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Two ethical reasons in favour of national debt you might be unaware of

As a response to crisis, several countries have increased their spending through debt. I want to give two moral arguments in favour of such behaviour you might not have heard of.

It seems like economic crises become more frequent over the last decades. As a response, several countries (the US leading amongst them) have increased their spending to protect their population. While seeing this as borrowing from future generations is sometimes a valid concern, I want to give to moral arguments in favour of such behaviour you might not have heard of. Let me know what you think!

Wealth redistribution

For countries who have a currency, nationally held debt is not comparable to private debt. Since the country prints the money itself, it could always simply print the amount owed and be done with it. For that reason, the only real impact national debt has is inflation. Inflation, however, means, that currency loses value and that mainly means a redistribution of wealth.

In several western democracies (like Germany, the US, Great Britain, etc.) the gap between the rich and the poor has been increasing in the last decades. In some, like the US, the speed of that process has also been growing. To quote from a report by the EIP:

Between 1979 and 2007, the top 1 percent took home well over half (53.9 percent) of the total increase in U.S. income. Over this period, the average income of the bottom 99 percent of U.S. families grew by 18.9 percent. The average income of the top 1 percent grew over 10 times as much — by 200.5 percent.

The effect that inflation has is that it reverses the inequality from heritage. Man economists consider 2% inflation per year a sign of a healthy economy. In such a scenario, all money in bank accounts loses 2% of its value every year. This effect has no impact on those without huge savings but is a considerable impact for those with full bank accounts.

This effect does not matter for material goods and real estate. But you can compare two scenarios:

  • The government does not spend money, and inflation remains low. Households with lower income and savings will not profit from low inflation because they have no savings. Additionally, they will most likely suffer directly from the fact that the government doesn’t spend money. Government investments should go towards helping those who need it the most so they would most likely be the target of such spending.
  • If the government does spend money, they will likely be receiving some of it directly, and the increased inflation will have an effect to narrow the gap between the rich and the poor.

In this sense, increasing inflation is borrowing from the past more than the future. In case my introductory comment about debt not being a problem, I can recommend the book “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy” by Stephanie Kelton.

Spreading out responsibility across generations

A government should not finance every expenditure through debt. If a president wants an enormous birthday party and the country is OK with that, they should pay for it, and that’s it. But consider the following thought experiment:

Scientists discover a new continent and settlers begin building a nation from scratch. The backbone of their expansion would be infrastructure — mainly streets, electricity and telecommunication. There would be two tasks: Paying for that progress and performing the actual labour involved in it. The first generation would be doing the work. If the project were not financed through some debt, the consequence would be, that the first generation builds the infrastructure and pays for it, too. Subsequent generations would get to live in a place that has all that for free.

Debt, in this case, would be a way to have future generations pitch in for the effort instead of only having them reap the benefits. As stated before, this should not be done for any investment: Military equipment that is only valuable for ten years should not be financed in a way that has effects past those ten years (unless it saves the country from worse effects like during World War II). If your counterargument to this system is, that future generations pay the upkeep of the infrastructure, that’s not the point. The maintenance is a running cost that every generation will have to face regardless of when the infrastructure was originally built.

It should not be expected of any generation to make gifts to future ones unasked. If people want to do that, for their families or loved ones, they are free to do so, but to ask it, in general, is a morally tricky task because, for obvious reasons, that favour will not be returned. Financing infrastructure and other, longlasting projects through debt, forces future generations to pitch in and earn their place in a country of increasing living standards.

Another way to illustrate this point is the following: As you may be aware, there are two ways to finance pensions: a generation contract and a personal fund model. The latter is the obvious version. In a fund model, every worker pays into an account. Once the worker qualifies to consume the pension (by age, years worked, disability, etc.), this fund is paid out. If the funds run out, the government steps in. If the person doesn’t live to receive all the funds, the remainder goes to the state. This system can be tweaked, but this is a core model of it. A generation contract has a whole other idea behind it. In this model, there is only one nationwide account. The contract states that the current workers will always pay for the current pension recipients. The core concept is that all workers pay into a pot which then gets split among all pension receivers. There are many ways to tweak such models, too, but the idea behind it is fundamentally different.

Financing a project by debt is comparable to a generation contract in the sense that it places responsibility on future generations without really asking them. For that reason, financing through debt should be only done for expenditures for whom the agreement to chip by future generations can be assumed. While this might sound somewhat bloated, I am pretty confident that we can say that future generations will be interested in electricity, roads, hospitals, schools and other governmental projects. It would be immoral to place all burden of building such infrastructure on the current generation and to gift it to future generations.

In short, we should spread out payments similar to the benefits they yield. We should finance short term benefits in a short term way (through taxes), and long term benefits through long term ways like inflation and debt.

Thank you to Karolina Grabowska on Pexels for the foto. You can also read this article over at Medium.com

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Last modified: September 9, 2020