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How does government debt slow growth? Explain the mechanism. (Bear in mind that "growth" is in GDP, a dubious measure in the first place. Hurricanes and cancer

How does government debt slow growth? Explain the mechanism. (Bear in mind that "growth" is in GDP, a dubious measure in the first place. Hurricanes and cancer add to GDP.) It's easy to see how slow growth can increase debt: expenses grow through inefficiency, inflation, or whatever, but revenue fails to keep up. So we get low growth driving up debt. I can buy that. If you have a big mortgage to pay off, will that slow down your salary increases? How? Why? You may lament the fact your salary goes to paying interest on your mortgage, but if anything you're more motivated to increase your salary (the proportional benefits from raises are greater!)

NoPiece 14y ago
In regards to your analogy: let's say you aren't salaried, but are self employed. Now you take on a a big mortgage, and spend you income on paying your mortgage instead of investing it in growing your business. Government debt slows growth because you have to pay it back. The currency (you savings/income) may end up being devalued, or your taxes may have to go up.
- tedsanders 14y ago
  What if you take out a business loan instead of a mortgage? You're still taking on debt, but now the debt is fueling your growth and hopefully leading to higher wealth. It doesn't seem like an open and shut case to me.
  - NoPiece 14y ago
    Of course, if you feel like the Government spending is good investment and will bring a return, then no problem. If you think it is wasteful political payoff, then it is a problem. The core problems is if the government taxes and extra $1000 dollars away from you that you would have used to grow your business, then spends it on debt service, or war, or something wasteful, that will slow growth.
    - cantankerous 14y ago
      Debt service that allows it to borrow more then spend more in the immediate. Wars that require massive amounts of spending on things that include manufactured goods. Something wasteful....which is open to significant interpretation in a lot of cases. Waste is part of any large organization. Government isn't alone there. It's just not this simple. It never is. That's why these arguments about debt and economy keep breaking down.
      - NoPiece 14y ago
        I agree, except when the amount of debt gets so large, and goes way beyond the immediate. Then it becomes much more clear that it is a problem. There is a case to be made that in 2008-2009, a big, debt financed, short term stimulus could have been helpful. But when that metastasizes into long term spending that doesn't look like it is going anywhere soon, and doesn't seem to be accomplishing anything, then it is worthwhile to sound the alarm.
- mncolinlee 14y ago
  You're only proving the opposing case with such a toothless argument. Generally speaking, debt is defined as something that is expected to be paid back. That's what makes it debt and not a gift. In many cases, taking debt increases growth. Maybe you took convertible debt or a loan to fund your startup? I don't imagine you told investors or bankers that taking on debt would slow the growth of your company. Did your 10-slide pitch deck show upward growth because you intend to stop growing as soon as they fund you? Why would investors lend you money if they knew your growth would slow down as soon as they did it? Now, consider government. What happens when your community outgrows its roads? Do new businesses continue opening in that area? Do well-paid executives and engineers move to a city with lousy, outdated schools, poor telephone service, and minimal broadband Internet service?
  - crusso 14y ago
    I don't imagine you told investors or bankers that taking on debt would slow the growth of your company Businesses use limited amounts of debt to fuel growth because they have a justifiable case that shows that the servicing of the debt is less than the returns on the investments made with the debt. Often, businesses are wrong about whether or not their "justifiable case" is true. When wrong, their debt may just cut into the other assets on their balance sheet. Perhaps creditors will allow them to refinance so that their debt servicing is below their investment. Perhaps they'll go bankrupt. Perhaps they'll close their doors. The US government 1. Has a really crappy track record of finding a return for its investments. 2. Will cause much more world disruption if it has guessed wrong on the whole "returns on investment vs debt servicing" equation. Finally, businesses do not borrow money without limits. Their borrowing of money is based upon the amount of credit that outside parties give them. Given the US Government's downgrade in its rated ability to service its debt, shouldn't we be concerned that we're overextending ourselves?
    - bubbleRefuge 14y ago
      They were downgraded on "willingness" to service their debt. Not ability. Notice that after the downgrade, interest rates went down. What does that tell you?
grannyg00se 14y ago
If I have a big mortgage to pay off that slows my growth because I'm wasting about 60% of that monthly expense solely on debt repayment. Without the big mortgage - and the same salary - I could be making monthly investments that actually produce income.
- podperson 14y ago
  This is true in a sense, but we're not talking 60% vs. 0%, but 60% vs 55%, or (in fact) 7.2% vs. 7.1% (in the case of the US servicing its debt). The fact that we're talking about shaving a tiny amount of debt servicing by, say, gutting education seems more like "I'll save money by getting rid of my cable bill, but now I can't work from home".
  - NoPiece 14y ago
    The US spends 6% of the budget for interest on the debt, and 2% on education. Doesn't that say we are already deep into the problem, are already too deep in debt, and need to reprioritize? The bigger the debt is, the more legitimate spending will get squeezed. The longer we wait to address debt, the harder it will be to get out of the hole. http://www.cbpp.org/cms/?fa=view&id=1258 http://www.cbpp.org/cms/?fa=view&id=1258
- anigbrowl 14y ago
  How many successful investors also live in their car? If not mortgage, then you'd have to pay rent. You could also save money but not eating, but how sustainable is that?
bcoates 14y ago
Spending causes various kinds of deadweight loss: Outright waste, rent-seeking by negative-output industries, do-nothing jobs and does-nothing purchases, some regulations have large financial externalities, war and war accessories. Taxes are mostly outside of government control, so more spending implies more debt. Reducing debt implies reducing spending, and therefore less loss. You're right that it's not the debt itself (or even the spending) that matters, but it's a good enough proxy.

