>Opinion- Not All Government Debt is Bad?

>In my opinion, not all government borrowing is bad. I like to use the analogy of a credit card vs. a mortgage. Municipalities, quasi-government agencies and States sometimes borrow money, and the federal government borrows money too. To me, the difference is that the former are required to borrow only for a specified purpose (often with approval of the voters), they’re required to budget for “debt service”, which includes paying down the principal, the purpose of borrowing is most often to purchase a capital asset that will be long-lived, and that the interest rates obtained are typically fixed. I think that this is most analogous to a mortgage for a home. On the other hand, the federal government seems to borrow whatever amount expenses exceed revenues, doesn’t have to appeal to a higher authority to increase its borrowing, doesn’t have to budget for paying off the principal, doesn’t usually spend the borrowed funds on purchasing long-term capital assets, and at least in part borrows using short-term bills that renew at market interest rates periodically.

Perhaps this analogy can be helpful to explain why the Federal deficit and debt are worrisome, but the state borrowing $50M to fund a new school or transit improvement is not.

Originally posted at AGA Weblog as a comment for Economistmom, by me.


About perkinsms

I'm an engineer and father interested in transit, parking and economics.
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3 Responses to >Opinion- Not All Government Debt is Bad?

  1. Mark says:

    >Well, typically some borrowing is “always” good for a functional, rational entity, because they can borrow at a lower rate than the value of the money. That’s why a company should sell some bonds before stocks, and why people like me can borrow money at crazy-low rates and make a few bucks on the deal. The problem (for a company, person, or country) comes in when the debt-to-equity grows too great.I would agree that borrowing money to build ‘things’ fits in that catagory, but borrowing money to give away (in various ways) is clearly not a good investment.Speaking of which:https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.htmlis very interesting. What trends can we draw from it? What abnormalities are there? Why hasn’t Japan melted down if they have 2 years of debt?

  2. Michael says:

    >The data table is interesting. I can’t figure out if there is a recognizable pattern. There are rich and poor countries, net importers as well as exporters at both ends of the list.I don’t understand your statement that “they can borrow at a lower rate than the value of the money”. What if the entity doesn’t have any reasonable risk-adjusted investment opportunities?

  3. Mark says:

    >> What if the entity doesn’t have any reasonable risk-adjusted investment opportunities?Well, who doesn’t, if you have good credit?People can invest in a diversified portfolio which should give higher expected returns with very limited risk.Companies theoretically are doing useful, profit-making things as their whole reason for existance.Governments can invest in infrastructure/education/energy/other useful things.

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