Debt And Politics

by | Jul 19, 2017 | Economy, Keith, Politics | 0 comments

Debt is ubiquitous in the United States. Virtually everyone in the United States has taken on debt at some time. That may be through credit cards, a car loan, a mortgage, or even to buy a telephone.

Credit and debt is the grease that keep economies running smoothly.

From an economic perspective credit and debt is good, healthy and normal. Our problem has become debt from a political perspective.

When an individual borrows money, to buy a car for instance, what they are doing is pulling that economic activity forward in time. They are making a choice between saving money for the next four years and paying cash for that car or borrowing money at interest to pay back for the next four years and driving that car home today. They are pulling forward in time that economic activity of purchasing a car.

There is nothing inherently wrong with doing that.

Debt from a political perspective is an entirely different story. Politicians have found that the same principle holds true for debt on a governmental level; that it pulls economic activity forward. In a government model where politicians are elected this is a very dangerous thing. What is the first job of every elected politician? To get re-elected. What is the surest way to get re-elected? Increase the standard of living and wages and perceived wealth of your constituents. What is the easiest way to do that? Borrow money as a government and get that borrowed money into the hands of your constituents.

For an elected politician, borrowing public money to pull economic activity forward into the politician’s current term in office is a temptation that is irresistible. That debt will come due when the politician is no longer in office. Magical.

The problem is that we have been doing this for decades in the United States. We have now adopted a zero interest rate policy in order to hide the pain of having to pay back the money we have already borrowed. Eventually we will not be able to hide the pain.

At some point politicians will not be able to keep kicking the can down the road to their elected successor. For example Greece has hit this point. A series of Greek governments borrowed an incredible amount of money over many years. This money was used by the politicians to proclaim how great and wonderful they were in improving the standard of living in Greece. Now the debt has come due and Greece is being bled dry trying to service that debt. The wages and income for Greeks has slid all the way back to what it was in 1980.

Politicians can borrow public money in order to make things look much better than they actually are and ride that to re-election. Politicians can do this for a long time. Eventually, and long after the politicians who voted to borrow the money have left office, the citizens are left with the consequences of that foolishness.