RateWatch #193 - Debt
April 8, 2000
by Dick Lepre
Debt. Friend or Foe?
Debt and, in particular, the national debt has long been portrayed as something that was particularly evil. It is often referred to in phrases such as: "It is wrong for us to burden our children and our grandchildren with debt. They will spend their lifetimes paying this off."
The Federal government has a method of bookkeeping which obfuscates the debt issue. It has a unified or cash budget; it treats everything spent as if it were gone.
If I buy a newspaper or a block of ice it has a very short useful life span. If I buy a car or a house, it does not.
I am the President of the company that I work for. Some of the money that we spend is on operating expenses. Some of it is on capital expenses.
The capital expenses do not get written off like blocks of ice, they get amortized over their useful lifetime.
The point is this: the particular accounting method that the Federal government uses makes the deficit look worse than it is.
In our lives, there are examples of good debt: a home loan, buying a car on credit so that one can get to work, and student loans are examples of good debt. These are investments in one's own future.
Buying consumer goods on credit to supplement the difference between one's income and expense is bad debt. Having credit extended by a bookmaker is bad debt. Taking money out of an ATM on your Visa card and using it to buy drugs or gamble is bad debt.
The above examples are obvious. Hopefully, no one is going to argue these. Like most everything in life there get to be some very large grey areas.
Politically Polarized Debt
There has long been political polarization on government spending on defense. We spend a lot of billions of dollars on the Cold War. We had nuclear missiles aimed at the Soviets. We have nuclear submarines. We had lots of troops in Western Germany.
I would offer that there are two certainties: 1) this was very expensive and 2) we didn't get blown up. Was this good debt? Probably. While the investment in defense did not contribute to the creation of wealth it did prevent the destruction of wealth.
Let's drop "politically polarized debt" and get back to the idea of good debt.
What makes debt "good"
I would offer that any debt that leads to a net increase in wealth is good debt. One must be careful here to define wealth. "Wealth" is not money. Wealth is that which makes me happy.
At the risk of personalizing this I want to offer a poignant example. A little over a month ago my dad died. Last week a received a check from my brother who is the executor of my dad's estate. I put the check in my desk. I didn't want to look at it. Finally, I took it out and looked at it. I realized that I now had more money but less wealth. This is something that one can contemplate in the abstract but sitting at my desk that day I had clarity about the difference between money and wealth. My dad's being alive was a source of wealth that I had been granted the day that I was born.
The problem lurking here is that it is much easier to measure money than wealth. In deciding to go into debt, an individual, a family or the government should be answering the question: will this debt make me wealthier in the long run?
It is impossible to discuss politics because, essentially, everyone has already made up their mind. But try this as a stretch of the old grey matter:
From 1980 to 1988 the National debt, roughly, tripled. Then it doubled again from 1988 to 1996. What was the effect? The greatest economic boom in history. The bottom line is this: our wealth increased a heck of a lot more than our debt.
The wealth is evidenced as: an increase in money, a decrease in unemployment, a decrease in crime, an end to the Cold War.
For the government the point is this: debt is not necessarily evil. A large increase in debt may actually lead to an even larger increase in wealth.
So Then Why...
Now that the economy is doing so well should we really be seeking to use any surplus to pay down debt or should we be investing it in things that will produce even greater wealth? Or have we just been lucky with our investments lately? Should we pay down the debt and run it up again when we think that there is a good reason? I really don't know the answer, I am just raising a question.
The one thing that should be certain is that debt is not inherently bad.