Since the start of the new year, Americans have once again begun to receive more COVID relief checks. In addition to the analysis about the effects on the economy, there has been some discussion about the implications of this for our national debt but. But, to me, there hasn’t been enough.
I often wonder whether economists really understand the nature of debt, because borrowing is not just an economic concept — I believe it is a philosophical one that has economic implications.
Marcus Aurelius said that to understand a man, you have to understand the nature of him. It is difficult to write this article without being too abstract, but the concept of borrowing and debt is confusing, yet understanding the nature of debt is vital and drives everything.
The nature of debt
Borrowing, at its root, is taking money from other people in exchange for a promise to pay it back rather than in exchange for goods or labor. To shore up that promise, a fee is added to that repayment in the form of interest.
On the other hand, the value of work in most cases is derived from the output we personally produce. In this way, earned money is a simpler way to get money because the value of our work directly generates economic value.
When you exercise, you experience some level of pain, but you know that the pain leads to something good. Some medicines don’t taste good, but they are good for you. Studying in school is not always pleasant, but hopefully it leads to more knowledge — a good. Within limits, most of us would agree that exercise, good medicine and studying are clearly good things. There are also things that seem or feel good but may not be good for you. Personally, I like Snickers bars, but they are probably not particularly good for anyone watching their sugar consumption.
In this way, debt at its root is a bad thing because it is money you do not earn through labor — you are taking without giving value at the time of transaction. But, that said, debt could convert into a good thing in certain circumstances.
Borrowing money is a good thing when that money can be reasonably applied to creating more economic good for you and others.
For example, if I own a business and I can borrow money to build or make something that produces economic value, and the cost of the debt is exceeded by the value of what is produced (the investment), then debt is good. Most people would agree with this even though we can’t know for sure whether the cost of debt will be exceeded by the value from deploying it.
Another case is buying a home. Most people need a mortgage loan to purchase a home. In this case, the buyer benefits economically as the home increases in value and the mortgage balance decreases. There is an overall economic net benefit from borrowing in these two cases.
The problem in the US
The problem in the United States today is that our use of debt does not satisfy the conditions for “good” debt. People could make an argument that the country borrowing money to build a road or a tank is a good investment, but it is difficult to evaluate those instances and they are up for debate in many cases. These points, however, are undeniable:
- For the past 50 years, the national debt of the country continues to rise. This has been true under both political parties. During the last four years, our national debt has grown a whopping 36%. This will create problems. Would you lend money to someone who never repaid it and kept asking for more money in perpetuity? Or, for investments that clearly don’t return enough to pay down the debt over time?
- A rising proportion of what we pay in taxes is going only to mandatory spending, fixed payments on programs like Medicare or financial items like the interest on our outstanding debt that must be funded regardless of the health of the country or our economy. As of now, our country must pay 69.9% of our tax dollars simply to meet fixed obligations that cannot be reduced. In 1962, it was about 32%. You would never lend money to a business that consumes 70% of its revenue just to meet overhead obligations.
For me, COVID has amplified the base assumption that I believe is embedded in the psychology of politicians and the general populace in understanding debt and its consequences. This has manifested itself, not just in temporary payments to people to keep the economy moving (which might be a good thing within a tight range), but in a lack of understanding of the implication of borrowing money instead of earning it.I’ve listened to a number of economists over the years. Some are concerned with the national debt but they always say the problem is off in the future. Unfortunately, a debt-triggered crisis is not something that can be reversed quickly when it becomes an issue.The debt crisis of the United States is similar to global warming — it is an incremental but enormous phenomenon that could trigger disaster at a given point. Simply, dealing with the $27.5 trillion in outstanding national debt would be difficult to do if our lenders (us and people outside the United States) ever consider the reality of our strength as borrowers. Suppose they find the US no longer a reliable borrower?
Generally, I don’t like to write doom and gloom pieces since America has a wonderfully resilient economy, but even Tom Brady might not still be playing if his diet consisted of Snickers bars and Oreos.