t seem to have worked particularly well. Courts have largely proven unwilling to step into the political fray to enforce them, and alternative institutional arrangements, such as the ones posited in the original Gramm-Rudman Acts, run into separation-of-power problems. Without external control mechanisms, balanced budgets can be enforced only by the political branches of government. But the political branches of government are those most susceptible to the temptation of factiously preferring the present generation over future generations.
A balanced budget amendment, even if largely unenforceable, might still provide a formal, aspirational focal point, one that might be able to rally both voter and legislator in sufficient numbers to work occasionally. The problem is not merely one of the economics of ballooning debt. Like all factious outcomes, it is a matter of justice. But it’s more than that. Parents are supposed to look out for the welfare of their children. For more than a generation, though, the politics of intergenerational faction has set up the reverse: the parents party, but leave the bill for their children.