NoPiece 14y ago

In regards to your analogy: let's say you aren't salaried, but are self employed. Now you take on a a big mortgage, and spend you income on paying your mortgage instead of investing it in growing your business. Government debt slows growth because you have to pay it back. The currency (you savings/income) may end up being devalued, or your taxes may have to go up.

tedsanders 14y ago
What if you take out a business loan instead of a mortgage? You're still taking on debt, but now the debt is fueling your growth and hopefully leading to higher wealth. It doesn't seem like an open and shut case to me.
- NoPiece 14y ago
  Of course, if you feel like the Government spending is good investment and will bring a return, then no problem. If you think it is wasteful political payoff, then it is a problem. The core problems is if the government taxes and extra $1000 dollars away from you that you would have used to grow your business, then spends it on debt service, or war, or something wasteful, that will slow growth.
  - cantankerous 14y ago
    Debt service that allows it to borrow more then spend more in the immediate. Wars that require massive amounts of spending on things that include manufactured goods. Something wasteful....which is open to significant interpretation in a lot of cases. Waste is part of any large organization. Government isn't alone there. It's just not this simple. It never is. That's why these arguments about debt and economy keep breaking down.
    - NoPiece 14y ago
      I agree, except when the amount of debt gets so large, and goes way beyond the immediate. Then it becomes much more clear that it is a problem. There is a case to be made that in 2008-2009, a big, debt financed, short term stimulus could have been helpful. But when that metastasizes into long term spending that doesn't look like it is going anywhere soon, and doesn't seem to be accomplishing anything, then it is worthwhile to sound the alarm.
mncolinlee 14y ago
You're only proving the opposing case with such a toothless argument. Generally speaking, debt is defined as something that is expected to be paid back. That's what makes it debt and not a gift. In many cases, taking debt increases growth. Maybe you took convertible debt or a loan to fund your startup? I don't imagine you told investors or bankers that taking on debt would slow the growth of your company. Did your 10-slide pitch deck show upward growth because you intend to stop growing as soon as they fund you? Why would investors lend you money if they knew your growth would slow down as soon as they did it? Now, consider government. What happens when your community outgrows its roads? Do new businesses continue opening in that area? Do well-paid executives and engineers move to a city with lousy, outdated schools, poor telephone service, and minimal broadband Internet service?
- crusso 14y ago
  I don't imagine you told investors or bankers that taking on debt would slow the growth of your company Businesses use limited amounts of debt to fuel growth because they have a justifiable case that shows that the servicing of the debt is less than the returns on the investments made with the debt. Often, businesses are wrong about whether or not their "justifiable case" is true. When wrong, their debt may just cut into the other assets on their balance sheet. Perhaps creditors will allow them to refinance so that their debt servicing is below their investment. Perhaps they'll go bankrupt. Perhaps they'll close their doors. The US government 1. Has a really crappy track record of finding a return for its investments. 2. Will cause much more world disruption if it has guessed wrong on the whole "returns on investment vs debt servicing" equation. Finally, businesses do not borrow money without limits. Their borrowing of money is based upon the amount of credit that outside parties give them. Given the US Government's downgrade in its rated ability to service its debt, shouldn't we be concerned that we're overextending ourselves?
  - bubbleRefuge 14y ago
    They were downgraded on "willingness" to service their debt. Not ability. Notice that after the downgrade, interest rates went down. What does that tell you?

grannyg00se 14y ago

If I have a big mortgage to pay off that slows my growth because I'm wasting about 60% of that monthly expense solely on debt repayment. Without the big mortgage - and the same salary - I could be making monthly investments that actually produce income.

podperson 14y ago
This is true in a sense, but we're not talking 60% vs. 0%, but 60% vs 55%, or (in fact) 7.2% vs. 7.1% (in the case of the US servicing its debt). The fact that we're talking about shaving a tiny amount of debt servicing by, say, gutting education seems more like "I'll save money by getting rid of my cable bill, but now I can't work from home".
- NoPiece 14y ago
  The US spends 6% of the budget for interest on the debt, and 2% on education. Doesn't that say we are already deep into the problem, are already too deep in debt, and need to reprioritize? The bigger the debt is, the more legitimate spending will get squeezed. The longer we wait to address debt, the harder it will be to get out of the hole. http://www.cbpp.org/cms/?fa=view&id=1258 http://www.cbpp.org/cms/?fa=view&id=1258
anigbrowl 14y ago
How many successful investors also live in their car? If not mortgage, then you'd have to pay rent. You could also save money but not eating, but how sustainable is that?

bcoates 14y ago

Spending causes various kinds of deadweight loss: Outright waste, rent-seeking by negative-output industries, do-nothing jobs and does-nothing purchases, some regulations have large financial externalities, war and war accessories. Taxes are mostly outside of government control, so more spending implies more debt. Reducing debt implies reducing spending, and therefore less loss. You're right that it's not the debt itself (or even the spending) that matters, but it's a good enough proxy.