Does Government Debt Actually Harm Future Generations

Tom Goldsworthy

The USAs national debt, visualised if it were in stacks of cash.

Does government debt harm future generations, as it is often argued? Government borrowing is argued to be immoral because of the supposed burden it places on our children, and our childrens children, and so on.  Higher debt-financed consumption today makes future generations poorer tomorrow, so the argument goes.  An article in the Telegraph last year entitled, Its time to come clean about our national debt used this very same argument.  Liam Halligan, the articles author, said:

"Why should we borrow so much, foisting our profligacy on our children and grandchildren...A spiralling national debt isnt only bad economics, but is also morally repugnant."

Unfortunately, many would point out that the economic logic behind the above argument does not completely hold.  In theory, government debt need not necessarily leave future generations any worse of at all overall - net.  This is because, for every pound the government borrows, there must be someone on the other side lending that money.  So, assuming all government debt is held only domestically, the burden on future generations will be zero.  While some parts of the population will pay higher taxes to service the debt, another section will receive interest payments for lending the government that money in the first place (and these two groups are likely to overlap).  Of course, there are many other reasons that excessive government debt may be undesirable in terms of its effects on future generations, not least the distributional consequences, but in terms of the question of a net burden on society, the case does not hold.

Having said that, around 1/3 of government debt is in foreign hands, and so there will be a net burden on society in the future to an extent.  The assumption that all government debt is held domestically is not completely accurate in Britain.  

Although, even then the argument over whether government debt burdens future generations is not settled.  It depends on how the government spends the money it borrows.  If it is being used to finance short-term consumption, then, yes, the fact that around 1/3 of our debt is foreign owned will mean that we are enriching ourselves at the expense of future generations. But, if the money is used to finance vital, beneficial long-term investments in, say, infrastructure, then future tax payers will feel the benefits of that spending, as well as the costs, and so not necessarily be worse off overall.

So, while in theory government debt neednt leave a net burden on future generations, in reality it probably will to an extent.  However, as shown, when government debt is domestically held (as 2/3 of British government debt is), hyperbolically stating that government borrowing is morally repugnant, irresponsible and so on, is clearly a huge exaggeration.  As the economic logic shows, the majority of British government debt will, in fact, not leave future generations worse off.

Tom Goldsworthy is the founder and editor of The Economic View, a blog that aims to provide the economic view on current events, analysing topical issues with the economists toolkit. 

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Government Regulation Gone Wrong

A 2013 report showed France to be quite the bureaucracy- it claimed that over 400,000 directives were being enforced, ranging from how far a postbox is allowed to stick out of a wall to how much boiled egg a kindergartener can eat at lunch time. 

The examples seem petty, but more serious regulation is coming to the cost of small town and village budgets- for example a law enforced making all pavements at least wide enough to allow two wheelchairs to pass. 

Of course, this is not a bad idea in itself, however when Paris enforced this on every French town or village, it becomes a problem- in many cases this blanket ruling is uneconomical, perhaps if there are few disabled people in the area or few people altogether.

According to Michel Therond, mayor of 25 years of the small town Albaret-Sainte-Marie, he gets letters with new regulations or stipulation from every time he opens his mailbox.

In many cases regulation is not as disputed- regulations on the minimum drinking age, or that businesses must hire employees regardless of any disability are largely accepted by society. However this excessive bureaucracy can have damaging effects on a country’s economy- it can mean managerial-type people are employed with high wages to not do very much, it can put pressure not necessarily on the cities, but smaller town or village councils- and it does not always work.

In Mexico City, at the time of a great pollution problem (that still exists in part today) a regulation was enforced that aimed to reduce car use and thus emissions and so on. So the government created Hoy No Circula (literally meaning Today it (your car) does not circulate)- a legislation that stated that cars with only cars with certain numberplates could be on the road on certain days- to bring this example to england you could say that on Mondays, Wednesdays, Fridays, only cars whose number plates begin with letters A-M can drive, and on the other days, cars N-Z. 

In Mexico City however, this plan backfired- it’s a typical example of what is known as the Cobra Effect. Most people needed their cars everyday- to go to work, do shopping, go to places where cars were the only reasonable, comfortable way to get there. So people didn’t start walking or taking the bus on days when their car could not be on the road- instead people just bought a second car, with a plate that would allow them to go on the days they previously couldn’t- granting them car usage for the whole week. It was quite an ingenious way of avoiding the regulation.

However we must remember that most people of Mexico City were not wealthy- so the second cars these people did buy were more often than not old beat-ups- whose emissions were even worse than their first cars. The result? Not necessarily fewer cars on the road, but instead older, more polluting cars on the road. This regulation did not last long, unsurprisingly.

This was the Cobra Effect- the origins of which I’ll briefly explain in another article.

So bureaucracy can be damaging, that’s for sure. Regulation may be necessary in areas, but like all things, in careful measure.

SOURCES:

French bureaucracy effect on small towns 

http://www.theguardian.com/world/2013/apr/30/government-rules-hinder-france-growth

Hoy no Circula regulation http://geo-mexico.com/?p=2343

Driving Restrictions and Air Quality in Mexico City www.rff.org/Publications/WPC/Pages/08_15_08_Driving%20Restrictions%20and%20Air%20Quality%20in%20Mexico%20City.aspx Lucas W. Davis

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