Tuesday, 26 May 2009

Does national debt matter?

Well, of course it does. But not in the black and white way that the Conservatives assert if you consult some of the world's leading economists. And that is exactly what President Sarkozy of France has done. He has asked the esteemed Joseph Stiglitz, former World Bank economic supremo, and Amartya Sen, author of the brilliant Development as Freedom (and Master of my College when I was there so I'll always have a soft spot), to look at the question of economic growth. GDP growth is merely one quantitative measure of economic output. President Sarkozy is interested in developing more qualitative measures.

Included in this is the issue of national debt. As Felix Rohatyn, former US ambassador to France, says in a Newsweek article last week:
"Americans look at debt more as wasteful expenditure, whereas the Europeans look at debt more as an investment."
It would seem that the Conservatives have adopted exactly the same approach as their ill-informed neo-liberal cousins on the right of US politics. Deficits and debt are bad, period. Now, don't get me wrong: if you are borrowing to spend rather than invest or if your debt can't be serviced then you are clearly borrowing too much. However, what if you are borrowing to invest in future economic performance, environmental improvement, or social progress, all of which add to national well-being? It is less clear cut that debt is undesirable. In fact, in many cases it is very desirable.

If you build schools, colleges and universities, broadband infrastructure, transport infrastructure, invest in health facilities, reduce carbon emissions, invest in science, or even save the banking system can debt not be of economic, social and environmental benefit? This is one of the issues that the Stiglitz-Sen Commission on the Measurement of Economic Performance and Social Progress is looking at. Its broad outlook is that GDP growth is not the be all and end all. It may be wise to sacrifice some economic growth in GDP terms for a better quality of life and that actually is national growth of a different kind. President Sarkozy has initiated a fascinating process and many eyes will be on its outcome.

But in terms of the domestic debate, there needs to a different dialogue about debt and growth. Clearly, the levels of borrowing that have been reached will have to come down. However, there comes a point where investment is hit and that has to be considered carefully. The Tories are not even in the hare versus tortoise race described in the Newsweek article above. A simple analogy is mortgage finance. Is a mortgage a bad thing? In most circumstances no it's not a bad thing. So it is with national investment. We just need a means of separating the 'good' debt from the 'bad' debt. And maybe once the Commission has finished we can do the same for GDP growth.

1 comment:

  1. I agree, for the most part your synopsis is correct and the way I have always felt about “total” US debt. It should be noted that (US) assets are sizable and to a large degree never considered in the overall equation. I believe Global Warming is due to natural cycles so obviously don’t think excessive spending in regard to Co2 is well thought through – better to spend on alternate energy projects like fusion and cleaner versions of current sources. But serious upgrades of infrastructure are in order – especially forward looking R&D investment. My concern is the current anti-capitalism trend. It will be interesting to see if Sarkozy can inject that back into the fabric of France.