Debt is demonised – but here’s why we need it
The Autumn Statement confirmed the intellectual bankruptcy of treating Government borrowing like personal consumer debt, to be paid down as fast as possible. As many economists had warned, this has undermined recovery – reducing the income out of which the debt can be repaid.
The headlong rush to austerity in the UK (and elsewhere) was unnecessary, as well as undesirable. A big rise in the UK government’s cost of borrowing never seemed close to happening, in part because the last government’s ‘fiscal stimulus’ was, in reality, largely funded by the Bank of England printing £200 billion rather than by the markets. £75 billion more is now being printed in an attempt to stave off ‘double dip’ recession.
But this argument does not resonate with the public or policy-makers around the world. Debt is demonised.
Businesses need to raise debt to finance expansion, people borrow money to become home owners, and the three main parties now promote it to finance university education. But when it comes to the Government borrowing to fuel growth, the talk is of ‘burdening our children’, as if they have no interest in economic recovery.
Hardly anyone can borrow as cheaply as the UK, US or Japanese governments, yet all are rejecting, for alleged lack of funds, many investment projects offering high rates of return. Even if borrowing costs rose a little as a result of pursuing more of these projects, most would still be viable. Comparisons with Eurozone countries are irrelevant as they cannot print money to guarantee their solvency. Debt, as much as money, makes the world go round. Trying to live without it risks causing it to stop.
Why is there such a mismatch between analysis confirmed by experience, and public opinion?
One reason is the ‘fallacy of composition’ - the belief that what is true at the level of a company or an individual also holds true for society as a whole. On this logic, because a struggling firm can benefit by laying off workers, the government should apply this approach to the overall economy.
So, business leaders were early protagonists of early 'cuts', but for society as a whole, the unemployed stay on the books - which fuels populist divisive 'solutions', as seen in the 1930s.
Another reason is that the language and thinking of struggle and sacrifice lies deep in human nature - and in our politics, whether we want to free workers from capitalists or markets from the State. It is assumed that doing the public sector down will help the private economy. We are hard-wired to confuse hurting with working. It is more virtuous to stay the course than to count the cost.
People know that in their own lives, once money is spent they cannot spend it again. The equally valid notion that only by spending it, do you provide others with income which they can spend, and give you income in turn, is very hard to get your mind round. Hundreds of years after Copernicus, we still talk of the sun rising and setting, but at least we have grown out of making decisions as if it really did.
As with the sources of false optimism in the boom, these misdiagnoses reinforce each other.
The public hear the warnings of business leaders and assume they know what they’re talking about. Politicians fear to fall out of tune with voters, or the hard-nosed business world. Market-worshipping economists - too often blinded by the complexity of economic models to focus on real-world evidence - provide a sort of priestly blessing. They all mistake common delusion for ‘credibility’.
Debt is necessary, and partially good. The fallacy of composition and the cult of pointless sacrifice are the real demons that we must exorcise if the economy is move beyond its current predicament.
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