Saturday, 8 June 2013

Fiscal austerity vs the life-cycle

Ohmigawd public sector debt! Ohmigawd! Pay it back or else, or else …… no much really.

The pro-austerity lot are funny about this because the way they approach it is so at a remove from well life really, including the businesses they love smearing themselves over.

Over the life-cycle, your own debt experience is ideally shaped like a bell curve. Simplistically, as you age you acquire more debt, say to pay for being a student, then to buy a car, then even more to buy a house. Time passes, grey hairs appear and the debt gradually reduces as you pay it back. And then you die.

When you adopt this perspective and apply it to government like a Maggie Thatcher, fer instance, then of course the deficit needs reducing and no wonder bods on the right talk about public sector debt as a destructive legacy that will harm future generations. Except “you” as a unit of analysis is pants. Government is a collective entity and does not have a finite lifespan, fundamental differences that really matter.  

So rather than “you” think of the collective entity you’re most intimately involved in, which is your family, over the same life-cycle; at a family level, as you’re repaying your debt there’s a good chance your kids are beginning to acquire it; on a net basis families continually carry debt because different members – particularly Uncle Nigel -  are simultaneously borrowing and repaying cash.

Even then, I don’t think the family is a sophisticated enough metaphor to use to understand government debt. Big corporations are and they have all sorts of debt. They borrow from banks, they issue bonds, they take shareholder cash via ordinary and preference shares, all to find the most financially efficient capital structure. The price of debt falls? Companies borrow more. Rises? They borrow less, but regardless of the specific amounts, company debt is never ending. And to add a touch of reality here, if a company had no debt whatsoever, chances are a private equity bod would snap it up so he could load it up with some.

Is it possible to have too much debt? You betcha cos there’s refinance risk and exposure to future interest rate movements. But, those are things to manage not avoid. Besides, too much of anything is bad for you.

However, the notion that government debt must be repaid NOW is stupid. It’s not how families work nor is it how terribly sophisticated companies complete with treasury departments work either. You might think that it does, but then that’s just you.

Right now, government is uniquely well placed to borrow at historically low interest rates to finance the kind of investment that would lessen the impact the credit crunch is having on innocent individuals and their families.Doing so would be morally right and would also lessen the damage fiscal austerity is doing to Britain's long-term economic prospects by destroying its productive capacity.

No comments:

Post a Comment