Anorak News | No, Borrowing More Won’t Work

No, Borrowing More Won’t Work

by | 15th, July 2011

IF only we could borrow more, spend lashings of cash on expanding the economy, then all our troubles would go away! As I pointed out yesterday, in our situation this just won’t work. But there are other reasons why it won’t, not just the problems with the basic theory.

This will surprise some but many economists actually go out and look at the real world: they’re not all just playing with numbers on blackboards. And when we do go out and look at the real world we find that, OK, borrowing a bit works just fine. Borrowing lots doesn’t:

At what point does indebtedness become a problem? In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth. Our results are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.

1% lower growth there is not 1% off whatever growth we would have had without the debt. It’s 1% off the trend growth rate of 2%. So half the growth we would have had without the debt. At 2% growth rate the country gets twice as rich every 35 years. At 1% every 70 years. So the difference in this growth rate is between you children being twice as rich as you are, your grandchildren four times as rich, or only your grandchildren being twice as rich. Yes, that is a big bloody difference.

Compare it backwards: if this had been happening since 1940 then we’d all be living at the standard of 1975, instead of our current level of double that.

But that 90% of GDP debt level: how far away are we from that? About a year actually. The national debt is about 80% of GDP and we’re borrowing another 10% of GDP each year.

OK, so sure, we could go and borrow lots more to keep the one legged black lesbian dancers’ outreach advisors in a job: at the expense of making our children poorer than they need to be.

Your choice really but it’s not obvious that the borrow’n’spend brigade have it right here.

Posted: 15th, July 2011 | In: Money Comments (2) | TrackBack | Permalink