When Debt is Investment

I recently ran across a very interesting report from the Brookings Institution, arguing for a “balance sheet” approach to fiscal policy. The basic argument, in “economic-ese” was

For a long-term balance-sheet approach to gain traction, politicians will have to drop the ideological biases that are distorting fiscal policy. Proponents of austerity currently use nominal debt figures to scare voters, even in countries with record-low interest rates and large private-sector profits that are not being channeled toward investment. To counter their arguments, opinion-makers should emphasize the expected long-term returns on incremental public investment, not with ideological arguments, but with concrete examples from various sectors in the recent past that have had reasonably good rate of returns.

In everyday English, author Kermal Dervis was arguing–among other things– that we need to distinguish between kinds of debt.

The mortgage on your house is debt. So is the credit-card balance from that shopping spree you indulged in. But the house is a long-term asset–the clothes you bought probably aren’t.

When we look at the books of a business, the purchase of more modern tools and machinery are an investment that will allow the business to earn more in the future (hence the saying “you have to spend money to make money”), while the CEO’s acquisition of a spiffy and expensive corporate jet is unlikely to improve the bottom line.

When we invest tax dollars in improved infrastructure or education, those investments generate future productivity and economic growth.

When we play games with the tax code to subsidize profitable businesses (with influential lobbyists), not so much.

All debt is not equal.


Defining “Wasteful” Spending

The charge that government wastes money (or “throws money at problems) is a favorite accusation of politicians of all persuasions. Certainly, lawmakers should refuse to fund activities that have been shown not to work. But as Steve Benen points out, the definition of waste generally owes more to ideology than evidence.