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There's always a lot of voodoo in economics; doubly so when partisan politics are involved. But to believe that there is a ceiling beyond which more debt should

by nkoren 14y ago

There's always a lot of voodoo in economics; doubly so when partisan politics are involved. But to believe that there is a ceiling beyond which more debt should not be accumulated requires a special type of magical thinking. Businesses evaluate decisions based on whether the rate of return is greater than the rate of finance. Eg., if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow that money and make that investment. Doing so will always make your financial position better, regardless of the level of debt you are carrying. Of course opportunity costs must also be taken into account: if you have cash in hand which you are are servicing debt at 15%, and have an opportunity to make an investment that returns 10%, then making that investment will worsen your financial situation; you should pay down the debt instead. Once again, this is true no matter how much debt you are carrying. All public spending is an investment of sorts. Infrastructure, education, R&D, public health -- all of these produce measurable returns. Where those returns are greater than the cost of debt, your society will be better off for financing them by debt. Where those returns are lower than the cost of debt, it won't be. This sounds like an over-simplification, but isn't: accurately measuring those returns is no easy task even after the fact, much less predicting them beforehand. But that is what the public debate and decision-making process needs to be about, because that's what really matters. All this handwringing over imaginary debt ceilings and such has been nothing more than an incredibly destructive canard.

fauigerzigerk 14y ago
>if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow... No, I think if we have learned one thing in the recent crisis it is that highly leveraged entities carry cumulative risk that is more than the sum of the parts. Also, the government is not one company of many. It is a monopoly that must be in a position to act countercyclically even when everyone else decides based on risk adjusted returns that it is best to sell everything, fire everyone and hide in a hole in the ground. If the government is levered up like everyone else and therefore exposed to the same self reenforcing global dynamics when things go wrong, it will not be able to do its job in a crisis. The government must invest when no one else does and that means it has to invest less when everyone else does. >All public spending is an investment of sorts Not all of it, but even for the part that is, you have to ask whether that investment has a higher return than if the private sector made those investment decisions. That's obviously a highly ideological question. My own opinion is that it depends on the type of investment. I think we have good examples either way.
defen 14y ago
> risk-adjusted returns of 15% The voodoo thinking here is the assumption that you can actually calculate "risk-adjusted returns" outside of a casino.

by nkoren 14y ago

fauigerzigerk 14y ago

>if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow... No, I think if we have learned one thing in the recent crisis it is that highly leveraged entities carry cumulative risk that is more than the sum of the parts. Also, the government is not one company of many. It is a monopoly that must be in a position to act countercyclically even when everyone else decides based on risk adjusted returns that it is best to sell everything, fire everyone and hide in a hole in the ground. If the government is levered up like everyone else and therefore exposed to the same self reenforcing global dynamics when things go wrong, it will not be able to do its job in a crisis. The government must invest when no one else does and that means it has to invest less when everyone else does. >All public spending is an investment of sorts Not all of it, but even for the part that is, you have to ask whether that investment has a higher return than if the private sector made those investment decisions. That's obviously a highly ideological question. My own opinion is that it depends on the type of investment. I think we have good examples either way.

defen 14y ago

> risk-adjusted returns of 15% The voodoo thinking here is the assumption that you can actually calculate "risk-adjusted returns" outside of a casino.