12 April 2012

When Metaphors Fail

Consider this nonsense:

What if borrowing money made you so much richer over the long-term that it paid for itself? It's not crazy. Millions of families make such a decision every year when they take on debt to pay for school. Indeed, investing in yourself is a bet that often pays off. But can the same be true for an entire country?
Brad DeLong and Larry Summers say yes. In a provocative new paper, they argue that when the economy is depressed like today, government spending can be a free lunch. It can pay for itself.

Except here’s the thing:  families don’t borrow from themselves; they borrow from other holders of capital.  The government, on the other hand, basically borrows from itself.  Now, economists like to get technical and explain that the Fed is not the same as the treasury.  It’s also true that the department of the interior is not the same as the department of defense, but no one would suggest that the former loaning to the latter would constitute anything other than the government loaning money to itself.

Now, to answer the question at hand:  yes, investing in the country over the long term should pay off.  But let’s not kid ourselves.  When the government borrows from itself, and particularly when the method for doing so is having the central bank purchase bonds from another department, all that happens is inflation.  Inflation and investment are two different things.  The latter, for example, is productive while the other is destructive.  And it takes a significant amount of ignorance, deceit, or stupidity to call inflation a form of investment.


  1. Whith investment, there is actually an identified mechanism to create wealth from which to pay back the loans. With student loans, there is the expected higher paying job. With a factory expansion, there are savings from economies of scale and the avility to satisfy more demand. if there is no higher demand, such an investment would be foolish and would squander the investment.

    When government spends money, there is no such investment calculation. It is just given away to anyone with a friend in Washington.

  2. Here's the thing. When one borrows as an investment in oneself, it amounts to placing a lien on one's future labor: "I am choosing to commit my later time and energy for the sake of acquiring something now."

    When the government borrows, it is not only borrowing "from itself" as you point out; it is placing a lien on future human beings, including many not yet even born. It is commandeering their "later time and energy" for the sake of acquiring something now.

    It's insidious and immoral.

  3. One of the few things I recall from taking economics in college was the idea that government should increase spending and lower taxes in hard economic times and decrease spending and raise taxes in good times. The theory seemed to make sense.

    The increased taxation and decrease in spending is supposed to pay off the debt incurred during hard times. But this is not what the government does. It almost never acts to decrease its debt.

    When individuals borrow to invest in their future, at some point they must act to decrease their debt. They may become unable to borrow, they may declare bankrupcy, or they pay it off. That's the only way it works.

    The government compounds its problem by making poor investments uswing the money it borrows from itself. It tends to invest in nonproductive employment. Obama had the right idea when campaigning for election in 2008, invest in the rebuilding of America's infrastructure. If he had done this, it would have created construction jobs that would have created manufacturing jobs, that would have created more jobs and so on. But by diverting huge amounts of his stimulus package into nonproductive jobs such as more government bureaucracy, teaching jobs, and health care, he failed to create jobs that would create more jobs. The stimulus package could't sustain itself because of it and simply created more debt.