October 13, 2012

Government Debt and the Danger of Historical Growth

Justin Katz

In today's Saturday column,Ted Nesi voices reasoning that is only possible in a society that's become hubristicly accustomed to economic growth as an inevitability:

If bond investors are offering Rhode Island the lowest interest rates in its history, shouldn't the state be borrowing more money right now? Gina Raimondo has hinted she’s thinking that way, and there are plenty of infrastructure projects that need to be done soon. Some people are opposed to any and all state borrowing, and that's fine – but if you're someone who acknowledges Rhode Island taxpayers will be borrowing money at some point over, say, the coming decade, shouldn't as much of it be borrowed as possible now, while interest rates are at historic lows and 10% of the state's workers are idle?

This is akin to the approach of a college student who lives beyond his means on credit, expecting the sort of paycheck that he's been told to expect ...

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There was a good debate between Russ Roberts and Robert Frank on this topic but on the national scale. It was cut down to a 10 minute segment for Planet Money, but the full discussion is available for download on EconTalk:

Frank was arguing that spending now is a no-brainer because of low interest rates, high unemployment, and the "crumbling" state of our infrastructure that will only get more expensive to fix over time. I feel Roberts did a good job challenging him on these and other flawed assumptions that statists are constantly using to justify increased spending in good times and bad.

Posted by: Dan at October 13, 2012 4:00 PM

I'm glad someone said it, and ironically it is either Marxists or Libertarians who are likely to point this out, and often not anyone in between!

We have a limited size Earth, and only so much resources to exploit. We can also only play the debt-rebottling game for so long, and all the Keynesian stimulus in the world is not going to save us from the fact that we have to conduct ourselves incredibly differently if we want to make do.

I'll leave HOW we do that to an argument for another day, but it really is true. After a certain point, we can not anticipate "jump-starting" the economy anymore when there simply isn't the same grade of meaningful work to be done by the hard-workers.

Posted by: Mike at October 13, 2012 6:47 PM

On state work, I don't think "high unemployment" will assist in reducing costs. Although things are slow for most contractors, wages are a major cost. Those wages are set at "union scale" by the "prevailing wage"
law. Granted, the contractors may "sharpen their pencils" a bit, but they cannot hire workers for less than the unions permit.

I am short on suggestions, but if certain work is crucial, this may be the time to borrow. On the other hand are state "revenues" down along with the interest rates? Perhaps we may have to wait until we can afford it.

Posted by: Warrington Faust at October 13, 2012 7:25 PM


Good stuff in that podcast. Walking my dog only got me through the first 35 minutes, but I kept wishing that Russ Roberts would make the full philosophical argument, namely: Because government can take money from people by force at the moment that it can (roughly speaking) persuade a majority that it is beneficial to do so, its incentives are all in the direction of using as great a percentage of its resources as possible on things that benefit government insiders, but not the people who need persuading to spend. That is WHY the infrastructure is crumbling. Nobody will ever say "no" to fixing a bridge that might fall, so of all the things for which the government can return to the people for more money, that's a great one to leave until the rest of the money has been spent.

The unseen cost, therefore, of having a group of experts come out of a locked room with a plan to spend $2 trillion on essentials is more than the waste on which they'll surely agree. It's the new target of spending for which dire essentials can shoot.

Posted by: Justin Katz at October 13, 2012 8:26 PM

The "experts in a room" solution is a progressive fantasy of top-down governance through an elite and benevolent autocracy. Even when those selected for such panels aren't overtly political, the "experts" seldom agree on much of anything. Lock ten of them in a room with a question and they will emerge with eleven conflicting answers. Of course then the central planners can pick and choose which answers they prefer and ignore or rationalize away the rest. I've sat through a number of such panels and there is never a consensus; little if anything is resolved (besides costing taxpayers a lot of money).

Russ Roberts is a better interviewer than guest. His weekly podcast is of impressive quality, and he's had most of the biggest names in economics (except Krugman, who refused his invitation). I highly recommend it for anyone interested in the intersection between economics and politics, or related topics. It's amazing how many brilliant and accomplished economists are out there every day speaking out against central planning and reckless spending but are completely ignored for not towing the Keynesian narrative to advance government interests.

Posted by: Dan at October 13, 2012 11:00 PM
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