Economy question

[Stoneburg]

Is it good for the economy to have a "modest" debt or deficit?

[Chronos]

Are you asking about the having, or the getting? There can certainly be benefits to going into debt, or nobody would ever do it. As for being in debt, the main way the government borrows money is through treasury bonds, and the existence of treasury bonds as an investment option is good for a lot of folks: They're a low-risk, reliable investment, good for things like saving up for a child's college education.

[Stoneburg]

I don't really understand your question.

I am basically asking if a nation should try to have a modest debt or deficit.

[MOIDALIZE]

There's no point to seeking a deficit just to have a deficit, as a deficit by itself confers no benefit. It's not like a nation needs to run up a debt to improve its FICO score.

But if the conditions warrant spending more than a nation takes in, and the debt can be financed relatively cheaply, and if the nation maintains control over its own currency (just look at Europe to see why that's important), then running up a deficit may be beneficial. Educated minds can obviously disagree as to when deficits are beneficial or whether they are manageable.

[US Bureau of Labor Statistics]

You're not going to get a simple up or down answer but you should look up Keynesianism.

http://en.wikipedia.org/wiki/Keynesian_economics

e: I think what Chronos was saying is that, in a slim set of circumstances, it might be beneficial to a country for its government to run up a deficit just for the point of having it, because the bonds are generally going to be the most reliable debt individuals can buy, and sometimes people need to buy very reliable debt. Obviously this is theory though. Said government will never find a shortage of public works, entitlements, or defense programs to spend the money on.

[MOIDALIZE]

A federal government agency posts here.

[MOIDALIZE]

And I see what you're saying about "safe" debt. At a minimum, we would expect the government to offer short-term treasury bills for banks and institutions to park their money in.

[Little Nemo]

I have heard arguments that a certain level of government debt can be useful in and of itself. Governments finance debt by selling bonds to investors and the existence of this debt gives the investors a financial stake in the well-being of that government.

[TriPolar]

There are a variety of economic reasons why a manageable debt is good for the economy, and good for many business situations as well. Unlike businesses which can sell stock, the government is limitied to borrowing for capitalization, and in those cases, as Lttle Nemo pointed out, borrowing becomes an investment. Unfortunately, the US has a massive debt that has been growing for a decade, without any plan to pay it off.

[Hari Seldon]

I can see why a debt might be useful. This might be a good place to mention the different experiences of the US and Canada over the last 15 years. Starting in 1995 or so both countries started running large surpluses. Canada used the surpluses to reduce its total debt and I guess the US must have done likewise (what else could it have done?). In Canada, and with the opposition party clamoring for tax reduction, this continued until whenever the Liberals were defeated and the Conservatives did indeed lower taxes. The Federal sales tax went from 7% to 5% and income taxes were also lowered, but not by that much. Also surpluses, though much smaller, continued and the debt was further reduced. When the great recession hit, Canada was able to have huge (comparatively) deficit for the last couple years and the recession never cut as deep and is pretty near over. Whether this can continue without exports to the US is another matter. The government (still Conservative) claims to be on track to return to surpluses in two or three years. I have no doubt that they have figures to prove, only I doubt that it can happen without improvement in the US.

Notice how close this is to Keynesian economics. Keynes, I understand, advocated deficit spending only in a depression; during the good time you were supposed to pay down that deficit. What we have seen in the US is just half-Keynesian. Run deficits during hard times and run more deficits during good times.

Notice that Keynes was really channeling the biblical Joseph.

[dracoi]

A modest government debt is a good thing. Besides economic stimulus, and offering safe investment, government has a different relationship with debt than a person.

Factors like normal GDP growth, population growth and inflation are always working to reduce the "cost" of the debt even if no payments are made. For example, $1 billion borrowed today has the full benefit in spending. But if inflation averages 2%, that $1 billion will only cost about $800 million to pay off in 10 years. (yeah, I'm ignoring compounding for the example). In 10 years, the population may have grown from 300 million to 330 million. So the cost per person has also gone down. To get that $1 billion up front would have cost $3.33 per person, but to pay it off costs only $2.42 per person in inflation-adjusted dollars. As long as you spend less than $0.90 per person on interest in the intervening years, you're actually ahead of the game by borrowing. And we've already suggested that the interest expense is itself a useful expense in terms of the markets and investing.

But... clearly a government should not continually run deficits ad infinitum. No one can afford infinite debt, and a high baseline debt makes you less able to respond to emergencies such as recessions or wartime.

[mazinger_z]

There is definitely a market for debt. But, without getting into a long-drawn out post of debt-financing, I'll just reiterate that if it wasn't good, then people wouldn't already be doing it.

The question of debt largely depends on what you incur debt for. This goes for countries as well as people. If your debt is incurred to finance your hooker and blow addiction (or whatever is analogous for a country), then it's probably not a good thing to go into debt for, Keynesians be damned. If the debt is for something like school, or infrastructure, or something that will reap rewards later, then it's probably a good thing.

For countries, anyway, the large cost of a debt incurred can be distributed across generations. A country that regularly and timely pays its debts provides a basis for a stable interest rate. Also, it makes floating currencies and free markets more manageable (through the interest rate).

[Little Nemo]

Originally Posted by mazinger_z

The question of debt largely depends on what you incur debt for. This goes for countries as well as people. If your debt is incurred to finance your hooker and blow addiction (or whatever is analogous for a country), then it's probably not a good thing to go into debt for, Keynesians be damned. If the debt is for something like school, or infrastructure, or something that will reap rewards later, then it's probably a good thing.

In some case, the country is a person. I've been reading about the Tudors and the author pointed out that Henry VIII inherited a huge treasury surplus from his father and later acquired a huge windfall by confiscating all the church property in England. Yet despite this, by the end of his reign the treasury was almost bankrupt because he wasted all that money away.

[Stoneburg]

Good answers, thanks!


Now if only all the answers agreed with eachother...

[Little Nemo]

Originally Posted by Stoneburg

Now if only all the answers agreed with eachother...

Somebody once said that in terms of being a science, economics ranks with comparitive literature.

[rbroome]

Originally Posted by Stoneburg

Is it good for the economy to have a "modest" debt or deficit?

I am not an economist. As I understand it, the answer is yes.

It is my understanding that the money supply should/will represent or track the size of the economy. It is the trading tool used to keep the economy running. If the economy grows, the money supply needs to grow in proportion. This can be indicated with the old saying that inflation is "too much money chasing too few goods" and the obverse.

Since the government is the entity that creates money and it does that by printing fiat money (issuing bonds etc) which represents a debt, to keep the money supply in balance with a growing economy the government has to run a deficit.

Of course in the real world things don't always work according to this simply model. Huge deficits don't necessarily produce inflation (almost every western country in the last 10 years= low official inflation. Japan in the last 20 = low inflation in Japan) and presumably the obverse is also true. So we didn't have a shrinking economy back in the 90's when the Gov't had a couple of years of surpluses, and we don't have a hugely growing economy now with huge deficits. But in (simple) theory, a deficit approximately equal to the growth of the economy is a good thing.